1. Introduction
Apart from venture capital, information technology and other growth-oriented start-up businesses may achieve cost effective capital raising through:
(a) private capital raising;
(b) government innovation initiatives;
(c) Initial Public Offering (IPO) (discussed in Venture Capital); or
(d) strategic alliance.
A - PRIVATE CAPITAL RAISING
1. General prohibition on new capital raising without a disclosure document
If an offer of securities requires disclosure to investors, a person must not make an offer of securities or distribute an application form for an offer of securities unless a disclosure document is lodged with the Australian Securities and Investments Commission (ASIC).(1) Generally, all offers to issue securities require disclosure unless exempted by the Corporations Act 2001 (Exemptions).
2. Types of disclosure document
Depending on the offer, the most likely form of a disclosure document for start-ups is a prospectus or offer information statement (OIS).(2) Most start-up funding is undertaken without a disclosure document instead relying on one or more of the Exemptions.
3. Securities offers not requiring a disclosure document under the Corporations Act 2001(3)
Any offer under the following do not require a disclosure document:
(a) "20/12/2" rule
(b) Sophisticated investors
(c) Executive officers
(d) No consideration
Other exemptions not covered here are provided for in Corporations Act 2001.(4)
(a) "20/12/2" Rule
No disclosure document is required:
(i) if the offers made are personal and result in the number of people to whom securities of the body have been issued being less than 20 in any 12 month period. An offer is personal if:
* the person who accepts the offer is the person who received it; and
* the making of the offer is a result of previous personal or professional connection with the offeror or from statements or actions by that person indicating an interest in receiving offers of that kind;(5) and
(ii) if the issue of securities to 20 or fewer persons raises no more than $2 million in a rolling 12 month period. In working out the amount raised, amounts payable on exercise of options, possible calls on partly paid shares and any amounts payable on conversion of a convertible security are included.
(b) Sophisticated investors
No disclosure document is required to raise funds from sophisticated investors.
Sophisticated investors are those who:
(i) invest at least $500,000 either in the present issue or when added to past investments in the offeror by that investor exceed $500,000; or
(ii) have net assets of at least $2,500,000, have gross income in the previous two years of at least $250,000 per annum (proved by certificate from a qualified accountant no more than 6 months old to the date of issue).(6)
In calculating the $500,000 amount, any amount payable in the future, such as on exercise of options or payment of calls on partly paid shares is not included.
(c) Executive Officers
No disclosure document is required for an offer to an executive officer of a company or his or her spouse, parent, child, brother or sister, or an offer to a body corporate controlled by any of them.(7)
(d) No Consideration
No disclosure document is required if no consideration is given on issue of the securities (or in the case of options on exercise either).(8)
4. Security Hawking
It is an offence to offer securities for issue or sale during or resulting from an unsolicited meeting or telephone call with another person unless the offer is made to a sophisticated investor (see above) or is an offer of listed securities made by telephone by a licensed securities dealer.(9)
5. Disclosure Documents
(a) General prospectus disclosure test
Generally, a prospectus must disclose all the information that investors and their professional advisers reasonably require to make an assessment of:
* the rights and liabilities attaching to the securities offered;
* the assets and liabilities, financial position and performance, profits and losses and prospects of the body that is to issue (or issued) the shares, debentures or interests.
(b) Forward-looking statements
Profit forecasts and other forward-looking statements in a disclosure document must be based on reasonable grounds.
(c) Persons liable for all statements in a prospectus
The issuer corporation, its directors, persons who have consented to become directors, and the underwriters of an issue will be liable to investors for misleading statements in or material omissions from the prospectus (subject to the due diligence defence described below). They are also liable for the failure to make investors aware of new material information that comes to light after a prospectus has been lodged with ASIC.
(d) Professional advisers and experts
Professional advisers and experts involved in the preparation will be liable to investors only for misleading statements attributed to them in the prospectus (subject to the due diligence defence described below).
(e) Due diligence defence
A defence is available to the offeror corporation, its directors, underwriters, experts and advisers if they made all reasonable inquiries and after doing so, believed on reasonable grounds that:
* in the case of a statement, the statement was not misleading or deceptive, and
* in the case of an omission from the prospectus there was no omission from the prospectus in relation to that matter.(10)
A director or expert who has consented to being listed in the prospectus may publicly withdraw that consent and avoid liability.
(f) Fundraising up to $5million under an Offer Information Statement (OIS)
A corporation can use an OIS to raise up to $5 million (during its life). The $5 million amount includes all amounts raised by a related body corporate or an entity controlled by a person who controls the body or an associate of that person.
