How Can My Small Business Issue Shares?

In Short

• Issuing shares means creating new shares to sell, increasing the total shares in your company.

• You must follow your company’s rules and legal requirements before issuing shares.

• Notify the regulator within 28 days of issuing shares to keep records up to date and avoid penalties.

Tips for Businesses

Always act in the best interests of your company when issuing shares. Avoid pricing shares below their true value to prevent tax problems. Seek professional advice for valuations and make sure all legal documents and company records are accurate and updated promptly.

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Table of Contents

• Share Issue vs. Share Transfer
• What Steps Do I Take to Issue Shares?
• The Share Issue Process
• Key Takeaways
• Frequently Asked Questions

Is your small business ready to raise money from investors? Do you want well-performing employees or advisors to have an ownership stake in the company? One way to achieve these goals is for your Company to create and issue new shares. In this article, we set out why and how your small business can issue new shares.

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Share Issue vs. Share Transfer

Many founders confuse issuing shares with selling shares.

A share transfer is a sale of shares. Existing shareholders transfer their shares to other shareholders or third parties, based on the market value of the shares. The exchange is between the existing shareholder and the buyer, not between the company and the buyer. A shareholder may wish to sell their shares to:

• relinquish their stake in the company;
• reduce their ownership stake; or
• earn additional income.

On the other hand, a share issue involves the company creating new shares to sell to incoming shareholders. This often occurs when a company wants to:

• raise capital to fuel business growth; or
• incentivise employees and advisors. 

Existing shareholders continue to hold their shares alongside the new shares issued by the company.

Strategic Considerations

Before issuing shares, consider the following:

• Dilution: New share issuances will dilute the ownership percentages of existing shareholders. Ensure this aligns with your company’s goals and the expectations of existing shareholders.
• Valuation Impact: Issuing shares can affect your company’s valuation. Consider consulting with a financial or accounting professional if you are having difficulty valuing your business. 
• Timing: The timing of share issuance can significantly impact its success. Consider market conditions and your company’s stage of growth. For example, if the economy has slowed at the time of a share issuance, it may make it more difficult for your company to achieve the strongest possible valuation.

Using Share Issues to Incentivise Employees

As a small business, you may employ or engage talented workers or advisors, but may not be able to afford to pay them as much as you would like or perhaps as much as they could earn elsewhere. Instead, your business can issue new shares to those people, encouraging and incentivising them to perform at their peak while growing the business simultaneously. Employees can pay for their shares in cash or through their services.

However, to avoid paying for shares at market value (which does not carry much incentive), your employees can take advantage of various tax concessions available to employees under an employee share option plan or similar incentive scheme. Under these arrangements, an employee or advisor may be able to receive cheaper shares or options (which can be converted or exercised in the future to obtain shares) in a more tax-optimisable manner.

What Steps Do I Take to Issue Shares?

1. Check Key Company Documents

Before issuing shares, review your shareholders’ agreement and company constitution. These documents may stipulate that you must offer existing shareholders in the company the opportunity to purchase new shares before offering them to other investors, a provision known as pre-emptive rights. 

Your shareholders’ agreement and constitution (in addition to the Corporations Act) may also require the company to obtain certain approvals from the Company’s directors and/or shareholders before you issue shares.

2. Understand Your Disclosure Requirements

When issuing shares, your Company may need to disclose certain information about itself and the offer to prospective investors using a prospectus, offer information statement, or other statutorily prescribed disclosure document, unless an exception applies. You will have to meet strict disclosure requirements when preparing these documents under the Corporations Act.

Some common exceptions to the disclosure requirements include:

• share issues made by a private company pursuant to which less than $2m across a rolling 12-month period from investors that are not classified as ‘sophisticated or ‘professional’. This is known as a ‘small scale’ offer; or
• offering new shares to:
  • Sophisticated Investors: Investors who are the following:
    • are purchasing more than $500,000 worth of shares; or
    • have net assets of at least $2.5 million or a gross income of at least $250,000 per annum for the last two financial years. The assets or income must be certified by a qualified accountant within the last 6 months.
  • Professional Investors: Investors who are the following:
    • have an Australian Financial Services Licence; or
    • manage gross assets of at least $10 million.

3. Set your Share Price

When issuing shares in your company, you will need to set the share price, which is the price the investor pays in exchange for each share. The share price should reflect your company’s current valuation immediately prior to the share issue, divided by the company’s fully diluted share capital at the same time.

The fully diluted share capital of your company refers to the total number of shares a company would have on issue if all securities on issue in the company (for example, convertible notes, SAFEs, options, warrants) were exercised or converted into shares.

The Share Issue Process

Below, we outline the key steps involved when a company issues shares. Please note that this is a general overview, and your shareholders’ agreement and constitution may outline slightly different steps.

Step 1

The board approves the decision to issue new shares in the company, based on the requirements outlined in its shareholders’ agreement and constitution (if applicable), as well as any additional requirements that may be specified under the Corporations Act. The types of approvals required will ultimately depend on the nature and terms of the investment. For example, additional approvals will be required if the Company is proposing to amend its constitution in connection with the investment.

Step 2

The company may need to offer the shares to its existing shareholders, usually in writing through a document called an issue notice, depending on whether the existing shareholders have pre-emptive rights. Alternatively, the company may ask the shareholders to waive these rights to the extent they have them.

Step 3

If any shares remain after the pre-emptive rights process has been completed or if shareholders have waived those rights, the company can typically offer them to a third party.

Step 4

The key legal documents required to formalise the investment are typically prepared by the company’s legal counsel, including:

• Subscription Agreement: A document under which the company agrees to issue and the investor agrees to purchase the new shares.
• Deed of Accession to the Shareholders’ Agreement (if the company has a shareholders’ agreement in place): The investor agrees to be bound by the terms of the existing shareholders’ agreement, as amended by this Deed of Accession. Alternatively, the parties may be entering into a new shareholders’ agreement as part of the investment. In that case, the document will need to be signed.

Step 5

Once the key transaction documents have been signed, the company must:

• issues the investor with a share certificate for its new shares;
• update the company’s member register to reflect the issue of the new shares to the investor; and
• notify ASIC within 28 days of the share issue date to avoid a late fee.

Key Takeaways

Issuing shares can be an effective way for small businesses to raise capital, incentivise key personnel, and fuel growth. However, the process requires careful planning, consideration of legal aspects, and adherence to regulatory requirements. Before proceeding with a share issue, it’s crucial to review your company’s governing documents, understand your disclosure obligations, and carefully consider the impact on existing shareholders and company valuation.

The steps involved in issuing shares – from board approval to finalising legal documents and updating company records – require attention to detail and often benefit from professional guidance. Whether you’re looking to attract new investors or reward valuable employees, a well-executed share issue can provide your small business with the resources and motivation needed to reach its next stage of development.

If you want to issue shares, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is the difference between issuing shares and transferring shares?
Issuing shares means the company creates new shares to sell, increasing total shares. Transferring shares means existing shareholders sell their shares to others without changing the total number.

How do I set the price for new shares?
The price should reflect your company’s current value. It’s best to get a professional valuation to avoid setting it too low, which could lead to tax issues.