Capital Raising

Raising capital is essential to start and grow businesses. It is also commonly used to fund the purchase of significant assets such as equipment or real estate.

Raising capital in Australia is a heavily regulated activity, with severe penalties for people who do not comply with the rules. Different rules apply to both the party raising the money and for people who assist them.

Generally, you must not raise capital without first preparing a regulated disclosure document. However, there are some exceptions to this rule.

Small-Scale Private Offerings

A small-scale private offering is the most common form of capital raising that does not require a regulated disclosure statement. A capital raising will qualify as a small-scale offering if all of the following requirements are met:

• It is not offered to the general public;
• less than $2,000,000 is raised;
• from no more than 20 investors;
• in any rolling 12 month period.

Offers made under the small-scale private offering exemption are generally done through an Information Memorandum, which is not formally regulated.

The number of investors does not include those who:

• have agreed to invest at least $500,000;
• receive the offer outside Australia;
• are officers of the company;
• have provided a qualified accountant’s certificate evidencing that they have earned more than $250,000 for the last 2 years or have net assets of at least 2.5 million (a ‘sophisticated investor or ‘wholesale client’).

There is no restriction on the number of people who may receive an offer, as long as the offer does not result in more than 20 investors in any 12 month period.

Other Exemptions

Exceptions also apply to offers made:

• To sophisticated or wholesale investors;
• To financial services licensees;
• To professional investors;
• To people associated with the offer or;
• To certain present holders of securities;
• That include issues or sales for no consideration;
• Under a Deed of Company arrangement; and
• As part of a Takeover.

The Type of Entity Raising the Money

The type of entity through which you are raising money will also impact on what regulations apply.

A regulated offer document cannot be used to raise money for a private company. Private companies cannot have more than 50 non-employee members, and cannot raise money other than through an excluded offer that does not require regulated disclosure

A unit trust is another popular entity for raising money and holding shared investments. This is because the income and capital gains are not taxed in the trust, but flow through to the unit holders, who pay tax in their own right. A unit holder may qualify for capital gains tax concessions on any gains and a super fund will only pay tax at the rate applicable to the fund.

Managed Investment Schemes

When money is raised via a unit trust the managed investment scheme (MIS) requirements may also apply.

The MIS may be required to hold an Australian Financial Services Licence (AFSL) as well as a responsible entity and a licensed asset custodian. Similar rules regarding capital raising apply to an MIS, including exceptions for small scale raising.

Types of Disclosure

If regulated disclosure is required for a capital raising, then it may take the form of a number of different documents.

The four different disclosure documents are:

• Prospectus;
• Short form prospectus;
• Profile Statements; and
• Offer Information Statement.
• Assisting Others to Raise Capital

You must not carry on a business of providing financial services to others unless you hold an appropriate AFSL or are an authorised representative of someone else’s AFSL. In order to obtain an AFSL you must demonstrate that you have the necessary training and experience to undertake the activity. You must also have suitable insurance.

To become an authorised representative, you will need to satisfy the licence holder that you have the necessary qualifications and experience and confirm your advice to products on the approved list.

It’s complex! Leave it up to Melbourne’s best business lawyers.

If you have any questions about raising capital, please contact Alex Martin on 9481 2000 or alex@tauruslawyers.com.au*

*Lawyers may assist with capital raising as long as their main task is legal advice, rather than financial advice.