Offshore entities that operate and market their investment products domestically are looking to Australia to expand their investor base. However, these entities are restricted by Australian legal requirements when marketing to Australian investors. The requirements aim to limit those who may make an offer of securities as well as those who may validly take up such an offer. This article highlights a number of exemptions may be available to allow such entities to market to Australian investors.
Making an offer
Generally, a person is required to hold an Australian Financial Services Licence (AFSL) to conduct an offering or placement of shares in Australia. This requirement does not apply where such person falls outside the threshold test for requiring an AFSL, or falls within a relevant exemption.
The threshold test for requiring an AFSL is that the person carries on a financial services business in Australia. What may constitute “carrying on” a business in Australia depends on the facts and circumstances. Any systematic, repetitious or continuous financial services activity in or in relation to Australia, whether for or without profit, may come under this definition. A financial services business will be taken to be carried on “in Australia” if, in the course of carrying on the business, a person engages in conduct that is intended to induce (or will likely have the effect of inducing) people in Australia to use the financial services the person provides.
A person will not be required to hold an AFSL where:
- the entity transacts in its own securities (e.g., a company issues its own shares);
- the entity conducting the offering has filed with ASIC to “passport” its recognised foreign authorisation, licence or registration to engage in financial services, provided that the entity only offers the shares to persons who are Permitted Offerees (see below) and gives a prescribed form of notice to each such person before making any such offer;
- the offer is made to an AFSL holder, provided that the AFSL holder is not acting as a trustee, acting as a responsible entity of a registered managed investment scheme or otherwise acting on someone else’s behalf; or
- the entity conducting the offering does so as an “authorised representative” of an AFSL holder and the issuer of the shares has appointed the AFSL holder as its “intermediary” for the purposes of “arranging” for the issue of securities.
Under the Corporations Act 2001 (Cth) (Corporations Act), a company incorporated outside Australia must provide a compliant prospectus or product disclosure statement in order to make an offer of shares, unless the offeree or subscriber falls within an exempt category (such person being a Permitted Offeree). There are several categories of Permitted Offerees, including a person who:
- would be required to subscribe at least A$500,000 in respect of any offer of the shares;
- has net assets of at least A$2.5 million or has had a gross annual income for each of the last two financial years of at least A$250,000;
- is participating in a “small-scale, personal offer”; or
- qualifies as a “professional investor”.
Small-scale, personal offer
The offer must be “small-scale” in the sense that it must not result in the issue of the shares in Australia to more than 20 people in any 12 month period, or the aggregate amount subscribed being more than A$2 million. It must be “personal” in that the offer may only be accepted by the offeree and the offeree must be likely to be interested in the offer, having regard to previous contact between the offeree and the offeror.
A professional investor includes any:
- an AFSL holder (e.g. investment banks, fund managers and private equity firms);
- body regulated by the Australian Prudential Regulatory Authority (APRA) (e.g. deposit-taking banks, building societies, authorised money market dealers and insurance companies);
- person who has, or controls, gross assets of at least A$10 million;
- trustee of a pension fund having net assets of not less than A$10 million;
- company or unincorporated body whose business is investing in financial products, land or other investments using funds raised from an offer to the public (e.g. an investment company);
- entity listed on the ASX and its related bodies corporate; or
- exempt public authority.
Common avenues of marketing available
For an offshore entity to market an offer to any Permitted Offeree, neither a compliant prospectus nor product disclosure statement is required. Instead such an offer would commonly be marketed through the distribution of a private placement memorandum, information memorandum or prospectus. The Corporations Act does not prescribe content requirements for these types of documents when used in connection with an offer to Permitted Offerees. However, legislation requires that such documents must not be misleading or deceptive. Accordingly, the offer should not be marketed using a draft prospectus as it may be “misleading” in the sense that the document is not a compliant prospectus under Australian laws, and “deceptive” in the sense the draft may not accurately reflect the key features, risks and benefits of the offer. Further, offering materials should only be distributed to Permitted Offerees by a person holding an AFSL unless the distributor does not meet the threshold test or is exempt.
Distribution of reports and pitchbooks
Monthly or quarterly reports on the company, or pitchbooks in respect of the relevant company/fund, should only be distributed to Permitted Offerees by a person holding an AFSL unless the distributor does not meet the threshold test or is exempt.
A person may engage in brand marketing – being marketing of the business’ services generally, without reference to any investment product or service – to Permitted Offerees without an AFSL, provided that brand marketing complies with general law requirements applicable to advertising and is not misleading or deceptive.
Any person may hold an investor conference in Australia provided that such person either holds an AFSL, or is exempt and complies with applicable conditions to such exemption. If there are any non-Australian invitees to such conference, consideration would need to be given to securities laws of the country of the relevant invitee (and if different, the country in which such invitee receives the invitation to the conference). It is recommended that there should be no indication that any such conference is held by, or that any persons giving presentations or involved in discussions with existing or prospective investors at the conference are representing or acting on behalf of, any entity which does not hold an AFSL or is not exempt from the requirement to hold an AFSL. This includes not giving any business cards or entering into any correspondence indicating otherwise. If the entity holding the conference is doing so on the basis that it has passported its recognised other jurisdiction authorisation, licence or registration, such person is required to give notice in the prescribed form to each attendee before any statements are made, or materials provided, in respect of such conference.
The Australian restrictions on offshore entities marketing to Australian investors can be complicated, and we recommend getting in touch with us to discuss your specific scenario so we can assist further.