BROSO ASSOCIATES LAWYERS
CLIENT BRIEFING PAPER 2013
FUNDING THE GROWTH OF PRIVATE COMPANIES
EQUITY FINANCING
IN AUSTRALIA
This Client Briefing Paper provides a general overview of some of the legal and practical issues involved in Australian private companies securing equity financing. It is intended to be introductory in nature and does not consider all of complexities involved in raising equity finance by private companies.
Broso Associates has considerable experience in advising and representing private companies seeking and obtaining equity finance, and likewise we have advised and acted for a range of financiers in relation to their equity investments in Australia private companies. We would be more than happy to provide further information regarding the topics and issues covered in this Client Briefing Paper.
If you have any questions of require further information regarding equity financing in Australia please contact Benjamin Broso on:
+61 424 796 563 or at
OVERVIEW OF THIS CLIENT BRIEFING PAPER
THIS CLIENT BRIEFING PAPER PROVIDES A GENERAL
INTRODUCTION TO THE LEGAL ISSUES SURROUDING
THE RAISING OF EQUITY FINANCE THROUGH THE
MARKETING OF AN ISSUE OF SECURITIES.
The Client Briefing Paper covers:
• reasons for private companies raising capital;
• chapter 6D Disclosure requirements for issues of securities; • Disclosure requirements for a prospectus of offer
information statement;
• important exceptions to the general requirement for Disclosure;
• the special situation of small-scale personal offerings; anD • the preparation anD contents of information memoranDa.
WHO THIS CLIENT BRIEFING PAPER WILL ASSIST?
The Client Briefing Paper will assist:
CONTENTS
5 INTRODUCTION
6
MARKETING AND DISCLOSURE
REQUIREMENTS
7
EXCEPTIONS TO THE DISCLOSURE
REQUIREMENTS
8
SMALL SCALE OFFERINGS
INTRODUCTION
Australian private (Pty Ltd) companies usually have an assortment of reasons for seeking additional capital (in the form of equity) for their business.
Among the most common reasons for private companies raising capital are to: • accommoDatestart-upcostsanDexpensesDuringthecompany’sinitial
businesscycle (oftencalleDseeDorventurecapital);
• funDexpansionanDgrowthofthebusiness (oftencalleDexpansion capital); anD
• enablethecompanytoretireexistingDebt.
The first step for a private company when raising capital is sometimes the most difficult: determining how much capital is required.
The board of directors of most companies will arrive at an appropriate capital requirement in consultation with their Chief Financial Officer or Financial Controller and their accountants (and perhaps their corporate advisors).
Once the capital requirement has been determined the business of capital raising begins. This will usually involve an offer of securities in return for a pre-determined amount of capital.
MARKETING AND DISCLOSURE REQUIREMENTS
As a starting point the marketing of securities is governed by Chapter 6D of the Corporations Act 2001 (Cth) and the primary effect of the provisions in that chapter is to determine when a disclosure document must be prepared in relation to a securities offering and what information must be contained in the offer documentation.
As a general rule, section 706 requires that any offer of securities will require disclosure to investors, which will take the form of either:
• an offer information statement (where the securities offering Does not exceeD au$10m); or
• a prospectus.
In either case the following conditions must be met:
• the Disclosure Document must not contain any misleaDing or Deceptive statements, must be DateD, anD must have receiveD the consent of all of the Directors of the company;
• the Disclosure Document must be loDgeD with the australian securities anD investments commission (asic);
• any investor application form must either be incluDeD in or accompanieD with the Disclosure Document;
• if it is founD that the Disclosure Document loDgeD is Deficient or a significant new matter arises, then a supplementary or replacement Document must be loDgeD, or else all money is to be returneD to applicants;
• all application money receiveD must be helD on trust until the relevant securities are issueD (or application monies returneD).
In the case of a Prospectus, Chapter 6D contains quite detailed requirements for the document’s contents, including all the information that investors and their professional advisors would reasonably require to make an informed assessment of:
• the rights anD liabilities attaching to the securities;
• the assets anD liabilities, financial position anD performance, profits anD losses anD prospects of the company that is to issue the securities.
If the offer of securities in a company requires the preparation of either an Offer Information Statement or a Prospectus the services of an AFSL holder will be required in order to market the securities offering.
EXCEPTIONS TO THE DISCLOSURE REQUIREMENTS
Preparing and lodging disclosure documents is time consuming and expensive. Fortunately section 708 of the Corporations Act provides a number of welcome exceptions to the requirement for a company to prepare and lodge with ASIC either an Offer Information Statement or a Prospectus.
