| All Businesses Need Capital | | | | when the business is booming, the repayment |
| Capital is the lifeblood of a business. It is true that | | | | direction probably means a very nasty situation for all |
| to make money you have to spend some - and to | | | | concerned. |
| spend it you have to have it. Without capital you | | | | Class Order 02/273 |
| can't buy the equipment you need, lease the factory | | | | Class Order 02/273 provides an exemption from the |
| shop/office you need or hire the people necessary | | | | fundraising provisions of the Corporations Act for |
| to help you do whatever it is you do. New capital | | | | persons involved in making or calling attention to |
| underwrites innovation and the take up of new | | | | offers of securities through a business introduction |
| technology and the development of new ideas. | | | | service. |
| It is commonly thought that lack of capital is one of | | | | This increases the limit of personal offers to $5million |
| the major reasons for small business failure in | | | | and allows considerably more scope in promoting the |
| Australia, yet access to capital has always been | | | | offer. The exemption allows, under certain |
| difficult for Small to Medium Enterprises (SME's) and a | | | | conditions, an offer to issue or sell securities to be |
| limiting factor to their growth. | | | | advertised in ASSOB's subscription-based publications. |
| What is equity capital? | | | | By appointing an ASSOB Sponsor the issuer is then |
| Equity capital is the money, time and other assets | | | | also covered by this exemption. |
| that the owners contribute to the business. | | | | ASSOB |
| Generally the originators of the business put in what | | | | The Australian Small Scale Offerings Board was |
| they can, they borrow against personal assets and | | | | formed in 2004 to originate, aggregate and sell |
| work very hard to build the business up over a long | | | | securities for unlisted companies so they can raise |
| period of time by reinvesting profits as they go. | | | | capital. |
| The idea of bringing others into the business to | | | | The proven ASSOB platform is a sophisticated |
| provide a stronger asset backing (more money) is | | | | system of documentation, policy, procedures, |
| foreign to most. | | | | operating processes and infrastructure developed |
| A large percentage of Australian companies are set | | | | specifically to comply with Section 708 of the |
| up under the advice of accountants and Solicitors to | | | | Corporations Act and the exemptions available under |
| save tax and protect assets but the issue of share | | | | Class Order 02/273. ASSOB operates 3 Boards for |
| ownership and share management is rarely discussed. | | | | the listing of Offer Documents: |
| The use of share issues and share management | | | | 1. Primary Issue Board – for the origination, |
| (equity capital) is a significant business strategy for | | | | aggregation and sale of ordinary shares to investors |
| growth that is understood and used by the big listed | | | | on behalf of issuers to enable them to raise capital; |
| companies. Most think that it is beyond SME's, but it | | | | 2. Secondary Sales Board – which facilitates the |
| is not. It is a powerful tool that can provide | | | | sale or transfer of existing shareholdings to other |
| significant benefits to SME's as well – if you get | | | | investors; |
| the right advice and the process is managed properly. | | | | 3. Disclosure Board – under which Offers under |
| Why raise equity capital? | | | | Prospectus, Offer Information Statements or |
| Does your business have the potential to grow? | | | | Product Disclosure Statements are distributed to its |
| What could you do with another $500k? What | | | | list of private investors and the general public. |
| about $1 or $2million? Would this give your business | | | | ASSOB Sponsors are highly trained individuals who |
| the ability to get to the next level? Would that be | | | | play an important role in capital markets. The |
| enough to double the business? Maybe more than | | | | ASSOB Sponsor is the "originator" of debt and equity |
| that? If there is this possibility, you should be | | | | securities for the SME client. |
| thinking about how bringing in new investors can help | | | | An ASSOB Sponsor provides the SME with 2 main |
| to make it happen. Maybe you can develop that new | | | | facilities – the legal exemption to issue or sell |
| product, add capacity to the production line, open | | | | securities or scheme interests and the appropriate |
| more outlets, expand interstate or overseas, and | | | | framework for doing so without breaching the share |
| build the prototype you've been dreaming about. | | | | hawking provisions of the Corporations Act 2001 |
| Equity capital is not repayable; it demands no | | | | Valuation |
| provision of security (other than issued shares) and | | | | The real key to finding investors for your business |
| bears no interest. In essence, a business can print its | | | | lies in being able to offer them realistic value in return |
| own currency by issuing shares not unlike the way | | | | for the risk they are sharing with you. One of the |
| that Barrack Obama and Kevin Rudd are printing | | | | reasons for the difficulty of raising equity capital has |
| money. In one sense you can even think of it as | | | | been the over-optimistic valuations that many |
| being another product line that you create and sell. | | | | owners place on their business. |
| Where do you get it? | | | | Typical valuation metrics include a range of 6 to 8 |
| Early stage funding is "relationship" based and | | | | times earnings for an Initial Public Offering on a stock |
| generally comes from family, friends, relatives or | | | | market listing, or 3 to 5 times earnings for a trade |
