In Australia, the disclosure requirements for capital raising for a small company is usually be less demanding than those for a large complex business, thus providing good opportunities for innovative small and medium sized enterprises (SMEs) to transform their ideas into a viable business.
The Corporations Act 2001 (the Act) sets out the types of offers that do not need disclosure. Most of these exemptions relate to circumstances where those who receive the offer are considered to be in a position to take care of themselves, and therefore do not require the degree of mandatory disclosure required for an IPO.
What are the disclosure exemptions?
By way of summary, the exemptions to the requirement for disclosure documents include:
- small scale offerings aka 20/12/2 rule (i.e. companies that do not raise more than $2 million in any rolling 12 month period from no more than 20 investors);
- offers to sophisticated investors (e.g., investors who invest at least $500,000, who have net assets of at least $2.5 million, or who have a gross income of at least $250,000 per year for the last 2 financial years);
- offers to professional investors (includes financial services licensees, entities that control assets of at least $10 million, and listed entities)
- offers to existing shareholders under a dividend reinvestment plan or share purchase plan;
- some rights issues/entitlement issues made to existing shareholders in listed companies;
- offers to employees under some employee share plans;
- some offers of listed foreign securities as part of the consideration for a takeover bid; and
- some offers of listed foreign securities, to existing shareholders, under a rights issue.
Why informal disclosure is still necessary
Even when disclosure exemptions apply, sophisticated and professional investors can still be very discerning when deciding the venture in which to invest. SMEs still need to be able to satisfy prospective investors that they have a convincing business plan, a robust IP portfolio, an impressive and experienced Board, and clearly articulated prospects.
One way of achieving this is through an informal disclosure documentation, such as an Information Memorandum (IM). An IM should tell the story of the company, demonstrate an impressive IP portfolio, include financial forecasts which can be substantiated by sound research, and the business’ success stories. It ensures that investors are fully informed and confident in the business.
The preparation of an IM, when carried out with the assistance of legal practitioners, does not need to be an expensive or onerous exercise (unlike formal disclosure), and has many benefits. These include:
- keeping investors informed and confident;
- minimising risks of allegations being made against the company for misleading and deceptive conduct by investors who make a loss on their shares;
- demonstrating to investors that the business has a robust IP portfolio, has taken considered measures to protect the business IP and has considered whether it is infringing on another party’s IP; and
- demonstrating to investors that the business has already considered who its competitors are, and what measures it has taken to deal with its competitors.
|Handpicked related article: Attracting New Angel Investors to your Innovative Startup|
A guide to preparing informal disclosure documents
As is the case with a prospectus document, an IM should clearly set out the rights and liabilities that come with being an investor, as well as the assets and liabilities, financial position and performance targets, profits and losses and prospects of the business. That is, the IM should generally provide information that a prospective investor might reasonably be expected to know about the business before they invest.
Often, an informal disclosure document will include information that is prospective (e.g. forward-looking statements, future orders and financial forecasts). Such representations should be made with caution and should take into account the variable nature of events that may influence future performance (e.g. as cash flow, regulatory environment, and market volatility).
Things to look out for, in particular, will be:
- overly optimistic and unrealistic financial forecasts which are based on hypothetical events and cannot be supported by reliable data or evidence;
- references to speculative or contingent future events or situations as definite;
- incorrect statements and representations about the IP portfolio (e.g. claims that the business owns a registered patent when in fact it has only applied for one);
- failure to identify any third party rights in the IP (e.g. claims that the IP is owned by the business when it is in fact licensed);
- references to product orders being secured when the business has only received expressions of interest;
- exaggerations about the management team’s profile, experience and capabilities; and
- failure to clearly articulate risks in the investment, including any regulatory barriers that might hinder or delay the commercialisation of the product or invention.