Very few private or unlisted companies that are seeking to raise capital companies have any clear understanding of the laws associated with raising capital, nor the options available to them.
Many companies spend thousands of dollars and countless hours going around in circles. Quite often, it is not due to poor advice – it is because they are receiving advice with no clear direction.
Am I the most qualified to be writing on this topic? Probably not. There are probably a thousand skilled lawyers in Australia that could provide these tips, but I have not seen them publish on Anthill just yet.
The information below is valuable for real Australian growth companies, who despite a turbulent market… have found opportunity.
Step 1: Learn to love Section 708 of the Corporations Act.
For most people reading this, spending $60k to $120k on creating a ‘full disclosure’ prospectus is not an option.
Section 708, provides a legal exemption to creating a full disclosure document and therefore reduces both the time and cost involved with raising capital.
Step 2: Master 20/12! It is a cornerstone element of this legal exemption
To put it simply and in context, personal offers of shares do not need to be accompanied by a full disclosure document if you do not sell shares in your company to more than 20 people in any 12 month period. A further element to the exemption is that you can not raise more than $2 Million by this method in a 12 month period.
To summarise… no more than 20 investors, in any 12 month period and no more than $2m is to be raised. Do not bother trying to think of ways around this, it is not worth the jail time you could potentially do!
Step 3: Engage a lawyer to sign off on your Information Memorandum.
Although you can gain exemption from creating a full disclosure document, you will still need to create an information memorandum, which discloses a fair assessment of the strengths, weaknesses, opportunities and threats of your business. In this regard I strongly recommend you use a firm that has some brand recognition in the marketplace. The brand carries an assumption of experience and depth… something that more sophisticated investors like to see.
Step 4: Make offers of a personal nature.
While that may sound exciting, note that to access the exemption the offer must be a personal offer. Summarised in non-legal jargon, a personal offer is one that:
1. may only by accepted by the person who you made the offer to; and
2. is made to a person who is likely to be interested because of one of the following reasons:
(i) there has been previous contact between you and the person you are making the offer to.
(ii) there exists some professional or other connection between you and the person you are making the offer to.
(iii) statements or actions by the person indicate that they are actually seeking to look at deals of this nature, which are traditionally high risk.
Step 5: Target high net worths, strategic investors and smart money.
These investors understand the value of their investment dollar… and will demand a better deal. So why would you want that? The answer is simple. They may have 10 to 40 years of experience, networks and ideas that you currently don’t have. You have done a great job to get to where you are, but with them on board… your growth rate could double or triple your current forecasts and enable you to otherwise develop your business in a faster or smarter way.
Step 6: Promote your deal via speciality services created for this.
Capital raising is a game of strategy and luck. I am consistently amazed to learn how investors come across deals. Either way, you need to ensure that your deal is in front of as many investors as is (legally) possible.
Growth Companies Seeking to Raise Capital
If you are a growth company seeking to raise capital, and you would like to promote your opportunity to thousands of high net worth and professional investors, go to http://www.wholesaleinvestor.com.au
Steve Torso is the founder of Wholesale Investor Pty Ltd, a high-end subscription-based magazine and website providing wholesale, profession and institutional investors with access to leading private companies. Wholesale Investor’s website structure ensures investors are provided with the appropriate warnings and then the opportunity to confirm that they want to look at private equity deals.
It’s Venture Capital Month at Anthill. Click the image below to attend the event!