06 Jun Guide: Dealing with s708 investors

Posted at 14:29h in Guide by

Guide: Dealing with s708 investors

 

If you are considering raising capital from investors, you will need to have an entity that is capable of receiving investment and managing the interests of the entity and the investors.  The most common entities used for this purpose in Australia are companies incorporated under the Corporations Act 2001 (Cth) (the “Act”), and all references to legislation in this guide are to the Act unless noted otherwise.

Raising capital from investors in Australia generally requires that the company issuing securities prepare, lodge and distribute a disclosure document with any offer of securities (s706). However, there are exceptions; and this Guide sets out the key points relating to the exceptions provided under s708.

This Guide is provided as background information, which is general in nature and does not take your specific circumstances into account and is not to be construed as advice. Prior to making any decisions or taking any action relating to anything contemplated by this Guide, you should obtain legal and financial advice.

The most common form of disclosure document is the prospectus, and the costs involved in preparing a prospectus are significant; as are the governance procedures that must be put in place when preparing one.  The exemptions from the requirement to prepare a disclosure document allow a company to raise capital with reduced costs and regulatory burdens for capital raising activities that are generally accepted by the regulator as lower risk to the broader community.

The following provides some guidelines around offering shares to investors in private Australian companies.

  1. Raising capital under s708(1) – Small scale offerings (the 20/12 rule)
    • If a company is planning to raise up to $2M from up to 20 investors in any rolling 12 month period, then it can do so under s708(1) without a disclosure document.
    • The key limitations relating to an offer under s708(1) are that:
      • Each offer must be a “personal offer”, which means that:
        • It may only be accepted by the person to whom it is made; and
        • That person is associated with the company (limitations may apply), or has otherwise indicated that they might be interested in such an offer;
      • The concept of a rolling 12 month period means any 12 month period.
    • Please note that when counting the investors, and amounts raised, for the purposes of this section, investors to which another exemption applies are not counted toward the stated limits.
    • This exemption has the broadest application as no other specific limitations apply to the investors to whom an offer of this kind can be made. However, other restrictions do apply and you should obtain financial and legal advice before raising funds under this section.
  2. Raising capital under s708(8) – sophisticated investors
    • If a company is planning to raise capital from “sophisticated investors” there are no upper limits on the amount of capital that can be raised, or the number of investors that can be offered securities (but please note that proprietary companies cannot have more than 50 non-employee shareholders).
    • However, the provisions of s708(8) impose strict rules about who a “sophisticated investor” is, including:
      • that an offer of securities with an amount payable of at least $500,000, will deem the relevant investor as sophisticated (s708(8)(a); or
      • that the aggregate amounts paid by an investor for securities in the same class are at least $500,000 on acceptance of an offer, will deem the relevant investor as sophisticated (s708(8)(b)); or
      • the investor provides the company with a certificate from a qualified accountant that was issued no more than 6 months prior to the offer is made to the investor that the investor has:
        • assets of at least $2.5M; or
        • gross income for each of the last 2 financial years of at least $250,000.
      • For the purposes of item (c) above, the offer can also be made to a company or trust controlled by a person who meets the requirements of the certificate discussed above.
  1. Raising capital under s708(11) – professional investors
    • If a company is planning to raise capital from “professional investors” there are no upper limits on the amount of capital that can be raised, the number of investors that can be offered securities (except that a proprietary company may not have more than 50 non-employee shareholder), or any certificates from third parties required.
    • However, the provisions of s708(11) have significant requirements that the company must meet to rely on the exemption, including:
      • the person falls within the definitions of “professional investor” under section 9 of the Act; or
      • the person controls gross assets of at least $10M.
    • Accordingly, the terms of any offer to professional investors must require evidence to substantiate an investor’s eligibility under this provision.
  2. Raising capital under s708(12) – senior managers of the company
    • If a company is planning to raise capital from members of its senior management team, or their family and associated entities, then the Company may do so in accordance with this provision.
    • Please note that there are limits on which family members can invest; and issues of control of any associated entities need to be considered carefully.
  3. Raising capital under s708(13) – existing shareholders
    • If a company is planning on raising capital from existing shareholders, then s708(13) applies in limited circumstances, including where the company:
      • offers fully paid shares to existing shareholders under a dividend reinvestment scheme; or
      • offers interests to existing shareholders in a managed investment scheme with specific attributes.
    • No other offers of securities to existing shareholders are provided for under this section, and any offers to existing shareholders contribute to the ceilings provided for in section 708(1).
  4. Answers to frequently asked questions (FAQs)
    • Question: If I offer shares to existing shareholders under s708(1) are those shareholders counted for each offer they accept?
    • Answer: No, the 20 investor ceiling is calculated on the total number of actual shareholders who have taken up the company’s securities in the previous 12 month period. However, any amounts invested into the company are counted toward the $2M ceiling.
    • Question: Can I offer shares to 20 investors, and allow them to then sell their shares to whomever they please?
    • Answer: If a company issues shares to an investor who then on-sells those shares it may be deemed an indirect issue of shares for the purposes of s707. For example if the company issues shares to 20 investors, and has consequently reached the 20 shareholder limit within a 12 month period, and any of those shareholders then sell their shares to more than one other person, the company will likely be in breach of the Sale Offer provisions of s707 and of s708 if there are reasonable grounds for concluding that the securities were issued or acquired for the purposes of sale within 12 months. Sale Offers are also subject to disclosure document requirements.
  5. Other exemptions
    • Section 708 does contain other exemptions, and these have been purposefully omitted from this guide. If you would like any further information about these exemptions, please contact us with your query.

 



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