The ASX has recently updated Guidance Note 8 (Continuous Disclosure) to address the practice of listed entities commissioning and publicising research reports which include objectionable material that the entity itself could not publish (e.g. information about exploration results, mineral resources, ore reserves or a production target that does not comply with the JORC Code or research reports with an estimate of earnings or other forward looking financial information that does not meet the requirements of relevant ASIC Regulatory Guides).

Section 4.15 of Guidance Note 8 now states that:

Generally speaking, an entity should not submit:

• a broker or analyst research report about the entity; or
• an announcement about the issuance of, containing an extract from, or referring or including a hyperlink to, such a report,

for publication on the ASX Market Announcements Platform under Listing Rule 3.1. Any market sensitive fact-based material in such a report should already have been released by the entity under that rule beforehand and so it can reasonably be inferred that the entity is seeking to publish or draw attention to the report for its opinion-based material (such as the broker’s or analyst’s buy recommendation, price target or earnings estimates).  This will raise an issue about whether the report is really being published for promotional rather than informational reasons.  It may also raise concerns about whether the entity is impliedly endorsing any price target, earnings estimates or other forward looking financial information in the report.  For these reasons, ASX is likely to refuse to allow an entity to publish such a report or announcement on the ASX Market Announcements Platform without a detailed and acceptable explanation as to why the entity considers this information to be market sensitive.

If an entity does happen to publish such a report or announcement on the ASX Market Announcements Platform without pre-clearing it with ASX Listings Compliance, ASX may require the entity to make a further announcement addressing the concerns mentioned in the preceding paragraph.  Further, if the report contains material that ASX considers objectionable, ASX may also require the entity to publish an announcement withdrawing or retracting the objectionable material and advising investors not to make any investment decision based on it.

Craig Sanford, Director, Sierra Legal on M: +61 (0)416 052 115 or E: csanford@sierralegal.com.au

Mike Jeffery, Director, Sierra Legal on M: +61 (0)402 745 054 or E: mjeffery@sierralegal.com.au

Kenneth Gitahi, Senior Associate, Sierra Legal on M: +61 (0)401 450 220 or E: kgitahi@sierralegal.com.au

In our last article in this series (“Proper preparation prevents poor performance”), we gave 3 initial tips for potential sellers to consider before embarking on the process of attempting to sell their business.  Our next 3 tips relate to due diligence and indicative offers.

Tip 4 - Get your backyard in order

• Consider and collate the documents/information that a potential buyer will want to see when conducting due diligence on your business.  It is important to get everything in order before entering into discussions with a potential buyer to determine whether there are any gaps or errors in the information (or documentation which can be corrected before due diligence commences).
• If you are able to give a potential buyer correct and up-to-date due diligence documents, this is likely to help give the potential buyer comfort, enhance value and lessen the severity of warranties and indemnities that may need to be agreed with the ultimate buyer.  Missing documents (or gaps in information) can have the reverse effect.
• The categories of key documents/information that a potential buyer is likely to want to review during due diligence is contained in the mergers and acquisition planning checklist referred to below.    

Tip 5 - Use a non-binding indicative offer/heads of agreement

• An indicative offer, heads of agreement or letter of intent is a good way of setting expectations with parties in relation to the potential terms of the deal and the proposed timetable.
• These documents should be non-binding, except for confidentiality (and possibly exclusivity and break fees, if applicable).

Tip 6 - Allow for a comprehensive due diligence process

It is important to have a well organised and comprehensive data room. A data room is important for a few reasons:

• The content of the data room forms the basis on which a potential buyer will determine its offer price for your business - so in simple terms, a disorganised/deficient data room can often result in a lower offer price (or the buyer requesting onerous terms and conditions in the sale and purchase agreement to protect its position).
• An effective data room can also give powerful tools to the seller (e.g. document security mechanisms, the ability to monitor who is reviewing what documents and for how long, and an effective process for submitting, answering and recording requests for further information (a.k.a RFIs)).
• If important information is missing from the data room (or there is any false or misleading information) and the deal goes ahead, then this may result in the buyer making a claim against the seller in the future for breach of warranty or misleading and deceptive conduct - so it’s important to have an accurate record of exactly what was disclosed to the buyer to assist with any future claims.
• Seller’s should consider using an online data room (such as the system offered by Ansarada) with document security controls (e.g. restrictions on copying, printing or sharing documents) rather than an online file sharing service like Dropbox.

To assist sellers in planning for a potential sale of their business, we have prepared a mergers and acquisition planning checklist.  The link to the download page is below:

Download

Look out for the next article in this series, which will provide some tips and traps relating to M&A transaction documents.

