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Where to go for capital? The options, the rules, the requirements for each

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You’ve decided to offer equity in your company to investors in order to grow your business — but what’s the next step you need to take? In the third of this six-part series on raising capital, corporate advisor Dr Mark Rainbird discusses the avenues you have to distribute your offer to interested parties.

When you boil down the act of raising capital — regardless of how you choose to do it — it’s essentially about finding people who will support your company by giving you cash for shares. That’s it. There are several different ways that one can go about finding these individuals, however, and they all have their advantages and disadvantages.

Know Your Rules for Individuals

Investors don’t necessarily need to be obtained via an established platform like the ASX.

While you can make a personal offer to just about anyone you know, there are varying levels of disclosure that need to be made, as outlined in Section 708 of the Corporations Act.

While I’d strongly advise reading through the section yourself, the main thrust of it is that you don’t need to make disclosure if:

  • the offer is considered to be a personal one, or;
  • the investors are deemed sophisticated, or;
  • the offer is made to someone within the management of the company itself (or a member of their family), or;
  • the offer is made to a trust or company controlled by a person that meets some of the qualities that define sophisticated investors.

There are, however, further restrictions on these disclosure rules. Despite sounding like it might be a new cricket competition, the Twenty Twelve rule is one of the most significant within the capital raiser’s handbook.

Essentially, this dictates that when approaching retail investors, only 20 “concessions” are available to retail investors in a 12 month period. Additionally, Section 734 of the Corporations Act dictates that companies acquiring investors in accordance with the Twenty Twelve rule are unable to advertise or publicise their offer. It is important to note that you cannot “induce people to apply for shares.”

Angel Investors

The aforementioned rules may be of particular interest to those who are looking for assistance in the form of angel investors — named as such due to the fact that they tend to give early-stage businesses that first push that they need to help their operation succeed in the first periods of growth.

These investors tend to be high net-worth individuals who have had prior experience in investing.

They are reasonably savvy about which businesses are and aren’t likely to succeed and, therefore, you need to ensure that you’ve got either an excellent business plan or disclosure document to show them. They often assist the entrepreneur to move the business forward.

Small Scale Capital Raising Options

So you’re not all that well connected professionally and you’ve asked everyone that you think might be interested in investing in your company. Where to from here, you ask? There are a number of options that you have at your disposal to attract investors.

The Australian Small Scale Offerings Board (ASSOB) works through sponsors, who assist the company with preparing an offer document to list on ASSOB’s web platform and to advertise their capital raise (in a compliant manner). The platform also has a secondary sales function for investors wishing to sell their shares.

Wholesale Investor utilise a magazine, website and events to advertise companies that are capital raising. Companies can generally raise up to $2 million (without a disclosure document), and up to $5 million if they operate under the Class Order 02/273, meaning the restrictions on fundraising are lifted somewhat.

One of the advantages of these platforms is that they have thousands of subscribers — all of whom are sent details of new offers when they are listed. Companies would be well advised, however, to remember that this isn’t necessarily a silver bullet; you’re still going to have to do leg work in order to encourage investors.

Typically it is best to work with a professional service provider who is experienced in capital raising and will assist you through the process.

The ASX and Beyond

For most companies, the granddaddy of aspirations is to list on the Australian Stock Exchange (ASX).

Listing on the ASX requires a significant amount of effort and time, and extremely thorough documentation, but also provides several benefits outside of just capital.

Your company will be able to leverage the prestige of listing on the ASX within your marketing and public relations activities and provide a liquidity event for shareholders. In addition to this high domestic exposure, the ASX is in the top 12 largest equity markets in the world, and as such gives companies excellent visibility on the international stage.

However, the Australia’s foremost stock exchange isn’t the only option available to you.

We are seeing companies also looking to list on other exchanges such as the Toronto Stock Exchange (TSX) for North American exposure and the Deutsche Börse for European exposure. Both are larger than the ASX in terms of trade value, and listing on them may be cheaper and faster than a domestic listing.

Dr Rainbird is the MD of Bluemount Capital and has over 15 years capital and M&A experience, having held senior executive positions in private, private equity, ASX and Government organisations.

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