For Many the Capital Raising Journey Commences with Section 708

Capital Raising is Easy for small companies?

This is a MYTH!

Directors of small companies need to ensure that proper processes are put in place whenever a company wants to raise capital.

Section 708 of the Corporations Act enables small companies to raise capital without having to issue a ‘Disclosure Document’.

This section gives a special exemption for companies undertaking ‘Small Scale Offerings’, also known as the ‘20/12 rule’.

It is called this because companies are able to make up to 20 issues in 12 months, with the maximum amount to be raised by issuing securities not to exceed $2 million from a maximum of 20 people.

A key point is that the offer must be a ‘personal offer’ and it has to be 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.
• Some professional or other connection between the person making the offer and that person.
• Statements or actions by that person that indicate that they are interested in offers of that kind.

The person receiving the ‘personal offer’ could be a customer, supplier, contractor, employee or someone who has viewed the company’s website and has made contact and asked for additional information on the company’s vision.

Raising capital under Section 708 is a popular way for small companies to start the capital raising process.  Furthermore, this is the type of initial capital raising that most companies have undertaken prior to attempting to raise capital as an Early Stage Innovation Company and/or as a Crowd Sourced Funding Equity Raising Company.

If your company is contemplating undertaking the ‘Innovation Journey’, capital raising in this manner can be very helpful in obtaining funds for Research and Development activities, start the commercialisation process and to raise the matching funds that your company may require to be able to access a government grant such as the new ‘Industry Growth Program’.

If your company is seeking to raise capital from the public utilising section 708 of the Corporations Act which enables the company to raise a maximum of $2 million in a twelve month period but only from “personal offers” the Directors need to ensure that the legal requirements are closely followed.

There can be no marketing or advertising relating to capital raising used to relying on section 708 of the Corporations Act.

The Corporations Act does not specify the documentation that the company should supply to a potential investor.

Sound corporate governance indicates that the following documents would be required by interested but not anxious investors who comply with the requirements of the “personal offer” rules:

• Business Plan which clearly identifies the company’s vision, team, resources and history with specific details provided on what the capital to be raised will be utilised for
• Predictive Accounting Reports comprising Budgets – Key Drivers Accounts – Cash Flow Forecasts – Projected Balance Sheets. These reports should be prepared on the basis that they are the “financial interpretation” of the company’s Business Plan.
• Valuation of the Company normally based on a critical review of the Budget Forecast and the present value of a twelve month forecast capitalised at a realistic price/earnings ratio.
• Statement of the capital to be raised and the shares proposed to be allocated for that capital.
• Statement of any other capital raised in the previous twelve months – this is to ensure that the company does not offend against the 20/12 rule (20 investors in 12 months maximum investment $2 million).
• Confirmation that the proposed issue of shares will not cause the company to exceed the 50 shareholder limit that applies for private companies.
• “Small-Scale Offerings” for Section 708 Capital Raising can be enhanced by a company that has “proactively communicated” its Services and Vision.
• Whilst advertising and marketing are not permitted, the company can utilise its website and news releases to comment on new projects, winning of government grants, team member achievements and appointments
• This type of communication can inform persons who may express an interest in obtaining additional information and ultimately become a person who has indicated their interest in share offers that the company is making.

Section 708 of the Corporations Act is a section that is well used by small companies to get started on the “Capital Raising Journey”.

This is the process that most small companies commence from – later on the Directors may be able to obtain an Early Stage Innovation Company Status for the company or the company may be granted the status of a Crowd Sourced Funding Equity Raising Company via a Crowd Sourced Funding Intermediary.

Like most things in life creating the correct foundations in the beginning is very important.  This is very applicable when it comes to setting out on a corporate development journey where most small businesses companies commence under section 708 and most Directors require assistance in the preparation of the documentation if the aim is to raise capital from more than family members and close associates.

Peter Towers the Managing Director and Founder of Towers Business Development and ESS BIZTOOLS has assisted hundreds of companies in this capital raising journey.  If you would like to discuss the services that can be provided for your company please contact us – 1800 232 088 or email peter@towers business.com.au and we will set up a complimentary Zoom meeting to discuss

If you want more information  please visit our website www.towersbusiness.com.au

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