An employee share scheme is a great way for your company to align your employees’ interests with your own and encourage productivity and retention. This is because it encourages your employees to purchase shares in your private company and benefit from a share of the company’s profits. However, you need to ensure that you meet certain requirements to fulfil your obligations under the law. Notably, you must provide interested employees with a disclosure document outlining specific information before they invest. This article explains: 

  • when a company must prepare a disclosure document to accompany the offer of shares or options to an employee; and 
  • what type of disclosure document is necessary. 

What is an Employee Share Scheme Disclosure Document?

The Corporations Act 2001 (Cth) (the Act) governs the offer of ‘securities’ (e.g shares and options) by a company. It requires you to provide investors with a disclosure document if you want to offer the opportunity to purchase securities, unless an exemption applies.

For example, you could provide them with a:

  • prospectus; or
  • offer information statement.

When raising capital, a company will generally try to meet one of the exemptions so that it can proceed with its raise without a disclosure document. In the same way, a company that wants to issue options or shares to employees must also:

  • determine that an exemption applies; or 
  • provide the employee with a disclosure document along with their offer. 

Preparing a disclosure document is a big commitment for early-stage businesses. Therefore, it is important to know how you can fit into the exemptions where possible. 

Offers That Need Disclosure

The Act requires you to provide a disclosure document when you offer securities, unless an exemption applies. An offer of options or shares under your employee share scheme is an offer of securities. You are exempt from disclosure where the offer is:

  • to a sophisticated investor;
  • to a professional investor; 
  • a small scale offering; or
  • to senior management.

Small Scale Offerings

A small scale offering is where: 

  • you do not make offers to more than 20 people in a 12 month period; and 
  • those offers do not raise over $2 million in aggregate (i.e. the amount the employee pays to acquire the shares or exercise the options).

For these purposes, you can disregard any offers that are excluded under any of the other exemptions. 

For example, if you make offers to 21 people in a 12 month period and one of those offers was to a sophisticated investor, you will still be exempt from providing a disclosure document.

This exemption is commonly relied on by early stage startups, who may only offer options or shares to a small handful of people in a 12 month period.

Sophisticated Investor

You do not need to provide a disclosure document if your offer is to a sophisticated investor. This is someone who: 

  • has invested at least $500,000 in the company; 
  • holds net assets of at least $2.5 million; or 
  • whose gross income for the previous 2 financial years was at least $250,000 per year.

Professional Investor

professional investor is someone who: 

  • has an Australian Financial Services Licence; or 
  • manages gross assets of at least $10 million.

They are exempt from receiving a disclosure document because they have the skills and expertise to make an informed decision by themselves.

Senior Management

If you are offering shares or options to members of senior management in your company, or their related parties, you do not need to provide a disclosure document.

Exemption Conditions

In each of these scenarios, it is important to note that ‘the offer’ must be a personal offer. This means that you must make the offer to a person who is likely to be interested as a result of: 

  • previous contact; or 
  • a professional connection.

You can only send the offer to the person who may intend to accept, meaning that you cannot send a blanket offer out to multiple recipients.

For example, an offer emailed to a specific employee would meet this requirement. However, an email blast out to your whole company would not.

Alternative Exemption Possibilities

If none of the above exemptions apply, you may still seek an exemption from your disclosure requirements under the Australian Securities and Investments Commission (ASIC) Class Order 14/1001 (the Class Order). However, this is only possible if your company meets the relevant conditions.

A key condition is that the value of all offers of options or shares to any eligible participant in the applicable 12-month period is not greater than $5,000 per participant. Unfortunately, this generally precludes most companies from relying on the Class Order. However, there are some possible exemptions to the $5,000 cap, so it is worth speaking to your legal advisor about your particular goals and circumstances. 

Type of Disclosure Document

The Act states that if an offer needs disclosure, a prospectus must be prepared for the offer unless the Act allows for an offer information statement (OIS) to be used instead. 

Your company can use an OIS (rather than a prospectus) if the amount of money you raise, when combined with all amounts previously raised under an OIS, is $10 million or less. Importantly, this excludes amounts payable on securities issued under an OIS as part of an employee share scheme. 

This means that when determining how much money you have raised, you do not count amounts raised under the other disclosure exemptions. Notably, you can exclude any amounts raised by sophisticated or professional investors. 

It also means that you may offer options or shares under your employee share scheme according to your OIS, up to any value. This is so long as you do not use the OIS to raise other capital. 

In short, if you have not raised funds from investors under an OIS, you can use an OIS as your disclosure document for your employees. 

This is good news, as an OIS is a shorter document than a prospectus and simpler to prepare. Amongst other things, an OIS must:

  • identify the company; 
  • outline the nature of the securities;
  • describe the company’s business; and
  •  include a copy of a financial report of the company.

Importantly, the financial report must: 

  • be for a 12 month period; 
  • have a balance date that occurs within the last six months;
  • be prepared in accordance with accounting standards; and 
  • be audited.

You must lodge the OIS with ASIC and all directors must consent to its lodgment. It will expire 13 months after the date you lodge it with ASIC. This means that you will have to prepare and lodge a new OIS each year that you offer securities that need disclosure under your employee share scheme. 

How to Make an Offer Under an OIS

To make an offer under an OIS, your company must:

  • prepare an OIS (which must satisfy all requirements of the Act and include audited accounts, with a balance date within the last six months);
  • obtain the consent of your company directors;
  • lodge the OIS with ASIC;
  • update your employee share scheme offer letter to reflect that you are making the offer under the OIS;
  • provide the employee with the OIS along with their offer; and
  • proceed as usual with the offer of securities.

Key Takeaways

When you first implemented your employee share scheme, you probably did not need to worry about disclosure documents. This is likely because you were only issuing options or shares to a handful of people, meaning that you were covered by the small scale offering exemption. However, as your startup grows and you start hiring large numbers of people each year, you may no longer fall under one of the exemptions. If that is the case, you will need to prepare a disclosure document (most likely an OIS). This document is governed by the Act and you will likely need legal support to ensure that you meet your obligations. If you would like advice regarding your employee share scheme or assistance preparing a disclosure document, contact LegalVision’s startup lawyers on 1300 544 755 or fill out the form on this page.

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