1. Funding Company Operations

2. This topic will cover: Disclosure Requirements – Equity Financing
Debt Financing
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3. Disclosure Requirements – Equity Financing
Policy Rationale:
A significant objective of Corporations Act is to encourage investment AND to protect the investing public by requiring full and accurate disclosure of relevant information concerning the activities of PUBLIC companies.
Note that Ch 6D are specifically directed at Public companies (recall the definition of Proprietary cos: those which do NOT engage in activities which triggers Ch 6D.)
Balance two considerations: Protecting investors vs Efficient market
s.717 summary of what disclosure is required.
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4. Primary Trading v Secondary Trading – we will consider these
separately, our focus is on primary trading
1. Primary Trading
Prospectus
Short form prospectus
Profile statement
Offer Information statement
General rule: s.706 “ an offer of securities for issue needs disclosure to investors” UNLESS
Exemptions under s.708 apply.
Definitions of terms used in s.706
“Offer” – defined in s 700(2) – inviting applications , wider than CL ‘offer’
“securities” -- defined in s 92(4) – shares of a body, debentures, options
“issue” – means primary , not secondary trading
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5. - s.734(1) prohibits advertising and publicity.
s 706 complemented by s 727 : a person is prohibited from offering securities or distributing application forms UNLESS disclosure document has been lodged with ASIC. Breaching s 727 is a CRIMINAL offence (s. 1311).
Exemptions under s.708
1. Small scale offerings
– Personal offers (only accepted by person to whom it is made, offer made through contacts, not offer to the public at large)
Number of issues (not number of offers) in a 12-months period < 20 investors
Amount of fund raised (including future calls and options) in a 12-months period < $2 Million
- s.734(1) prohibits advertising and publicity.
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6. 2.Sophisticated investors
Rationale: these investors have means to obtain their own advice, have
enough bargaining power to obtain information from co.
Large offers: s.708(8)(a) – minimum amt payable for securities is $500,000;
(but does not include any loans made by co)
Offers to wealthy investors: S708(8)(c)- “wealthy investors”
if accountant certifies that person to make at least $250,000 over each of the previous two financial years, OR
net assets of at least $2.5 Million. (amount subject to change in regulations)
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7. - Experienced investors
s.708(10) if offer is made through a financial services licencee; licensee must be satisfied that investor has enough experience to assess the merits and risks, etc;
In addition, investor must sign a written acknowledgement of no disclosure document given.
- Professional investors
s.9 – definition of professional investor: include: financial services licensee; a body regulated by APRA (financial institution); a trustee of a superannuation fund with net assets of at least 10 million.
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8. 4.Existing security holders
3. Executive officers
- s. 9 defines ‘executive officers’ to anyone who takes part or is concerned with management of the body OR a related body OR close relative (spouse, child, parent…)
4.Existing security holders
- s.708(13) If offers of fully paid shares to existing security holders under a
Dividend reinvestment plan OR
Bonus share plan
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9. Lodgement of Disclosure documents Lodge with ASIC (s.719)
s.727: Quoted securities : disclosure doc can be given to potential investors, immediately after they have been lodged with ASIC. (before 99, had to lodge and get registered)
Unquoted securities: 7 day waiting period, so if any incorrect information is contained in the disclosure doc, parties can apply for injunction to halt the fundraising.
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10. Contents of Disclosure Documents
s.715A – general requirement for all disc docs  information in a disclosure document must be worded and presented in a “clear, concise, and effective manner”.
Other requirements depends on the type of disclosure documents
1. Prospectus Contents
Most detailed doc out of the four, regarded as a full-disclosure document.
s. 710(1) – must contain all information that investors and their advisors would reasonably require to make an informed assessment .
