Australasian Biotechnology (backfiles) AusBiotech ISSN: 1036-7128 Vol. 12, Num. 2, 2002, pp. 27

Australasian Biotechnology, Vol. 12 No. 2, 2002, pp. 27

MEDIA RELATIONS

LAUNCHING A COMPANY: WOULD YOU LIKE TO SHARE?

Nicholas Wells

Partner, Gilbert & Tobin, GPO Box 3810, Sydney, NSW, 1042. Email: nwells@gtlaw.com.au

Code Number: au02010

Many biotech companies have to go through the process of raising funds in order to grow and develop their businesses. Often the fastest and easiest way is to offer shares. However, many companies are not aware of restrictions in the Corporations Act which prohibit offers of shares without a disclosure document (such as a prospectus). The logic behind these requirements is to ensure adequate information is passed to potential investors. The downside to getting the share issues wrong is significant. Not only is there potential for a hefty fine, directors may face prosecution and future investors and VC funds are likely to be scared off. The good news is that if you keep your eye on what you are doing the rules are relatively easy to follow and comply with.

The process of preparing a disclosure document to offer shares is time-consuming and expensive. It is unlikely to be of benefit to biotech companies seeking to raise small amounts of capital for growth, unless they are anticipating listing on the stock exchange within a year. There are several exceptions which allow a company to offer shares without a prospectus/disclosure document. This allows the company to defer the expense of a prospectus until it is necessary. The exceptions that would be most useful to a biotech company seeking to raise funds for growth and development are:

• small scale offerings 20 offers in 12 months rule;
• sophisticated investors; and
• issues to executive officers.

There are other methods of gaining exemption from the prohibition (such as an individual application to the Australian Securities and Investments Commission for a waiver) but these are beyond the scope of this article.

Small scale offerings - The '20/12/2' rule

This is a general exception to the prohibition which has two parts: it must be a personal offer and comply with a strict numbers game.

A personal offer:

• must only be made to a person who is likely to be interested. Examples would include previous contacts; professional or other connections such as customers, family members and friends; and
• can only be accepted by the person to whom the offer is made; and
• cannot be advertised.

The second part of this exception is the limitation on the number of issues and the amount raised. Under this exception a company can issue shares to 20 people within a rolling 12-month period without a disclosure document as long as the funds raised from the issue of these shares during this period do not exceed $2,000,000.

This exception can be used in addition to the other exceptions which may mean that if other exemptions are also used that the company can actually make more than 20 issues in a 12-month period.

As this exception applies in a rolling 12-month time period, if shares have been issued within 12 months of the proposed capital raising, then the number of issues you can make under this exception is reduced by those previous issues.

Sophisticated investors

Another exception to the general prohibition offering shares without a disclosure document is where the minimum amount payable on acceptance of an offer of shares by the person to whom it is made is at least $500,000. This exception also extends to 'top ups' where a person who has previously accepted an offer for securities, accepts a further offer shares in the same class and the amount paid, together with all amounts previously paid by that person, totals $500,000. The sophisticated investor exception is also available to investors who qualify as wealthy investor' by reason of their assets or income. The wealthy investor exemption can be used when an investor has obtained a certificate from a qualified accountant which certifies that the investor has net assets of at least $2.5m or a gross income of $250,000 for each of the 2 preceding financial years.

As mentioned above one advantage of this exception is that 'sophisticated investors' are not counted for the purposes of the 20/12/2 rule potentially enabling a company to have more than 20 investors.

Executive officers

An offer of shares to an 'executive officer,' who is a person involved in the senior management of the company, does not require a disclosure document. This exemption also extends to offers made to a spouse, parent, child, brother or sister of the executive officer. The exemption is based on the assumption that those involved in the management of the company have or can obtain all relevant and material information in relation to the offer of shares.

Conclusion

As long as the company has carefully planned its share issues to comply with the statutory requirements it can defer the expense of preparing a prospectus and avoid a possible breach of prohibition. However, companies should bear in mind two general warnings:

(i) do not issue shares willy nilly; and
(ii) always get professional advice.

Copyright 2002 - AusBiotech