Overview of Equity Capital Raising Options

Companies have several avenues for raising equity capital, each with its own set of legal, regulatory, and practical considerations:

1. Initial Public Offering (IPO): An IPO involves a company listing on a stock exchange for the first time to raise funds from the public by offering securities. This is a highly regulated option, necessitating compliance with numerous Corporations Act requirements (including disclosure under Chapter 6D.2 of the Corporations Act) and the listing rules of the relevant stock exchange.
2. Secondary Capital Raising: This encompasses various methods used by already listed companies, such as institutional placements, share purchase plans, rights issues (renounceable or non-renounceable), or entitlement offers.
3. Crowd-Sourced Funding (CSF): CSF operates under a separate regime outlined in Part 6D.3A of the Corporations Act. Offers under this regime generally do not require disclosure under Part 6D.2.

Companies may also retain equity through dividend reinvestment plans or offer debt/hybrid securities, though these are not the primary focus of companies, we are happy to advise on this if needed. The choice of capital raising options depend on factors such as legal and regulatory considerations (including the need for a disclosure documents), time, cost, complexity, target investor base, demands on management, underwriting needs, attractiveness to investors, and liability regimes. Proprietary companies face greater restrictions then public companies as they are generally prohibited from engaging in activities requiring disclosure to investors under Chapter 6D, except as detailed below.

The Disclosure Requirement: When is it Needed?

A key principle in raising capital by issuing shares is that offers of shares generally require disclosure to investors, unless an exemption applies. This is often referred to as the “disclosure requirement”. Subject to specific exemptions and excluding CSF offers, offers of shares for issue (s 706) require disclosure unless sections 708 or 708AA dictate otherwise.

Offers of Shares that do not need Disclosure: Key Exemptions

Exemptions from the disclosure requirement are crucial, particularly for proprietary companies seeking to raise capital without contravening s 113, and for public companies aiming to minimise fundraising costs. Key exemptions include:

• Small-Scale Offerings Exemption (s 708(1)): Also known as the “20/12/2 million” exemption. This applies when a company makes personal offers of its shares, and within a rolling 12-month period, no more than 20 investors are issued shares, and no more than $2,000,000 is raised.
• Sophisticated Investor Exemption (s 708(8)): This exemption applies if the minimum investment is at least $500,000 (including previous payments for shares in the same class). Alternatively, it applies if a qualified accountant’s certificate (issued within the last 2 years) confirms the investor has net assets of at least $2,500,000 or a gross income of at least $250,000 for each of the last two financial years. 
• Professional Investor Exemption (s 708(11)): Applies to offers made to “professional investors” as defined in s 9 (excluding certain persons). This includes financial services licensees (not limited to claims handling), APRA-regulated bodies, superannuation trustees, persons controlling gross assets of at least $10,000,000, and listed entities.
• Senior Manager Exemption (s 708(12)): Covers offers made to “senior managers” (persons involved in management, regardless of designation, director, or secretary status, as amended by ASIC Corporations or their relatives or controlled body corporates. 
• Employee Incentive Schemes: Offers under employee incentive schemes (ASIC Class Order [CO 14/1000] for listed bodies and ASIC Class Order [CO 14/1001] for unlisted bodies).

It’s important to note that multiple exemptions can be combined across different recipients, and even if a disclosure exemption applies, companies must still comply with advertising and anti-hawking restrictions. Companies must be aware that certain offenses, civil liabilities, and compensation provisions under the Corporations Act still apply to such offerings, particularly concerning false, misleading, or deceptive conduct.

Consequences of Non-Compliance and Available Defences

Failing to comply with disclosure requirements can lead to serious consequences, including:

• Criminal Liability: For breaches of procedural requirements (e.g., offering shares in a non-existent body, without a disclosure document or application form, or before the 7-day waiting period), or for reliance on but breach of the small-scale exemption. Also, if persons listed in s 729 fail to notify the offeror about prospectus deficiencies.
• Criminal or Civil Liability: If the prospectus is “defective” (misleading, deceptive, omits required disclosure, or new circumstances arise that should have been disclosed) and the defect is materially adverse to an investor.
• Common Law Liability: For fraudulent or negligent misrepresentation in the prospectus by the company, its directors, or persons responsible for statements.
• Investor Remedies: Such as compensation claims under s 729 for defective prospectuses (against the company, directors, and “involved” persons) or a return of securities and refund if a supplementary prospectus was not issued.
• General Financial Services Market Misconduct Offences: Triggering offences under the Corporations Act relating to false and misleading statements and dishonesty (ss 1041E and 1041G), and civil action for loss or damage (s 1041I), or consumer protection laws under the Australian Securities and Investments Commission Act 2001 (Cth).
• ASIC Stop Orders: ASIC can issue “stop orders” under s 739 to prevent offers or issues of shares if the prospectus contravenes s 728 (defective) or s 715 (not clear, concise, effective).
• Court Injunctions and Orders: The court may grant injunctions to restrain continued use of a defective prospectus or other orders, such as “unwinding” transactions or compensation.

Defences to Liability

Statutory defences are available for civil and criminal liability under Chapter 6D:

• the due diligence defence (s 731). This is where a person is not liable for misleading or deceptive statements (or omissions) in a prospectus if they prove they made all reasonable inquiries and, after doing so, reasonably believed the statement (or omission) was not misleading or deceptive.; or alternatively
• the reasonable reliance defence (s 733). This defence applies if the person proves they reasonably relied on information provided by someone other than a director, employee, or agent of the company (if a company) or the person’s employee or agent (if an individual).

Navigating the complexities of equity capital raising in Australia requires careful consideration of these disclosure requirements, exemptions, processes, and potential liabilities. Seeking specialist legal and financial advice is highly recommended to ensure compliance and optimize outcomes.

Further resources

For more information, you can visit the following useful Australian Securities & Investments Commission website:

• Regulatory resources for Fundraising
• Offering securities under a disclosure document
• Crowd-sourced funding: Guide for intermediaries

This article provides a comprehensive overview of the key concepts and considerations to register a company in Australia.

If you are considering registering a company in Australia, our team of specialist commercial lawyers are here to help every step of the way. Contact us today for a confidential discussion about your situation.