In relation to an offer to issue shares, must disclose:
rights and liabilities attached to securities; (s.710)
assets and liabilities, financial position and performance, profit and losses and prospects of the body (s.710)
if restructuring, disadvantages as well as advantages of proposed restructure. (Fraser v NRMA Holding Ltd 1995) (a well-rounded objective document, not too biased)
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11. S. 711 – specific info which must be contained in every prospectus:
s.728(3) – criminal offence if material required by s 710 is omitted; and materially adverse to from the point of view of the investor. (see s 728 discussed again for Misleading Deceptive Conduct)
Qualification : prospectus must contain info only to the extent that the investors can reasonably expect, only if the info is actually known or in the circs ought reasonably to been known
S. 711 – specific info which must be contained in every prospectus:
Terms and conditions of offer
disclosure of interests, fees and benefits
quotation (displaying or providing, on a Market, information concerning: highest bid to buy and lowest bid to sell at any given time)
expiry date
lodgement with ASIC
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12. Alternative Disclosure test
Forecast
Forecast of future profit, dividend, can influence investor’s decision.
Forecasts/forward-looking statements are optional , i.e. do NOT have to be contained in a prospectus.
S. 728(2): if it is contained, then the forward-looking statement is misleading IF person does not have REASONABLE GROUNDS for making the statement. Onus of proof is on the plaintiff to prove maker of statement did not have reasonable grounds. (see also RG170)
Alternative Disclosure test
If the issuing body is already listed, then it is already under continuous disclosure and periodic reporting requirements of Corps Act and ASX LR.
listed entities are required to disclose anything which has a material effect on the price of securities..
Info required by s.710 is already known to the market. No need to include again (s.713).
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13. Overcome the complaint that prospectuses are too lengthy and complex.
2. Short form Prospectus
Overcome the complaint that prospectuses are too lengthy and complex.
s. 712(1) – allows a short form prospectus to refer to material in documents lodged with ASIC
3. Profile Statements
S. 721 – Allows these brief documents to sent to investors instead of a prospectus, but still need to lodge full prospectus
s. 714 : Content includes identifying the body, nature of risks, amounts payable, etc
Now rarely used after FSRA 2001 was enacted. Originally intended for in MIS. Now Pt 7.9 applies  Product disclosure statements.
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14. 4.Offer Information Statements
s. 709(4) -- OIS provides an alternative to prospectuses for small fundraisings., amount raised less than 10 million. (replaces the need for prospectuses, cf a Profile statement).
s.715 – content of OIS: lower level of disclosure than prospectus.
describe business
risks
amounts payable
financial report
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15. Restrictions on Issue of Securities 1.Minimum subscription
s. 723(2) – if disclosure doc states that securities will NOT be issued UNLESS applications for a minimum number of securities are received;
aims to protect early subscribers where co unable to raise a minimum amount.
application money must be held in trust until minimum is met
s. 724, if not met within 4 months of initial discl doc, must refund money or give applicant a choice of refund.
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16. listing rules also give additional protection to investors.
2. ASX listing
listing rules also give additional protection to investors.
securities much more marketable if listed,
s.723 – must refund if not listed, if discl document says it will apply for listing.
Expiry of discl document
s. 711: discl doc expires after 13 months. If application received after 13 moths, then must refund or give choice to refund with supplementary disclosure document.
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17. 2.Secondary Trading
Generally , secondary trading of listed securities quoted on the ASX does NOT require disclosure.
There are some exceptions
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18. Advertising Restrictions
Corps Act seeks to ensure investors have the disclosure document at hand BEFORE applying for securities. This aim would not be achieved, if no restrictions is placed on advertising.
Previously, advertising is ONLY allowed AFTER disc doc is lodged.
S. 734(5)(b) Advertising UNLISTED securities before lodgment is limited to
Statement identifying the offer or securities
Statement of how to receive discl doc,
Statement that disc doc will be avail, application form attached to disc doc. etc
After lodgment, must still mention disc doc in advertisement.
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19. Misstatements and Omissions
ASIC’s power to exempt and modify fundraising provisions for a particular person ( s.741(1) )
Misstatements and Omissions
S.728 (1) – A person is prohibited from offering securities under a DD if it contains a Misleading or Deceptive statement OR omits information required.
s. 719 – Once a person becomes aware of M D or omission, must discontinue making offers, and lodge a supplementary or replacement document to correct the deficiency.