There are four main exceptions:
• thesophisticatedinvestorexception – this is where minimum
amount payable for the securities by the investor is au$500,000 or it appears from a certificate given by a qualifieD accountant no more than 2 years before the offer of securities is maDe that the investor has net assets of at least au$2.5m or has a gross income for each of the last 2 financial years of at least au$250,000;
• theexperiencedinvestorexception – this applies where the offer
of securities is maDe through an afsl holDer who is satisfieD on reasonable grounDs that the investor to whom the offer is maDe has previous experience in investing in securities that allows them to assess:
(i) the merits of the offer; (ii) the value of the securities;
(iii) the risks involved in accepting the offer; (iv) the investor’s own information needs; and
(v) the adequacy of the information given by the person making the offer.
(Note: before the offer of securities is made the AFSL holder must give the investor a written statement of the AFSL holder’s reasons for being satisfied as to the matters set out in (i) to (v) above.
Additionally, the investor to whom the offer is made must sign a written acknowledgment before the offer is made that the AFSL holder has not given the investor a disclosure document in relation to the offer of securities.)
• theprofessionalinvestorexception – this exception applies to an
investor who has or controls gross assets of at least au$10m (incluDing any assets helD by an associate or unDer a trust that the investor manages); anD
SMALL SCALE OFFERINGS
In the current economic climate, small scale offerings are becoming increasingly popular.
Small scale offerings provide a relatively low cost mechanism for start-up companies seeking seed capital and also for companies seeking expansion capital to access investors with minimal cost and complexity.
However, this fundraising mechanism is not without its pitfalls. It is essential to remember that to satisfy the requirements of this exception the offer of securities must be a personal offer, meaning that the offer may only be accepted by the investor to whom the offer is made.
Additionally, the offer must only be made to an investor who is likely to be interested in the securities offer, having regard to:
• pREvIoUS CoNTACT bETwEEN ThE pERSoN mAkING ThE oFFER ANd ThAT INvESToR; oR
• SomE pRoFESSIoNAL oR oThER CoNNECTIoN bETwEEN ThE pERSoN mAkING ThE oFFER ANd ThAT INvESToR; oR
• STATEmENTS oR ACTIoNS bY ThAT INvESToR ThAT INdICATE ThAT ThEY ARE INTERESTEd IN SECURITIES oFFERS oF ThAT kINd.
The fact that small scale offerings must only be conducted by way of personal offers is reflected in section 734 of the Corporations Act.
Section 734 essentially contains a prohibition on advertising small scale offerings by stipulating that a person must not advertise or publish a statement that refers directly or indirectly to an offer of securities that does not need a disclosure document because that offer is by way of a small scale offering.
Despite the above numerous exceptions to the requirement to prepare and lodge an Offer Information Statement or Prospectus, in most cases it is unlikely that the securities offering will occur without the preparation of any disclosure document whatsoever.
USING AN INFORMATION MEMORANDUM
The document that is ordinarily prepared in lieu of an Offer Information Statement or Prospectus is an Information Memorandum. This document is not regulated by the Corporations Act and does not need to be lodged with ASIC.
An Information Memorandum is usually intended to give prospective investors all the information they need in order to make a decision whether or not to invest in the company.
The Information Memorandum is not required to be lodged with ASIC and is not a public document. Usually it is prepared as a Confidential Information Memorandum and a prospective investor may be required to execute a Non-Disclosure Agreement prior to being granted access to the document.
An Information Memorandum should be prepared with a high degree of care and skill. In particular, a company preparing an Information Memorandum needs to be extremely careful that the document does not contain any misleading or deceptive statements.
Extreme care should be taken with any financial projections included in the document which, if incorrect, may give rise to legal action on the part of the investors.
Companies should be aware of the following matters in relation to any projections they include in an Information Memorandum:
• whEN A CompANY mAkES A REpRESENTATIoN wITh RESpECT To ANY FUTURE mATTER ANd ThE CompANY doES NoT hAvE REASoNAbLE GRoUNdS FoR mAkING ThE REpRESENTATIoN, ThE REpRESENTATIoN IS oRdINARILY TAkEN To bE mISLEAdING;
• financial projections which are honestly maDe by a company anD baseD on reasonable grounDs are not misleaDing just because they Do not come to pass;
• financial projections by a company may be misleaDing if: (i) the company Does not believe in the projections or is recklessly inDifferent to the truth of the projections; or (ii) there is no objectively reasonable basis for the projections; or (iii) there are important assumptions unDerlying the financial projections or qualifications to which the projections
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