Raising capital from investors can be a fantastic way to finance business expansion. You may have got to a point where you’re ready to move into international markets or bring new technology to market. Raising capital can help facilitate these, and other, avenues for growth.
Whether a private or public company, the main issue to consider when promoting an offer to investors is disclosure. Here’s some more info on the distinct types of disclosure when raising capital in Australia.
Your options for raising capital
There are basically two options for raising capital in Australia – one is with full disclosure and the other with limited disclosure. Full disclosure applies mostly to public companies limited by liability (Ltd) when raising money from retail investors.
For smaller private (Pty Ltd) companies, capital can be raised with limited disclosure from both retail and professional investors.
Raising capital with limited disclosure
Chapter 6D of the Corporations Act – better known as the ‘fundraising provisions’– regulates the way in which capital can be raised in Australia without full disclosure.
According to the Act, you’re not required to issue a disclosure document if you’re raising less than $2 million from less than 20 investors in any rolling 12-month period.
This is known as the “20/12 rule.” The same provision holds true if you are raising capital from ‘sophisticated investors’.
What is a sophisticated investor?
Chapter 6D of the Corporations Act defines a ‘sophisticated investor’ where:
- the minimum amount payable for securities (in your business) is at least $500,000
- a qualified accountant certifies the total net assets of an individual as more than $2.5 million, or
- an individual’s gross income for each of the last two financial years is at least $250,000 per annum.
Put simply, the wealthier an investor, the less information you need to give.
If you’re a Pty Ltd company trying to raise capital for your business, then your options might be to comply with the 20/12 rule or raise capital from sophisticated investors.
Capital raising rules for public companies
Public companies in Australia can raise funds from the public by issuing securities. Offering securities, such as shares or debentures for sale, requires a disclosure document.
Disclosure documents can include:
- a prospectus – long and detailed
- an offer information statement – short and punchy but limited use
- a profile statement – must be approved by ASIC, or
- a two-part simple corporate bond prospectus – when issuing debt instruments like fixed-income securities.
A prospectus is the most common type of disclosure document and has the broadest information requirements. An offer information statement has lower disclosure requirements but can only be used for capital raisings of up to $10 million in total.
Advertising your offer of securities to the public
Before advertising your intention to raise capital from investors, a company must lodge a disclosure document with the Australian Securities and Investments Commission (ASIC). Beyond that, advertising must include a statement that an offer will be accompanied by a copy of a disclosure document.
If an investor wishes to buy securities, they’ll need to complete an application form in the disclosure document. Companies raising capital aren’t allowed to cold call members of the public to sell securities, although an Australian financial services licensee may do so in certain circumstances. For example, when a disclosure document is not required to support a capital raise.
Other capital raising options for private companies
In general, the smaller the company, the less likely you’ll be able to meet your capital raising target. It depends mostly on your network of contacts.
If you’re unable to raise the capital you seek from investors, you might consider traditional alternatives such as:
- bank finance
- venture capital or private equity
- business incubators
- tech start-up accelerators, and
- other forms of funding.
Seek professional advice when looking to commence a capital raising
At Lakis & Knight, we help SMEs and public companies make informed decisions about how they’ll raise capital from investors. Other critical issues to consider are voting rights, director’s duties, compliance, dispute resolution, listing rules for ASX-listed companies, and other components.
Our personalised approach and fixed-fee service offering ensure you’ll be fully informed before raising capital from investors. If you’d like to speak further about expansion plans for your business, contact us to book your free, no-obligation discovery session.