Raising capital without disclosure (prospectus)

Last updated 25 August 2015
The general rule provided in the Corporations Act 2001 (Cth) (Act) is that you can’t raise capital in Australia without issuing a disclosure document.  Disclosure is generally thought of as being a prospectus but there are also other allowable forms of disclosure documents.  Chapter 6D of the Act contains what is  widely referred to as the “fundraising provisions” which regulate the way in which capital can be raised in Australia without issuing a formal disclosure document.

Investor Legal ServicesImportantly:

– section 727 prohibits the offer of Securities to Investors without disclosure; and
– section 703 provides that you cannot contract out of the Fundraising provisions.

This article will discuss the general rule and the exemptions and issues that people raising capital without a disclosure document should consider.

Exceptions to the requirement to issue a disclosure document

Section 706 of the Act provides that an offer of Securities for issue needs disclosure to investors under Part 6D of the Act unless section 708 or 708AA says otherwise.

The small scale offerings exception (20 issues or sales in 12 months)

The small scale offering exception (known as the “The 20/12 rule”) is contained in section 708(1) of the Act.  The provision provides that a disclosure document is not required if a person makes a personal offer of Securities that results in Securities being issued or transferred to 20 or fewer persons with no more than $2 million being raised in any rolling 12 month period.  The 20/12 rule provides that:

An offer by a body to issue securities will breach the 20 investor ceiling if:

  • it results in the number of people to whom securities of the body have been issued exceeding 20 in any 12 month period; and
  • a body makes offers that results in a breach of the $2 million ceiling if the body issues securities exceeding $2 million in any 12 month period.

The 20/12 rule also applies to transfers of existing Securities.

Key definitions for chapter 6D

What are securities?

Securities are defined as:

  • Debentures, stocks or bonds issued or proposed to be issued by a government;
  • Shares in, or debentures of, a body; or
  • Interests in a managed investment scheme; or
  • Units of such shares.

Securities are not:

  • Derivatives as defined in Chapter 7, other than an option to acquire by way of transfer a security covered by paragraph (a), (b), (c) or (d); or
  • excluded securities.

To be within the scope of section 727, the Securities offered or planned to be offered must fall into one of the categories in (a) to (d) above regardless of whether or not the body was incorporated.  Practically however it would seem difficult to fall outside the scope of section 727 by offering something other than Securities.

What is a disclosure document?

Section 705 describes the four different disclosure documents as follows:

  • Prospectus;
  • Short form prospectus;
  • Profile Statement;
  • Offer Information Statement (OIS).

Note that each has different requirements and applicable thesholds

What is an offer?

For the purposes of Chapter 6D, the term ‘offer of securities’  is defined by s700(2) and includes:

  • an offer to issue unissued securities; and
  • an offer for sale of securities that have previously been issued.

What is a “personal offer”

The test to determine whether a personal offer has been made is contained in s708(2).  A personal offer:

  • may only be accepted by the person to whom it is made; and
  • is made to a person who is likely to be interested in the offer having regard to:
    • previous contact between the person making the offer and that person; or
    • some professional or other connection between the person making the offer and that person: or
    • statements or actions by that person that indicate that they are interested in offers of that kind.

Exceptions to the requirement to issue a disclosure document

Section(s) 708(8) – 708(21) of the Act contains further exceptions to requirements to issue a disclosure document.  They include (subject to certain requirements) offers made:

  • to sophisticated investors;
  • to financial services licensees;
  • through financial services licensees;
  • to professional investors;
  • to people associated with the body;
  • to certain present holders of securities;
  • that include issues or sales for no consideration;
  • under a compromise or arrangement under Part 5.1 of the Act;
  • under a Deed of Company arrangement;
  • as part of a Takeover; and
  • Debentures in certain bodies.

Note that this list includes only the common exceptions. For the full list, please refer to section 708 of the Act.

Restrictions on advertising

Section 734 prohibits advertising of offers for the issue of securities covered by the exception for 20 issues in 12 months.  Specifically, section 734(1) provides that a person must not, advertise, or publish a statement that directly or indirectly refers to an offer, or intended offer that would need a disclosure document.

If an offer of securities needs a disclosure document, a person must not:

  • advertise the offer or intended offer; or
  • publish a statement that:
    • directly or indirectly refers to the offer or intended offer; or
    • is reasonably likely to induce people to apply for the securities.