For more information, please contact:

Craig Sanford, Director, Sierra Legal on M: +61 (0)416 052 115 or E: csanford@sierralegal.com.au

Mike Jeffery, Director, Sierra Legal on M: +61 (0)402 745 054 or E: mjeffery@sierralegal.com.au

The commonly known 5 P’s of success (“proper planning/preparation prevents poor performance”) are as relevant to the sale of your business as in other areas of life.  If you are proposing to sell your business, proper planning and preparation before entering into any discussions with potential buyer(s) will assist you in obtaining the best possible price for your business, limit delays and reduce exposure to risks.

Over the next few weeks, we will highlight some of the top tips and traps for parties that are looking to sell their businesses.

Tip 1 - Consider the best corporate structure for a future sale of your business

Is your business operated through a company, unit or discretionary trust, or by you personally as a sole trader?  Business operators typically consider business structuring issues from their own personal legal and financial risk minimisation perspective.  But when structuring your business, always plan for the possibility of a future exit.  Consider how each structure will impact on a future sale and how each option will impact a potential buyer.

If you need to restructure your business immediately before a sale, this could:

• delay the transaction;
• scare off buyers; and/or
• cause additional expense,

and may have adverse tax consequences (e.g. stamp duty or capital gains tax from shifting assets).

Tip 2 - Appoint your advisers early

• Seek help from professional advisers before approaching or engaging in discussions with any potential buyer(s).  Advisers are less likely to act for you (particularly on a "success fee" basis) if your business has already been "shopped around".  You will typically only get one opportunity to approach and impress a potential buyer, so ensure that you give the best possible impression by seeking advice on the optimal way to market your business and to rectify potential "deal killers" before they are discovered by a potential buyer.
• The necessary advisers for a M&A transaction typically include corporate advisers, lawyers and accountants/tax advisers.  They need to be experienced in M&A transactions (as this is a specialist area).   
• When engaging lawyers, accountants or tax advisers, get cost estimates up front, ideally with fee caps or fixed fees.
• When engaging corporate advisers, try to agree a fee structure that incentivises the corporate adviser to maximise sale price (e.g. a "success fee" with ratcheting increases for exceeding your expected valuation).

Tip 3 - Share sale vs asset sale

• Consider how the transaction is to be structured – i.e. the shareholders selling their shares in the company that operates the business or the operating entity selling its assets.
• The tax outcomes are often better for the seller if the transaction is a share sale – but buyers may be reluctant to take on all the historical liabilities associated with the company.
• Buyers often prefer an asset sale (as the buyer may choose the assets to be acquired and leave behind most liabilities).
• Further to Tip 1 above, if you operate your business as a sole trader or through a trust, the transaction will normally need to be structured as a sale of the assets (so your transaction structuring options become more limited).

To assist sellers in planning for a potential sale of their business, we have prepared a mergers and acquisition planning checklist.  The link to the download page is below:

Download

Look out for the next article in this series, which will provide some tips and traps relating to due diligence and indicative offers.

For more information, please contact:

Craig Sanford, Director, Sierra Legal on M: +61 (0)416 052 115 or E: csanford@sierralegal.com.au

Mike Jeffery, Director, Sierra Legal on M: +61 (0)402 745 054 or E: mjeffery@sierralegal.com.au

On 19 March 2018, the Federal Court imposed a $300,000 penalty against online business directory service ABG Pages Pty Ltd for engaging in systemic unconscionable conduct, undue harassment, and making false and misleading representations in relation to its online advertising services.  The sole director of ABG Pages, Ms Michelle McCullough was ordered to pay a penalty of $40,000 and was disqualified from managing corporations for 5 years.

The ACCC instituted proceedings against ABG Pages in December 2016 alleging a raft of breaches of the Australian Consumer Law, including:

• falsely representing that large businesses purchased its directory services;
• using high pressure sales tactics to sell listings on its online business directory;
• misleading businesses into entering one or more contracts;
• refusing to cancel contracts which customers did not want;
• misleading businesses about the total duration and the total price of contracts;
• misleading businesses into entering into second or subsequent contracts for additional listings; and
• unduly harassing customers by repeatedly contacting them for payments.

Of particular note were the high pressure sales tactics used by ABG Pages to sell listings on its online business directory.  Such conduct included chasing debts that did not exist, with one customer called 993 times by ABG Pages over a nine-month period.

ABG Pages and Ms McCullough admitted to various breaches of the Australian Consumer Law and the ACCC action resulted in the closure of the ABG Pages business in 2016.  The Federal Court also ordered ABG Pages and Ms McCullough to jointly make a $25,000 contribution towards the ACCC’s costs and that Ms McCullough attend an ACL compliance program.

