Raising capital is crucial for business growth, but navigating the legal landscape is essential to avoid costly mistakes. Founders must ensure compliance with legal requirements to protect themselves and their investors. This guide covers the core legal considerations for capital raising as a private or public unlisted company and highlights three primary types of capital-raising platforms available in Australia.
1. Understand the Types of Capital Raising Platforms
When raising capital, companies have three main platform options, each with specific legal frameworks and regulations:
AFSL Licensee (Australian Financial Services License): Working with an AFSL-licensed advisor or group ensures that securities are dealt with legally. You can confirm their license by checking the footer on their website and performing a simple search online.
Equity Crowdfunding Platforms: Crowdfunding has grown significantly, and companies operating under this license must adhere to specific disclaimers and legal requirements, which you'll typically see when investors register on their platform.
Class Order [CO 02/273] Platforms: Platforms like Wholesale Investor use this class order, which allows them to target high-net-worth and sophisticated investors without breaching the 20-retail investor limit across a 12-month period.
2. Complying with the 20/12 Legislation
For private companies, one of the critical legal frameworks is the 20/12 legislation, which sets strict rules on the number of retail investors you can raise capital from within a 12-month period. Key points to remember:
Retail Investor Cap: Private companies are limited to raising capital from no more than 20 retail investors in a 12-month period. This cap is designed to protect everyday "mom and dad" investors and is strictly enforced.
Sophisticated Investor Criteria: Investors who meet certain financial thresholds, such as earning over $250,000 annually or having net assets above $2.5 million, are classified as sophisticated investors. They must provide a certified "sophisticated investor certificate" to ensure compliance.
By adhering to these guidelines, founders can avoid legal complications and demonstrate credibility to potential investors.
3. Risks of Non-Compliance and Legal Considerations for Founders
Operating outside of the legal framework for capital raising can have serious consequences. Founders must:
Vet Platform Licensing: Always check that the platform you’re using displays its licensing or regulatory framework. If this information is absent, it's a red flag.
Secure Investor Compliance: Ensure that investors sign the appropriate documentation confirming they meet legal requirements before making investments.
Obtain Sophisticated Investor Certificates: For high-net-worth investors, these certificates help ensure compliance and protect your company from potential disputes.
Ignoring these guidelines may result in investor claims or legal action, which could jeopardise your company’s capital, reputation, and future growth.
In Summary: Protecting Your Company During Capital Raising
When it comes to capital raising, understanding the legal landscape is as crucial as presenting a compelling pitch. Founders should:
Select the appropriate platform (AFSL, equity crowdfunding, or class order).
Adhere to the 20/12 legislation limiting retail investor participation.
Ensure investors meet legal requirements, including sophisticated investor certification.
By taking these steps, you protect both your business and your investors, creating a foundation for trust and long-term growth.