Counting the number of offers made

In counting the number of issues and sales of a body’s securities, section 708(5)(b) provides that issues and sales that result from ‘offers that are not received in Australia’, should be disregarded in counting the numbers of offers.

Arguably it would seem that a body could make any number of personal offers; however it is only issues that are used to determine the number offers made – a practical and significant difference.

In counting issues (evidenced on a share register for example) assuming the offer that resulted in the issue was a personal offer, by a body, and was received outside Australia, then the issue would not be counted for the purposes of the 20/12 rule.  Alternatively, if the member received the offer whilst in Australia and is simply resident in another country, then the offer would be counted.  Offers made pursuant to a disclosure document not counted.  It is possible that a body raises capital by both personal offer and by way of a disclosure document then those made by way of disclosure document should be disregarded.

The $2 million threshold

It is possible to breach the 20/12 rule by simply raising too much money.  The following formula is used to determine the amount of money raised by the body issuing securities:

  • the amount payable for the securities at the time when they are issued;
  • if the securities are shares and are partly-paid – the amount payable at a future time is a call is made;
  • if the security is an option – any amount payable on the exercise of the option; and
  • if the securities carry a right to convert the securities into other securities – any amount payable on the exercise of that right.

Rights issues

Section 708AA of the Act exempts rights issues from the requirement to issue a disclosure document subject to the satisfaction of certain tests.

Offers made by Australia body’s received overseas.

Section 700(4) provides that Ch 6D applies to offers of securities that are received ‘in this jurisdiction’, regardless of where any resulting issue, sale or transfer occurs. Therefore on its face, Ch 6D does not apply to Australian body’s offering securities outside Australia.

Care must be taken in making any offers for the sale or transfer of securities in other jurisdictions.  The securities laws in the jurisdiction where the offer was made may (or may not) impose similar (or different) obligations regarding disclosure to investors.

Must bodies raising capital issue a disclosure document?

As provided above, the Act provides various exceptions to the general prohibition against raising capital without a disclosure document.  Therefore the need for a disclosure document is not an absolute one.  A client’s specific circumstances need to be considered before deciding whether a disclosure document is required.

The anti-avoidance provisions

Section 740 of the Act describes the anti-avoidance provisions applicable to the Chapter 6D and the 20/12 rule contained therein.  The aim of the section is to ensure that multiple bodies are not formed by the same controllers who then raise more than the monetary threshold and make more than 20 issues in 12 months.

ASIC may determine in writing that a number of different bodies are closely related and that their transactions should be aggregated for the purposes of the fundraising provisions .

Section 740(2) of the Act provides that ASIC may determine in writing that the transactions of a body and of a person who controls the body should be aggregated.

Control in the case of an entity is defined by section 50AA of the Act as “an entity controls a second entity if the first entity has the capacity of determine the outcome of decisions about the second entity’s financial and operating policies“.

Indicia of whether or not the first entity has this capacity include:

  • the practical influence the first entity can exert; s50AA(2)(a)
  • any practice of pattern of behaviour affecting the second entity’s financial or operating policies; s50AA(2)(a)

Importantly s50AA(3) provides that a first entity does not control a second entity merely because the first and third entity jointly have the capacity to determine the outcome of decisions about the second entity’s financial and operating policies.

ASIC power to modify or exempt

Section 741 of the Act provides that ASIC may exempt or modify any of the provisions of Chapter 6D by exempting or making them apply to an individual or group of individuals.

Notable class orders in this regard include “Business Introduction or matching services” – [Class Order CO 02/373].  The Class Order permits:

  • an Operator to conduct an introduction service through a publication or meeting subject to various requirements including the inclusion of “prominent statements”; and
  • the amount that can be raised in any twelve (12) month period though the Operator is lifted from $A2Million to $A5Million.

Related Articles by Dundas Lawyers

The Crowd-sourced Funding Bill 2016

ASIC Statement on Initial Coin Offering

Further information

Dundas Lawyers has assisted numerous organisations to raise capital without disclosure in compliance with Chapter 6D.  To ascertain how Dundas Lawyers can assist you personally, contact us for an obligation free and confidential discussion.

Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.

Legal Practice Director
Telephone: (07) 3221 0013 Facsimile: (07) 3221 0031 Mobile 0419 726 535


This article is general in nature and cannot be regarded as legal advice. It is general commentary only. You should not rely on the contents of this article without consulting one of our lawyers. If you would like advice regarding how the law applies to your individual circumstances, then contact Dundas Lawyers.

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