Raising capital without disclosure

Aug 25

General

In the ordinary course where there is an offer of securities, a disclosure document must be prepared. However, there are some exceptions to this rule under sections 708, 708AA and 708A of the Corporations Act 2001 (Cth) where disclosure is not required. This article will briefly consider the small scale offering sophisticated investor and professional investor exemptions.

Further, the application of these provisions to foreign investors and corporations is discussed.

Section 708 exemptions

In Australian Securities and Investments Commission v Cycclone Magnetic Engines Inc, it was held that the exemptions in s 708, and in particular the "small-scale offering" exemption, allow offers to be made without a disclosure document This case also held that the person relying on the exemption needs to proves that the exemption applies.

These exemptions include:

Small scale offerings;
Offers by exempt public authorities;
Sophisticated investors;
Professional investors;
Offers to certain associated parties;
Certain offers to present holder of securities;
Issues or sales for no consideration;
Offers of options for no consideration;
Compromise or arrangement under Pt 5.1;
Deed of company arrangement;
Takeovers;
Debentures of ADIs and life companies;
Offers by exempt bodies; and
Offer through financial services licensee.

Small scale offerings

The small scale offerings exemption allows up to 20 personal offerings in any period of 12 months. To qualify for this exemption, the offers:

must be personal offers for issue or sale of a body's securities;
must not result in the breach of the 20 investors ceiling; and

must not result in a breach of the $2 million ceiling.

The $2 million ceiling for an issue of securities includes:

the amount payable for the securities at the time when they are issued;
if the securities are shares issued partly-paid—any amount payable
at a future time if a call is made;
if the security is an option—any amount payable on the exercise of the option;

if the securities carry a right to convert the securities into other securities—any amount payable on the exercise of that right.

It is an offence, for a person who has relied on the small scale offerings exemption to issue or transfer securities, without disclosure to investors, where the issue or transfer would breach the 20 investors ceiling or the $2 million ceiling.

Sophisticated investors

$500,000 or more

No disclosure to investors is needed if the minimum amount payable for the securities is at least $500,000. The offers can be aggregated to make up the $500,000 but does not include any amount paid that has been lent by the offeror.

Assets and Income test

No disclosure is needed if a qualified accountant gives a certificate, six months prior to the offer being made, that the offeree either has net assets of at least $2.5m or has had a gross income of $250,000 per year for the last two years. The exemption is also available if the offer is made to a company or trust controlled by a person who meets this criterion. The net assets or gross income of a company or trust may be included as the net assets or gross income of the person who controls them.

Offer through financial services licensee

An offer of a company’s securities for issue or sale does not need disclosure to investors where the offer is made through a financial services licensee. In order for this to apply the licensee must be satisfied on reasonable grounds that the person to whom the offer is made has previous experience in investing in securities.

Based on this experience the investor must be able to assess:

(a) the merits of the offer;

(b) the value of the securities;

(d) the investor's own information needs; and

(e) the adequacy of the information given by the person making the offer.

Additionally, prior to the time when the offer is made:

(a) the licensee must provide a written statement with reasons as to why the above conditions have been; and

(b) the person to whom the offer is made must sign a written acknowledgment that the licensee has not given the person a disclosure document, prior to the offer being made,

For this exemption to apply.

Professional Investors

If the offer is made to a “professional investor” no disclosure is needed. A “professional investor” includes:

(a) a financial services licensee;

(b) a body regulated by APRA such as a bank, life insurance company or general insurance company;

(d) the trustee of a superannuation fund with net assets of at least $10 million;

(e) a person who controls at least $10 million;

(f) a listed entity, or a related body corporate of a listed entity;

(g) an exempt public authority;

(h) a body corporate, or an unincorporated body, that carries on a business of investment in financial products, interests in land or other investments,
and invests funds received from the public for that purpose;

(i) a foreign entity that, if established or incorporated in Australia, would be covered by one of the preceding paragraphs.

Foreign Investors

Australia’s disclosure provisions do not apply to offers received by foreign investors outside of Australia as they are quite simply out side the jurisdiction of the Corporation Act 2001 (Cth).

The requirements on foreign corporations raising capital in Australia

Generally, foreign companies offering securities in Australia need to comply with the prospectus provisions in Ch 6D. However, the exemptions provided in s 708 also apply. In addition even where a prospectus is required, ASIC may grant conditional class order relief from these provisions where the cost of compliance is disproportionate to the regulatory benefit. Further, ASIC has indicated in regulatory guide 72 that conditional relief has been granted from the prospectus provisions in Ch 6D for:

(a) rights issues by foreign companies where the securities are in the same class as those already held by Australian investors;

(b) foreign takeovers and schemes of arrangement; and

Advertising

Advertising, where disclosure is not required, the offer is not subject to the normal practices when raising capital under disclosure. It should be noted that there is a special restriction on advertising on small-scale offerings.

Further Links

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For more information on raising capital in Australia, please contact Gavin McInnes on 07 3367 8681 or g.mcinnes@grmlaw.com.au.

"The information contained in this article is general in nature and cannot be regarded as anything more than general comment. Readers of this article should not act on the basis of this comment without consulting one of GRM LAW 's legal practitioners who will consider their particular circumstances".

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