In successfully bringing proceedings against ABG Pages, the ACCC has sent a clear message that making false or misleading representations, engaging in high pressure sales tactics and unduly harassing customers to enter into contracts or pay invoices, are not legitimate business strategies.

It should also be noted from this case that the potential penalties under the Australian Consumer Law for engaging in such conduct are significant.

Click here for a link to the ACCC media release on the proceedings against ABG Pages and Ms McCullough.

For general Australian Consumer Law compliance advice, please contact:

Craig Sanford, Director, Sierra Legal on M: +61 (0)416 052 115 or E: csanford@sierralegal.com.au

Mike Jeffery, Director, Sierra Legal on M: +61 (0)402 745 054 or E: mjeffery@sierralegal.com.au

Kenneth Gitahi, Senior Associate, Sierra Legal on M: +61 (0)401 450 220 or E: kgitahi@sierralegal.com.au

Sierra Legal is excited to be named as a finalist in the “Boutique Firm of the Year” award category at the 2018 Australasian Law Awards!  Thanks to all our clients for the continued support.

The ASX has published a compliance update which, among other things, summarises updates to various Listing Rule Guidance Notes.  The updates were released by the ASX on 9 March 2018 and the following Guidance Notes are affected:

1. Guidance Note 1 - Applying for Admission

The updates include further commentary in section 3.8 on using artificial means to achieve spread and in section 3.19 relating to the ASX's good fame and character requirements.

2. Guidance Note 8 - Continuous Disclosure

The updates include:

• additional guidance in section 4.15 on the ASX's disclosure expectations for material contracts;
• removing a reference in section 4.20 to disclosing the impact of material contracts on revenue, costs or profits;
• expanding the guidance in section 5.10 to address the new insolvent trading safe harbour for directors in s588GA of the Corporations Act and what should be disclosed when an entity in financial difficulty requests a voluntary suspension to complete a transaction necessary for its survival; and
• clarifying aspects of example D in Annexure A.

3. Guidance Note 12 - Significant Changes to Activities

The updates include changes:

• reflecting a change in policy for back door listings (which is effective immediately) requiring all directors or proposed directors to provide evidence of their good fame and character, including existing directors who have been elected by shareholders to the board; and
• clarifying the accounts that need to be disclosed in an announcement under Annexure A to that Guidance Note.

4. Guidance Note 16 - Trading Halts and Voluntary Suspensions

This guidance note has been updated to reflect the changes to section 5.10 of Guidance Note 8 as mentioned above.

Click here for a link to the ASX compliance update.

For more information regarding the updates to these guidance notes, and for general ASX Listing Rule compliance advice, please contact:

Craig Sanford, Director, Sierra Legal, M: +61 (0)416 052 115 or E: csanford@sierralegal.com.au

Mike Jeffery, Director, Sierra Legal, M: +61 (0)402 745 054 or E: mjeffery@sierralegal.com.au

Kenneth Gitahi, Senior Associate, Sierra Legal, M: +61 (0)401 450 220 or E: kgitahi@sierralegal.com.au

In a compliance update released on 15 March 2018, the ASX has highlighted recent incidents where disclosures by listed entities about their contractual arrangements with customers has fallen short of the required standards.

Section 4.15 of Guidance Note 8 provides that announcements regarding the signing of a market sensitive customer contract should generally include information about:

• the name of the customer;
• the term of the contract;
• the nature of the products or services to be supplied to the customer;
• the significance of the contract to the entity;
• any material conditions that need to be satisfied before the customer becomes legally bound to proceed with the contract; and
• any other material information relevant to assessing the impact of the contract on the price or value of the entity's securities.

The ASX has used this compliance update to remind listed entities that, if a listed entity fails to comply with the required disclosure requirements, the ASX will not hesitate to suspend the entity, query it and require it to correct any inadequate or misleading disclosures. The ASX will also refer the entity to ASIC to consider regulatory action.

Listed entities should also be aware of the significant criminal and civil consequences that can apply where a market announcement does not meet the requirements of Listing Rule 3.1 or is misleading or deceptive.  These potential consequences are set out in Annexure B of Guidance Note 8.

Click here for a link to the ASX compliance update.

For more information on the disclosure requirements relating to customer contracts, and for general ASX Listing Rule compliance advice, please contact:

Craig Sanford, Director, Sierra Legal, M: +61 (0)416 052 115 or E: csanford@sierralegal.com.au

Mike Jeffery, Director Sierra Legal, M: +61 (0)402 745 054 or E: mjeffery@sierralegal.com.au

Kenneth Gitahi, Senior Associate, Sierra Legal, M: 61 (0)401 450 220 or E: kgitahi@sierralegal.com.au

Sierra Legal has developed an innovative monthly services package for selected clients. In simple terms, it involves Sierra Legal providing expert legal services for a fixed monthly fee, rather than the traditional method of charging clients based on the number of hours spent providing those services.

