When offering shares for sale in a company, you need to consider whether the Corporations Act 2001 (Cth) (Corporations Act) imposes share sale disclosure requirements. The seller will have to issue a prospectus and offer an information statement along with the offer to purchase.
The purpose of the disclosure requirements is to address the imbalance of information between the seller and the investors. There are, however, numerous exemptions available. The exemptions recognise that certain people and certain circumstances don’t require protection. Therefore, there is no need for the Australian Securities and Investment Commission (ASIC) to step in with strict regulation. This article will unpack the share sale disclosure requirements in more detail, and what you can do if you do not need to make any disclosure.
When is Disclosure Required?
There are two circumstances where share sale disclosure requirements are applicable. Firstly, ASIC requires disclosure where:
- the person making the offer to sell the shares controls the company (like a major shareholder or director and therefore has all the information as to the value of the shares); and
- the offer is not quoted or is made off-market (and therefore there is no trading or market history that the purchaser can rely on).
The second scenario is where:
- the offer was made with the intention of the purchaser transferring, reselling or reissuing the shares within 12 months.
This requirement is an anti-avoidance measure. It stops people from trying to avoid their share sale disclosure requirements. Usually, this occurs when the initial offer is to an exempt person who has the intention of on-selling those shares to someone who would have needed a proper disclosure/prospectus if the seller had sold or issued those shares to them initially.
Share sale disclosure requirements are exempt if:
- the offer is a personal offer made to a person likely to be interested in the offer (as a result of previous contact, a professional connection, etc.) and the seller only intended that person to accept it; and
- the seller made the offer to less than 20 people in a 12 month period; and
- the offer will not result in the company raising more than $2 million in a 12 month period.
An offer for sale will also be exempt from the disclosure requirements if it is an offer to either:
- a sophisticated investor (i.e. an offer over $500,000 or the seller made the offer to someone who has a certificate from an accountant confirming that their net assets or gross income meet the necessary requirements); or
- a professional investor (a person who has an Australian Financial Services Licence or manages gross assets of at least $10 million).
These exemptions mean that in practice, a minor shareholder of a private company will not be subject to disclosure requirements if they decide to sell their shares (as they do not control the company).
Additionally, a major shareholder of a private company will not be obliged to prepare disclosure documentation when offering its shares for sale as long as they are making an offer which is exempt from the disclosure requirements.
In the absence of formal disclosure requirements, and in the instance that a majority shareholder makes the offer, the shareholder may wish to provide the prospective purchaser with a pitch deck or information memorandum (IM).
A pitch deck is a short document (usually about 15-20 slides) which clearly and succinctly sets out all the key things an investor should know about your business and their potential investment. It includes your:
- business proposal,
- plans and performance,
- market position, and
- basic financials.
On the other hand, an IM is a much more comprehensive document (usually at least 50 pages) which will include details of:
- the investment opportunity,
- product or service offering,
- market share,
- directors and management team,
- financials, and
- investment risks.
The purchaser can use these documents to inform their investment decision. They act as marketing documents for the business and can assist the shareholder with achieving a sale. Importantly, you must draft both documents properly even though they are not subject to formal disclosure requirements and they must not contain information which is incorrect, misleading or deceptive. For large scale share sales, you may wish to use a more detailed IM, but for smaller scale sales, a pitch deck may suffice. Ultimately, this is market driven so get a feel for what is standard and what the prospective purchaser is looking for in making their investment.
While uncommon, there are circumstances in which a major share sale will fall under the Corporations Act’s disclosure requirements. In this instance, company’s should prepare formal disclosure documents and seek legal advice where necessary. In the absence of these regulations, the level and type of disclosure associated with your major share sale will depend on the circumstances of the sale, including size and complexity, and the requirements of prospective purchasers.