| clients and/or suppliers wishing to firm up their | | | | sale. In other words, if a company has an EBIT of |
| relationship with the issuing company. | | | | $1m, then in a public float it might be valued at $6 to |
| Even amongst these groups it has traditionally been | | | | $8million, or $3 to $5 million on a trade sale. |
| difficult to attract investors as there has been little or | | | | These are the valuations that you expect to achieve |
| no liquidity, returns are uncertain and there is often | | | | in say, 3 or 4 years time. Investors will pay a |
| little transparency in the way the business is | | | | premium over today's valuation if they have |
| operated. | | | | confidence that the business will grow significantly. |
| A well structured offer however can address all | | | | These are the maximum valuation ranges and |
| these issues and provide potential investors with | | | | investors won't pay that sort of valuation 3 or 4 |
| demonstrable capital gains, a planned exit strategy, | | | | years in advance. They want to see a substantial |
| regular company reporting and communications. | | | | discount in return for the risk they carry, or to put it |
| Couple this with a secondary market platform and | | | | another way, they expect to earn a much higher |
| many of the obstacles to finding investors disappear. | | | | return from this investment than they would get |
| Corporations Act restrictions | | | | from other competing investment options. |
| It is illegal for any person (or company) to ask a | | | | On a 3 year time horizon, these types of investors |
| number of people to invest in a shared business | | | | will typically pay 1/4 or less of the valuation that is |
| venture, property or other investment without | | | | expected at the point of exit. In the above |
| following the fundraising rules set down by the | | | | example, this would mean a company valuation of |
| Corporations Act 2001, or without utilizing the | | | | $1.5 to $2 million on an expected IPO or $750k to |
| exemptive relief such as that provided by an | | | | $1.25m on a trade sale exit. |
| independent ASSOB Sponsor. | | | | Note that without an exit plan, they may not be |
| The commonly referred to 20/12 rule stipulates that | | | | interested at all! |
| it is an offence to issue or transfer securities without | | | | Investor Ready Businesses |
| disclosure to investors once 20 issues or transfers | | | | Before investors can be approached, the business |
| have occurred or $2million has been raised | | | | needs to be investor ready. This means that it should |
| (Subsection 727 (4). Disclosure means an expensive | | | | have a clear and concise business plan, which is then |
| Prospectus – which could cost as much as | | | | translated into an easy to understand Offer |
| $100,000 to prepare and might take as long as 6 or | | | | Document. It needs to convey to potential investors |
| 12 months to be completed. | | | | just what the business is all about, where its |
| Section 708 defines offers that do not need | | | | customers and revenues will come from, why it is |
| disclosure – no expensive prospectus! These | | | | better than its competitors and how it will achieve |
| are defined as small scale offerings made as personal | | | | the growth necessary for the positive results that |
| offers (they can't be made to the public!). A personal | | | | everybody is hoping for. |
| offer is one that can only be accepted by the person | | | | It should be a public unlisted company as this means |
| to whom it is made, and made to a person who is | | | | 3 Directors (more eyes watching the shop), an |
| likely to be interested in the offer, having regard to | | | | auditor (an independent expert checking the books), |
| previous contact, some professional connection or | | | | with regular reporting and guaranteed share transfers. |
| statements or actions that indicate they are | | | | A proprietary limited company lacks transparency and |
| interested in receiving offers of that kind. | | | | is not a suitable investment vehicle. |
| The following investors are classed as "excluded" | | | | Management processes and reporting/compliance |
| from the 20/12 rule – overseas investors, direct | | | | procedures need to be implemented to |
| family, executive officers of the company, gifted | | | | accommodate the requirements of multiple |
| shares for nil consideration, existing shareholders on a | | | | shareholders. This includes a Shareholders Registry, |
| pro-rata offer, sophisticated investors and | | | | quarterly reporting and use of funds reports as well |
| professional investors. | | | | as audited accounts. |
| Penalties for breach | | | | Finding Investors |
| Failing to consider the consequences of | | | | There is an art to sourcing equity investors – an |
| non-compliance can lead to a fine of up to $22,000 | | | | art that specialists such as Transition Capital and |
| for individuals and $110,000 for companies and up to | | | | ASSOB are well practiced in. In begins with a viable, |
| 5 years jail. Further, ASIC can place a stop order | | | | vibrant business and enthusiastic, energetic owners |
| that prevents the offer, issue, sale or transfer of | | | | and management. Add some expertise to structure |
| securities and is likely to make an application to wind | | | | an attractive offer to investors and the funds can be |
| up the company. | | | | found, all within the requirements of the Corporations |
| More scary is the fact that if one investor complains | | | | Act. |
| (say 2 years later) and it is found that the capital | | | | Most companies will only have one chance at this |
| raising was inbreach of the Act, ASIC will request | | | | – so doing it right the first time makes a lot of |
| that ALL the money raised be refunded. Given | | | | sense. |
| that a disgruntled investor is not likely to emerge | | | | |