Are you a start-up looking to raise capital?

Raising capital in Australia is a tightly regulated endeavour, subject to stringent penalties for non-compliance with established rules. The regulatory framework encompasses guidelines for both the entities raising funds and those facilitating the process.

Individuals pursue capital raising for diverse purposes, ranging from pooling resources for specific ventures, such as property acquisition or business initiation, to more intricate structures like establishing a unit trust or raising funds for a company's operational activities.

Regardless of the motive, adherence to regulations is paramount when engaging in capital raising activities in Australia. Non-compliance with the rules may result in severe consequences for both the fundraising entity and its facilitators.

The fundamental requirement is the preparation of a regulated disclosure document before initiating any capital raising efforts. However, exceptions to this rule exist, allowing certain fundraising activities to proceed without a formal disclosure document.

SMALL-SCALE PRIVATE OFFERINGS

Small-scale private offerings, often referred to as the '2/20/12 Rule,' provide a common avenue for capital raising without a regulated disclosure statement. This exemption applies when the funds raised do not exceed $2,000,000 from a maximum of 20 investors within a rolling 12-month period. Typically, small-scale private offerings are facilitated through an informal Information Memorandum (IM).

To determine the number of investors, certain exclusions apply, such as those investing at least $500,000, recipients of offers outside Australia, officers of the company, and individuals meeting specific financial criteria, such as earning more than $250,000 for the last two years or having net assets of at least $2.5 million.

Publicising the offer to the general public is prohibited under the small-scale private offering exemption. Each offer must be a personal one, directed to individuals with a prior connection, often limited to family, friends, and known business associates.

Anti-avoidance provisions prevent the creation of multiple entities to circumvent the 2/20/12 thresholds. The Australian Securities and Investments Commission (ASIC) has the authority to aggregate transactions of closely related bodies engaged in fundraising.

ASIC also possesses the power to modify fundraising provisions for specific individuals or groups, offering relief in certain circumstances, such as for business introduction services related to managed investment schemes.

Various exemptions from disclosure requirements exist, encompassing offers to sophisticated or wholesale investors, financial services licensees, professional investors, and others outlined in the Corporations Act.

The type of entity used for fundraising influences applicable regulations. Private companies have restrictions on the number of non-employee members and fundraising methods. Public companies, on the other hand, can raise money publicly but may need a regulated disclosure document if exemptions do not apply. Unit trusts are commonly used for long-term investments but may fall under managed investment scheme rules.

Managed investment schemes (MIS) provisions apply when money is pooled, requiring compliance with specific regulations and potential licensing requirements. Different types of disclosure documents, including prospectuses, short form prospectuses, profile statements, and offer information statements, may be required depending on the circumstances.

Assisting in capital raising is also regulated, necessitating an Australian Financial Services Licence (AFSL) or becoming an authorised representative. Lawyers and accountants may be exempted from holding an AFSL under specific conditions, provided their involvement is ancillary to legal or accounting services and does not extend to promoting offers or providing financial services.

WHAT NEXT?

At BlackGold Legal we work with our clients from the ground-up. We are able to provide strategic advice for businesses looking to start and scale. Contact us today to set up a consult.