Small Scale Offering Board

Introduction

Chapter 6D of the Corporations Act (Cth) 2001 deals with fundraising. It commenced operation in March 2000. The fundraising provisions apply to offers by bodies of securities for issue and offers of securities for sale - that is, securities that have already been issued.

Due diligence and cost

The extent of the disclosure and the need to ensure that there are no misleading or false statements in a prospectus, invariably requires issuers and their legal and other professional advisors to undertake due diligence procedures.

The general all-up costs of a company going public, issuing a prospectus and becoming listed on the stock exchange is generally accepted as being somewhere in the vicinity of between 5% - 10% of the funds raised.

Offer Information Statement

There are 5 types of disclosure documents and a prospectus is one of them. An “Offer Information Statement” is another. In reality, it is a short form of a prospectus. It can be used instead of a prospectus if the amount raised from issues of securities is $5 million or less – section 709(4). The total cost of an Offer Information Statement can be in excess of $30,000.

The 20/12 rule

Section 708(1) says that a disclosure document is not required if a person makes a “personal offer” of securities that results in securities being issued or transferred to 20 or fewer persons with no more than $2 million being raised in any rolling 12 month period.

This exemption is limited to “personal offers”. This is designed to exclude potential fundraisers from making offers to the retail market at large without a disclosure document.

An offer under section 708(1) is a personal offer if it “can only be accepted by the person to whom it is made” and if the person is “likely to be interested in the offer” because:

of any previous contacts; or

of any professional or other connection to the person making the offer; or

they have indicated that they are interested in offers of that kind – s708(2).

Section 708 (7) sets out rules which apply in determining whether offers of issues are within the $2 million ceiling outlined by section 708 (1)(b) – for example, if the security issued is issued on the basis that it only be initially partly paid, then any amount payable at a future time if a call is made, is included in the calculation.

Under Section 740, ASIC can determine that a number of different bodies are “closely related” and that their transactions should be regulated for the purpose of the fund raising provisions of the Corporations Act. So using related companies to circumvent the $2m threshold is not a good idea.

So, summarizing the Section 708(1) exception, you are basically limited to family, friends and business acquaintances. You cannot make unsolicited telephone calls or offers, you cannot issue partly paid securities to get over the $2m threshold and you cannot advertise or publish anything.

These restrictions make access to the 20/12 rule very difficult, cumbersome, time consuming and impractical.

Class order 02/273

The legislation as amended by this class order issued by ASIC under Section 741 (1)(a) of the Corporations Act, acknowledges these limitations  and as part of the government’s policy to encourage small and medium business, recent changes to the fundraising provisions have been enacted.

Under class order 02/273 which came into effect on 11 March 2002, an exemption from the fundraising provisions of the Corporations Act is provided for persons involved in making or calling attention to offers of securities through a “Business Introduction Service”.

Any business “which has as one of its objects the promotion or encouragement of investment in small and medium business enterprises” is an introduction service for the purpose of the class order. That is, we are talking about a fundraising or business broker.

These “Business Introduction Services” or brokers are now self-managed in the sense that they have formed the Small Scale Offering Board which is located at www.ssoboard.com and securities are brokered by way of access to that website.

Business Introduction Service

The Broker

The brokers act for the company in the sale of its equity. They provide the legal exemption to issue or sell up to $5m worth of shares in any 12 month period, as well as the appropriate framework for doing so without breaking the security hawking provisions of the Corporations Act.

You do not need an “Offer Information Statement” for raising capital of up to $5 million if you comply with class order 02/273. The class order is to the effect that the disclosure provisions do not apply to any person conducting the introduction service who through a “publication” or a “meeting” offers securities for issue or sale.

The Equity

So if you use a broker and comply with the class order, you can raise up to $5m in any 12 month period so long as you don’t sign up more than 20 people during that period. The class order applies on a 12 month rolling basis. You are not limited to $2m as you are if you rely on the 20/12  exception in Section 708(1).

The Publication

Furthermore, you can advertise details about the offer in the “publication”.

The publication must be a document published by the broker containing information about the company which is soliciting the investment. It must be low key. It can contain advertisements and statements referring to the securities on offer but must limit them to $5m.

It can contain the company’s logo or trade mark only if the publication is only available by subscription. The broker cannot have any interest in the company raising the funds.

Any publication by the broker must carry the disclaimers referred to in the class order including a statement that “investment in new business carries high risks.”

The Meeting

The meeting must be one or more meetings between the issuer and seller and potential investors which are organized by the broker but it cannot be held at the premises of a potential investor.

No application form for the securities can be issued at the meeting and the broker must make various statements at the meeting including one to the effect that a prospective investor should obtain further information from the issuer or seller and should take professional advice before accepting an offer for issue or sale.

Benefits of Using Broker

The broker can arrange and conduct investor meetings.

The broker can ensure there are appropriate paper trails to prove compliance. He can ensure that investors are clear on the nature of the investments and its risks. The broker is also someone to whom the business owner can direct interest to maintain a healthy distance from potential investors.

There are a number of reasons why complying with the provisions of class order 02/273 is preferable to proceeding with an “Offer Information Statement”.

Firstly, cost. The costs to prepare an Offer Information Statement start at about $30,000. Secondly, an Offer Information Statement can only be used in relation to an offer of securities for issue. It cannot be used in relation to an offer of securities for sale.   Thirdly, in determining the $5 million threshold, any previous amounts raised by the body under Section 709  (i.e. under the Offer Information Statement section) must be included. You must also include amounts raised by a body corporate “related to” the offering body. All amounts raised by any of them are included in the $5 million lifetime threshold ceiling. So you can only use the Offer Information Statement procedure up to $5m, whereas you can access the class order procedure on a rolling basis annually and indefinitely.