Our monthly services package offers clients a number of advantages, particularly in that it encourages early and regular contact with experienced legal advisers (rather than seeking advice after issues have escalated), and without the fear of receiving unexpected invoices for legal fees.

For more information, see our Monthly Services Package page.

Sierra Legal would like to congratulate SPAC Logistics Pty Ltd on its recent acquisition of Josie’s Transport Group.  Josie's Transport Group is a business-to-business courier service that primarily operates in the Geelong and Melbourne areas (with the ability to also service Warrnambool and Ballarat, and other Victorian and interstate destinations).

Sierra Legal assisted with all legal aspects of the transaction including:

• drafting and negotiating transaction documents; and
• assisting with completing the transaction.

For further information, please contact Craig Sanford or Samantha Khoo. 

Sierra Legal is pleased to announce that Kenneth Gitahi has joined the group as a Senior Associate.

Ken specialises in mergers and acquisitions and equity capital markets. 

For more information, see: https://www.sierracorp.com.au/team/  

On 18 September 2017, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) (Treasury Laws Amendment Act) received Royal Assent.  The Treasury Laws Amendment Act creates major changes to Australia’s insolvency law regime by introducing:

• a “safe harbour” for company directors to avoid contravening the insolvent trading provision in the Corporations Act 2001 (Corporations Act); and
• provisions making “ipso facto” clauses unenforceable while a company is undergoing specified restructuring or other arrangements aimed at avoiding being wound-up in insolvency.

The new safe harbour provisions came into effect on 19 September 2017 and the changes to the ipso facto laws are expected to come into effect on 30 June 2018.

Background to the Treasury Laws Amendment Act

Australia has had very strict laws aimed at preventing companies from trading while insolvent.  Section 588G of the Corporations Act imposes a statutory duty on company directors to prevent insolvent trading, making the directors personally liable for debts that are incurred and imposing civil and criminal penalties.  In addition, ipso facto clauses (i.e. those that allow one party to terminate or modify a contract on the occurrence of a specified event, such as an insolvency related event) can adversely impact the ability of a company suffering financial difficulties from restructuring, selling assets or trading out of those financial difficulties.

It is hoped that the new provisions will:

• reduce the number of premature formal insolvency processes;
• encourage more early stage investors and professional directors to become involved in start-up companies by reducing the stigma associated with being involved with an insolvent company; and
• give Australian companies facing financial difficulties a better chance of being restructured or turned around (with a view to preserving value for creditors and shareholders). 

Safe Harbour

The Treasury Laws Amendment Act introduces a new section 588GA into the Corporations Act which provides that the civil insolvent trading provisions of section 588G(2) of the Corporations Act do not apply to a person and a debt (i.e. creates a “safe harbour”) if, after the person starts to suspect that the relevant company may become (or already is) insolvent, that person starts developing a course of action that is reasonably likely to lead to a better outcome for the company (Improvement Action) and the debt is incurred in connection with that Improvement Action.  

Key points relating to the operation of the safe harbour are as follows:

• The safe harbour period starts to apply from the time the person starts developing the Improvement Action (including any decision-making period relating to that Improvement Action and any period required to obtain initial advice). 
• The Improvement Action must be taken within a reasonable period for the safe harbour to remain in place, and the safe harbour applies until the director or company stops taking the Improvement Action, the Improvement Action stops being reasonably likely to lead to a better outcome for the company or the company goes into administration or liquidation.
• The Treasury Laws Amendment Act includes a non-exhaustive list of factors that may be considered relevant when determining whether any Improvement Action is reasonably likely to lead to a better outcome for the relevant company.  For example, whether the person/director has:
• kept him/herself informed about the company’s financial position;
• taken appropriate steps to prevent misconduct by officers or employees of the company that could adversely affect the company’s ability to pay all its debts
• taken appropriate steps to ensure the company is maintaining appropriate financial records;
• obtained advice from appropriately qualified advisers who were sufficiently informed; or
• developed or implemented a plan to restructure the company to improve its financial position. 
• During the safe harbour period, directors must continue to comply with their other duties under the Corporations Act and (if applicable) the company and its officers must also continue to comply with the continuous disclosure obligations under the Corporations Act and the ASX Listing Rules.

