Private Company Fundraising – options and rules

It is a truth universally acknowledged that a company requiring capital must be in want of good fundraising options. While it is common knowledge that public companies (those with more than 50 non-employee shareholders) can raise funds from the public by issuing securities, it can sometimes be forgotten that private companies (proprietary limited companies with fewer than 50 employee shareholders) actually have more options for increasing cash flow besides borrowing from the bank or judicious saving.

Perceived complexity often deters companies from going down this path. Their timidity is generally attributed to confusion relating to what documents must be provided and how the process should be undertaken.

Public companies seeking to raise cash must provide disclosure documents such as a prospectus, an offer information statement, a profile statement or a two-part simple corporate bonds prospectus. Limits on the types of fundraising, amounts raised and target markets will dictate which document will be appropriate.

However, private companies can raise funds from existing shareholders and employees of the company or a subsidiary company.

Alternatively, they can raise funds from the general public (this has some qualifications which will be explained shortly) if the fundraising does not require a disclosure document.

When is a disclosure document not required?

The main exception is for small-scale capital-raisings — ie, when an offer is a personal offer; when offers or invitations have been made to fewer than 20 persons in the previous 12 months; and when the new offer will not result in more than $2 million being raised in that 12 months. These provisions, taken together, are often referred to as the 2/20/12 Rule.

There are a few other mandatory requirements. Most importantly, unlike a public share offering, your offer cannot be advertised.

In fact, the offer must be made personally and can be accepted only by the person to whom is it is made, and you should have reason to believe that the acceptee’s interest arises from some prior connection. The practical implication of this is that your potential investors are then largely limited to family, friends or business acquaintances.

But be warned, clever attempts to set up multiple entities under the same controllers in order to expand the scope of your fundraising will not be tolerated. If the Australian Securities & Investments Commission determines this is occurring, it has the power to aggregate the transactions for the purpose of the $2 million ceiling.

On the upside, so-called "sophisticated investors" or those outside Australia will not be counted within the 20-person limit.

So now that the hard part is over, all that’s left to do is find those 20 investors.