The 20/12 Rule and anti-avoidance provisions

Chapter 6D of the Corporations Act 2001 (Cth) (Act) contains what is widely referred to as the “fundraising provisions” which regulate how capital can be raised in Australia without issuing a formal disclosure document.

The general rule is that companies that raise more than A$2Million are required to issue a disclosure document.  In particular, an offer requires a disclosure document if the result is that securities are issued to more than twenty (20) people in a twelve (12) month period, and that more than $2 million is raised.  This is known as the “20/12 rule”.

When an offer of securities does not require disclosure

To be exempt from disclosure obligations, the offer must be a “small-scale” offer – that is, one which does not breach the 20/12 rule – and must be a “personal offer”.  Section 708(2) states that an offer of securities is a “personal” one where that offer may only be accepted by the person that it is made to, and that person is likely to be interested in the offer, based on expressions of interest by the person, or the relationship between the offeror and that person.  Note that this rule also applies to transfers of securities, not just issues.

ASIC’s powers under Chapter 6D – exemptions and anti-avoidance

According to section 741, the Australian Securities and Investments Commission (ASIC) has the power to exempt a person from the application of section 708, or to expressly order that the rule does in fact apply to a person, or class of people.

Further, under section 740 ASIC is able to make a determination that two or more separate entities are so closely related that their individual transactions should be aggregated for the purposes of assessing their disclosure obligations.  These are referred to as ‘anti-avoidance’ determinations.  If ASIC makes such an order, security issues or transfers by one body will be taken to also be executed by the other(s).  Any money received from the issue or transfer will also be taken to be received by the others.

Section 740 seeks to prevent companies circumventing the disclosure requirements under Chapter 6D by offering large-scale offerings that have been broken up and issued by a number of different companies in collaboration with each other.

When will bodies be ‘closely related’?

There has been little consideration of ASIC’s powers under section 740.  However, analogy can be drawn with other provisions in the Act, such as section 601ED, which provides an anti-avoidance regime in relation to the registering of managed investment schemes and also revolves around the 20/12 rule.  Guidelines issued by ASIC provide some insight into how it will determine when two (2) or more bodies are ‘closely related’.  Schemes will be considered closely related when:

(a)        The schemes are promoted by different persons but the circumstances and similar natures indicate that the persons are likely to be associated; or

(b)        The activities of the schemes are similar, and the schemes form part of a ‘systematic promotion’, and the interests being offered relate to different pools or common enterprises, not being part of one scheme; or

(c)        The schemes are so similar that one prospectus might reasonably relate to offers in both schemes, and they are structured separately because it leads to the offers as being ‘excluded’ from registration as the 20/12 rule is complied with by each scheme.

When compared with how two or more entity’s transaction can affect their disclosure obligations, it can be inferred from ASIC’s approach here that they may consider companies to be ‘closely related’ where:

(a)        The companies are separate entities, however the circumstances and the similarity of the nature of the companies indicates that they, or their directors are likely to be associated; or

(b)        The activities of each company, whilst different, can be seen to form some interrelated scheme of issuing securities which may be taken as an attempt at circumventing the 20/12 rule and hence avoiding disclosure obligations.

Where a company seeks to divide its capital raising into segments or projects, even if those individual projects taken separately do not break the 20/12 ceiling, it is likely that ASIC will consider them as being interrelated.  In this case, ASIC may provide that company with a written determination stating that the transactions should be aggregated for the purposes of the disclosure provisions.  If this occurs, security issues that were considered separate from each other may then amount to a breach of the 20/12 rule under the Act.

Links and further references

Legislation

Corporations Act 2001 (Cth)

Further information about corporate law

If you need advice on the 20/12 Rule or the anti-avoidance provisions as it applies to your circumstances, contact us for a confidential and obligation-free discussion.

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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