Australia’s institutional investment management industry, which according to the RBA has approximately A$2.8 trillion under management, is the largest in the Asian region. According to reports, Australia also has the ninth largest high-net-worth investment market, worth approximately US$735 billion. This represents an extremely attractive market for companies that are seeking to raise additional capital.

While Australian equity capital markets do offer significant opportunities for companies looking to raise capital, there are several important regulatory considerations that foreign-based companies and their brokers need to be mindful of before approaching investors in Australia.

Requirement to issue a prospectus or other disclosure document to Australian investors

Australian fundraising laws under the Corporations Act 2001 (Cth) (Corporations Act) apply to offers of securities that are received by investors in Australia, regardless of where the issuer or broker is based or where the resulting issue, on-sale or transfer occurs.

Under the Corporations Act, an offer for issue of securities received in Australia must be made under a disclosure document (e.g. a prospectus) unless a specific exemption applies.

An exemption to making an offer under a prospectus will be available if the offer is made to specified people who are presumed not to need disclosure because of their financial capacity, experience, association with the issuer or wholesale status. In the context of a capital raising targeting sophisticated or wholesale investors in Australia, exemptions will be available in the following circumstances:

  • if the amount payable by the investor for the securities is at least A$500,000 or if the investment will bring the total amount paid by that investor for securities in the relevant class to over A$500,000;

for high net worth investors that have produced a current certificate signed by a qualified accountant certifying that they either:

  • had a gross income of A$250,000 or more per annum in each of the previous two years;
  • or have net assets of at least A$2.5 million; and

for certain ‘professional investors’, including those that:

  • hold an Australian financial service licence (AFSL);
  • are regulated by the Australian Prudential Regulation Authority; or
  • are a listed entity, or a related body corporate of a listed entity.

In most circumstances, it will be a question of fact as to whether an individual investor being offered securities will satisfy the criteria for the relevant exemptions.

12 month ‘on-sale restrictions’

Investors in Australia who are issued shares without a disclosure document, in reliance on a statutory exemption, may be subject to the 12 month ‘on-sale restrictions’ under the Corporations Act. Unless an exemption applies, the 12 month on-sale restrictions prohibit such investors from transferring those shares without disclosure for a period of 12 months. Two exemptions that may apply include the sophisticated or wholesale investor transferring those shares to:

  • another sophisticated or wholesale investor; or
  • a third party who is not based in Australia so that no offer is received in Australia.

For this reason, it is usual for an issuer to include covenants in the relevant subscription agreement under which the securities are issued restricting the investor from on-selling the securities within 12 months of issue if a disclosure document would be required to be issued to do so.

Issuer and broker exposure to liability under a placement

Although there is no requirement to issue a prospectus for a placement to sophisticated and wholesale investors in Australia, issuers and brokers are not completely relieved from potential exposure to liability in relation to such offers. There is a general rule under the Corporations Act that prohibits individuals from engaging in conduct in relation to the issue of securities that is misleading or deceptive or likely to mislead or deceive. Accordingly, issuers and brokers need to ensure that any information that they provide to prospective investors in Australia in relation to a capital raising will not breach this prohibition.

Key takeaways

  1. An offer for issue of shares received in Australia must be offered under a formal disclosure document (e.g. a prospectus) unless a specific exemption applies.
  2. Investors in Australia who are issued shares without a disclosure document, in reliance on a statutory exemption, may be subject to the 12 month ‘on-sale restrictions’ unless a specific exemption applies.
  3. Issuers and brokers need to ensure that any information that they provide to prospective investors in Australia in relation to a proposed capital raising is not misleading or deceptive or likely to mislead or deceive, regardless of whether the information is provided under a formal disclosure document or otherwise.