Lodge with ASIC, accompany any subsequent offers.
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20. Penalties / Remedies for Misleading or Deceptive statements omissions
s. 739(1) -- ASIC has the power to stop further offers, issues, sale or transfer of the securities if Misleading Deceptive s. 728 OR if not clear, concise and effective s.715A.
s. 728(3) -- Contravention of s.728(1) is criminal ONLY if M D statement or omission is materially adverse from the point of view of an investor.
s. 729 – right to recover compensation for loss or damage suffered because of M D statement or omission.
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21. 1. the person making the offer
People Liable on Disclosure Document (s 729(1) ) - civil liability
1. the person making the offer
2. each director of the body making the offer if the offer is made by a body
3 a person named in the disclosure document with their consent as a proposed director of the body whose securities are being offered
4 an underwriter (but not a sub-underwriter) to the issue or sale named in the disclosure document with their consent (underwriter – is a person who guarantees the fund sought by a company when issueing shares, taking up the balance should the public not subscribe for all the issued shares, usually an underwriter is an investment banking firm or broker-dealer . Fees paid by the co.)
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22. (liable for loss or damage caused by the inclusion of the statement)
5. a person named in the disclosure document with their consent as having made a statement:
(a) that is included in the disclosure document; or (b) on which a statement made in the disclosure document is based the inclusion of the statement in the disclosure document
(liable for loss or damage caused by the inclusion of the statement)
6. a person who contravenes, or is involved in the contravention of, subsection 728(1)
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23. Defences to MDS/ Omission/New matter
s 731 – due diligence defence (only avail for prospectuses): a person made all reasonable inquiries and believed the statements on reasonable grounds.
have a proper system of checking statements are accurate and complete
many co set up a “due diligence committees” to do this
s ( avail for OIS and profile statements) unaware of M D statements or omissions.
s 733(1) – reasonably relied on information given by someone else; someone other than a director, employee or agent.
s.733(3) -- if (proposed directors, maker of statement) publicly withdrew their consent to be named in disc doc.
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24. Debt Finance
Debt finance/loan capital is to be distinguished from equity finance/share capital. These are some main differences:
Shareholders are internal members, lenders are not.
Dividend payment depends on profit, Interest payment does not.
Maintenance of share capital does not apply to debt capital.
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25. (a) Debentures
Definition in the Corporations Act s 9: “a legally binding undertaking by a company or other body to repay a debt where that debt is money deposited with or lent to the company or other body.”
If a company issues Debentures to the public, then the debentures must be secured ( s 283H)
Companies which raise debt capital through the issue of debentures to the investing public must comply with Chapter 2L, Chapter 6D of Corporations Act. If the debentures are to be listed, then must comply with ASX listing rules.
The debenture trust deed sets out the terms; A trustee for debenture holders must be appointed (Chapter 2L).
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26. (b) Securities
There are many reasons for the lender to take security. Security
lessens the risk of the lender suffering loss as a result of default by the
borrower:
In the event of bankruptcy or liquidation of the borrower, the lender in the absence of security, would be an unsecured creditor and would have to join the queue for a distribution from the realisation (sale) of the borrower’s assets.
Without security, the lender will only have a personal right to sue for breach of contract.
Even if the borrower is solvent, lender can recover the debt more quickly and efficiently, (without long delays and high cost of court proceedings)
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27. All property of the borrower may be given as security. An exception is
Property over which security may be taken
All property of the borrower may be given as security. An exception is
contractual rights which are, by their nature, incapable of assignment
(transfer) for example contracts for personal services (employment
contracts).
In the case of a personal borrower the property could be
family home (land is preferred as security by lenders)
shares in a company
cash deposits
car
life insurance policy.
