Would you like to bring investors into your company? Do you want to issue shares? There are strict legal requirements, plus some important legal documents and compliance steps to keep in mind. You need to get these right, then you can move on to focus on using the funds to grow your business. This article will look at raising capital through equity funding.

What is equity funding?

A way to generate finance for your business without going into debt, is to issue shares to investors. You can issue different types of shares, such as ordinary shares or preference shares.

What are the legal requirements? Ordinary shares are common shares, usually with one vote for share. With preference shares, the investors may or may not have voting rights, but they may have preferential rights to dividends and/or a liquidation preference if the business is sold. This means they will be the first ones to be repaid their investment if you sell your business, even before yourself and your employees. They may negotiate a multiple, for example they receive twice their investment back.

There are strict rules on issuing equity, set out in Chapter 6D of the Corporations Act. There is a set of rules and obligations for a listed public company, and a set of rules and obligations for a private company or an unlisted public company.

Who can invest in a private company?

A proprietary (private) company can only offer shares to existing shareholders, employees and certain classes of investors. These include:

  1. personal offers to no more than 20 people in a 12-month period to raise a limit of $2 million – this can be to anyone (e.g friends and family), as long as the offers are personal offers (as defined in the Corporations Act);
  2. to sophisticated investors who meet a net worth or income test, and have earned at least $250,000 or have $2.5 million in net assets for the previous 2 years;
  3. to professional investors – a detailed test, includes venture capitalists and investment funds;
  4. to (or through) financial services licensees; and
  5. to people associated with the business, including senior management.

Conclusion

Are you interesting in equity funding? It may be a great option to gain vital early stage funds without taking on debt. Your revenue can be focussed on growing the business. If equity funding would work for your business, it’s important that you understand the relevant law and prohibitions, including the prohibitions on advertising. Please obtain legal advice on your proposed equity funding offer and what you need to do to comply with the law, from a lawyer that understands startups and equity funding.

LegalVision can help you conduct equity funding, including negotiating the shareholders agreement, the investment terms, and completing the compliance requirements. We have capital raising lawyers with local and international experience, and with large and small business experience, so get in touch today at 1300 544 755.

Working on a startup? Download LegalVision’s Startup Manual – a free 60-page manual featuring 10 case studies and tips and tricks from Australia’s leading VCs and startups.

Ursula Hogben
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