An OIS must identify the offeror, the nature of securities and the nature of its business and describe what the funds are being raised for. It must also state the nature of risks involved in investing in the securities and give details of amounts payable in respect of the securities (including fees and commissions and charges). The document must also expressly state that it is not a prospectus and has a lower level of disclosure than a prospectus and state that investors should obtain professional investment advice before accepting the offer. The due diligence inquiries imposed on the body making offers under the OIS and its directors are less onerous than those for a prospectus, turning principally on actual knowledge of the person rather than knowledge after specific enquiry.
An OIS must include a financial report for the body for a 12 month period with a balance date within 6 months of the date the securities are first offered under the OIS, must be prepared in accordance with Accounting Standards and must be audited.(11)
B - GOVERNMENT INNOVATION INITIATIVES
The Commonwealth government currently maintains Innovation Investment Funds (IIF), provides Research and Development (R & D) Start Grants and administers the Building on IT Strengths (BITs) program.
AusIndustry (http://www.ausindustry.gov.au administers the IIF program. The first round of the IIF involved $130 million Commonwealth funding matched on a maximum 2:1 basis with private capital. A second round of $91million is now underway.
BITs is a $158 million initiative administered by the Commonwealth Department of Communications, Information Technology and the Arts (see http://www.dcita.gov.au/bits). It has three core elements:
(a) Incubator Centres in each State and Territory to assist IT&T small to medium enterprises ($78m);
(b) support the development, trial and demonstration test-beds and advanced information infrastructures ($40m); and
(c) develop Tasmania as an ’Intelligent Island’ ($40m).
The R&D start program administered by AusIndustry provides grants and loans of up to $15 million for research and development. Grants typically range between $50,000 and $5 million. The recipient of an R & D start grant will generally be required to commercialise project intellectual property (IP), meet project milestones and restrict dealings with project IP. A recipient in breach of funding conditions may be required to repay the grant and the government may be entitled to clawback project IP. Applications can be submitted to AusIndustry any time throughout the year.
The Industry Research & Development (IR&D) Board’s Committees meet regularly to consider projects, with smaller projects being considered every two weeks and larger projects every six to eight weeks Further information can be found at the R&D Grants and Loans section of the ausindustry website. http://www.ausindustry.gov.au
C - STRATEGIC ALLIANCE
A company considering a strategic alliance with another company should ensure the following issues are covered in the agreement establishing the venture:
(a) Business vehicle
May be incorporated or unincorporated, partnership, trust or company, agency or representative relationship. Seek tax advice before deciding.
(b) Business issues
The contributions of services and capital and responsibilities of each shareholder to the joint venture (JV), provision for further funding and other contributions and default financial provisions to ensure venture continuity.
(c) Shareholder relationship
Share purchase or share issue, identity of shareholders, constitution, rights attaching to various classes of shares, number and class of shares to be subscribed for by each shareholder and any restrictions on transfer.
(d) Board of directors and company officers
The number, nomination and removal process of directors, director’s fees and expenses, powers and responsibilities and procedures for holding directors meetings and making resolutions.
(e) Other issues
Control provisions such as minority rights, dividend policy, financing, general exit strategy and termination provisions, management of the company and customer ownership.
(f) Regulatory issues
E-commerce spawns joint ventures and alliances between competitors. Such alliances must not infringe the per se prohibitions against price fixing and group boycotts under the trade practices legislation.
Price fixing for the purpose of a joint venture or in relation to pricing by joint buying groups or joint advertising of sale price of goods or services collectively acquired may not infringe the trade practices legislation.
Consider structuring the venture as follows: the competitors are related corporations in relation to venture, vertical exclusive dealing conditions are imposed and a right to terminate exists in the event of conduct against the interest of the joint venture or alliance.(12)
Other relevant Articles on this site:
Other relevant Fact Sheets:
Anti-Competitive Trade Practices
Corporations and Securities Law
Funding Business Start-ups
End Notes
1) section 727(1)Corporations Act 2001
2) section 705 Corporations Act 2001
3) section 708 Corporations Act 2001
4) section 708 Corporations Act 2001
5) section 708(2)Corporations Act 2001
6) section 708 (8) Corporations Act 2001
7) section 708 Corporations Act 2001
8) section 708(15)Corporations Act 2001
9) section 736 Corporations Act 2001
10) section 731 Corporations Act 2001
11) section 715 Corporations Act 2001
12) sections 45(8), 45(6) Trade Practices Act 1974(Cth)