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28. In the case of a company borrower, the property could be
freehold title to its factory or office premises
the lease of premises from which it operates
plant and equipment
Trading stock
book debts
uncalled capital.
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29. (c ) Personal Property Securities Act 2009 Definitions:
(* section references below are to PPSA, not Corporations Act)
Definitions:
‘Personal Property’ - property other than land(s. 10)
‘Security Interest’ – an interest in personal property provided for by a transaction that, in substance, secures the payment or performance of an obligation. (s.12)
‘Security Interest’ includes charges, liens, pledges
‘Grantor’ – usually the borrower (see s. 10 for detailed def)
‘Secured Party’ – a person who holds a security interest
(s. 10) usually the lender
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30. ‘Security Agreement’ – an agreement or other act by which a security interest is created. (s.10)
‘Perfection’ –
registration OR
Taking possession OR
Taking control
(s.21)
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31. Circulating Security Interest
A Circulating Security Interest is a security interest which attaches to a “circulating asset”.
A “circulating asset” is an asset where the secured party has given the grantor authority for any transfer of the personal property to be made, in the ordinary course of business, free of the security interest. (s.340) For Example, a floating charge over trading stock
A grantor does not have power to dispose of all assets without replacing them by others and thus to cease to be a going concern, because this would not be in the ordinary course of business.
Non-Circulating Security Interest
Grantor is not entitled to sell or otherwise dispose of the collateral free of the security interest without the secured party’s consent.
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32. Why is Non-circulating Security Interest Stronger than Circulating Security Interest?
Because if there is default, non-circulating security interest entitles the lender to take possession, sell and repay.
Whereas for circulating security interest, a receiver must pay debts to certain unsecured creditors first (such as employees). Liquidator must also pay certain unsecured creditors first.
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33. Retention of Title Clause
This is a term in a contract under which the seller retains the ownership until the goods are paid for.
Retention of Title clauses gives rise to a security interest.
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34. Registration of Security Interests
Registration gives rise to ‘perfection’
Registration gives notice to all other persons that the company has given the particular type of security interest over one or more of its assets and thus the amount and value of assets that would otherwise be available for distribution to unsecured creditors has been reduced by the amount secured.
Failure to register does not invalidate the security interest, but can affect priority.
Method of registration
Lodge a financing statement on the PPS Register. (s.150)
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35. Priority of Security Interests
Priority between unperfected security interests is determined according to the order of attachment of the security interests (s 55(2))
A perfected security interest has priority over unperfected security (s 55(3))
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36. Priority between perfected security interests is determined by the time of registration or of possession/control or of perfection by the Act (s55(5))
A security interest that is perfected by control has priority over a security interest perfected by any other means. (s 57(1))
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37. Security Interest in favour of Officers and Associated Persons
void if enforced within 6 months after it is made without court approval. (S 588FP(1) of Corporations Act )
Circulating Security Interest Created Within 6 Months of winding up
S 588FJ - Void against liquidator unless exceptions apply
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38. (d) Guarantees
A guarantee is a promise made by one party (the guarantor or surety) that should another party (the principal debtor) fail to carry out an agreement made with a lender, the guarantor will be liable to the creditor.
Liability of the guarantor
The liability of the guarantor is secondary to that of the principal debtor. There is a fundamental difference between a guarantee and an indemnity. With an indemnity the indemnifier undertakes a primary liability to ensure that the other party does not suffer loss as a result of a dealing with another party. A guarantor is only liable if the principal debtor is liable. Thus if the contract guaranteed is void or unenforceable, so is the guarantee.
If the lender and the debtor, without the guarantor’s consent, agree between themselves to alter the nature of the obligation, the guarantor is discharged unless such circumstances are expressly covered in the guarantee document.
Defences available to the debtor are available equally to the guarantor.
Subrogation
A guarantor who pays to the lender the full amount of the debt owing by the principal debtor is normally subrogated to all rights which the creditor has against the principal debtor. This means the guarantor “steps into the shoes” of the creditor and has the right to seek payment from the debtor.
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