The safe harbour will be unavailable in certain circumstances, such as where the company has not been paying its employees, complying with its tax reporting obligations, or if a person seeking to rely on the safe harbour fails to substantially comply with obligations to assist an administrator, liquidator or controller that is later appointed under a formal insolvency process.  

Stay on enforcing ipso facto clauses

The amendments in the Treasury Laws Amendment Act provide for a stay against the enforcement of rights that amend or terminate an agreement to which a company is a party in the following circumstances:

• because of the company entering into a compromise or arrangement under Part 5.1 of the Corporations Act (where the scheme is for the purpose of avoiding insolvent liquidation);
• where a receiver or managing controller is appointed over all or substantially all of the property of the company under Part 5.2 of the Corporations Act; or
• where the company is placed into voluntary administration under Part 5.3A of the Corporations Act. 

Key points relating to the operation of the stay are below:

• The “stay period” (generally) begins and ends at the following times:
• In the case of a compromise or arrangement under Part 5.1 of the Corporations Act (scheme), the stay period starts when the scheme is publicly announced and ends on the later of:
• if the company fails to make the scheme application within 3 months after the announcement, at the end of that 3 month period;
• when the scheme application is withdrawn or dismissed by the court; or
• when the scheme ends, unless this occurs because the company is to be wound up (in which case the stay period ends when the company’s affairs have been fully wound up). 
• In the case of receivership or appointment of a managing controller, the stay period starts when the receiver or managing controller is appointed and ends when the receiver’s or managing controller’s control ends.
• In the case of a voluntary administration, the stay period starts when the company enters into administration and ends when:
• the administration ends; or
• the company’s affairs have been fully wound up, 

whichever is the later.

• The right to amend or terminate an agreement under an ipso facto provision will also continue to be unenforceable indefinitely after the end of the stay period, where the reason for enforcing the relevant amendment or termination right relates to the company having been under one of the specified forms of restructuring arrangements referred to above or because of its financial position before the end of the stay period or in certain other prescribed circumstances (including where the reasons are in substance contrary to the stay provisions).
• The stay does not apply to agreements made after the commencement of one of the specified forms of external administration referred to above.
• The provisions do not (generally) impose a stay or prohibit the exercise of a right for any other reason (e.g. termination for a failure by the company to make required payments or perform some other obligation under the relevant contract).
• While a stay is in force, the relevant contractual counterparty or creditor of the company will not be required to provide additional credit or new advances to the company.
• The new stay rules will only apply to contracts, agreements or arrangements entered into after the commencement date of the stay provisions.  

Author:  Samantha Khoo

If you have any queries about this article, please contact Samantha Khoo (Senior Associate - skhoo@sierralegal.com.au), Michael Jeffery (Director – mjeffery@sierralegal.com.au) or Craig Sanford (Director – csanford@sierralegal.com.au).

Sierra Legal would like to congratulate Bingo Industries Limited (ASX: BIN) on its entry into the Victoria waste management market through the acquisition of Konstruct Recycling, Resource Recovery Victoria and AAZ Recycling.

Sierra Legal assisted Bingo with all legal aspects of the transaction, including:

·         Legal due diligence;

·         Drafting and negotiating transaction documents; and

·         Assistance with completing the transactions.

The combined deal consideration across the 3 acquisitions was approximately $38 million.

For further information, please contact Craig Sanford, Michael Jeffery or Jenny Lau.

Corporate/Commercial Lawyer

4-8 years PQE (Associate or Senior Associate)

• Melbourne
• Unique and flexible work environment
• Relaxed, close-knit and supportive team
• Broad range of corporate and commercial work

Are you tired of working in a typical “ivory tower” law firm?  Do you want to be part of a dynamic and growing team with genuine flexibility around work location and hours? 

Sierra Legal is a boutique legal practice that was formed almost 8 years ago.  Our current clients, to name a few, include Atrum Coal, Aussie Farmers, BP, Chubb, Harris Capital, Hisense, Medibank, Bingo Industries, Simoco and Sodexo.

We have offices in Melbourne and Brisbane, but when our lawyers are not out seeing clients, they are often working from home offices and communicating regularly with each other online.  All our lawyers have come from large firms (Middletons/K&L Gates, McCullough Robertson, King Wood Mallesons and Clyde & Co) and share a common desire to practise law in a far more flexible workplace environment, but still being part of a friendly, supportive team that does interesting, high quality legal work. 

We are looking for a talented Melbourne based corporate/commercial lawyer to join our growing team at Associate or Senior Associate level, to work on a broad range of complex and interesting M&A, corporate and commercial matters. 

You will be working within a close-knit team of experienced commercial lawyers in some or all of the following areas:

• Mergers and acquisitions
• IPOs, reverse listings and public company takeovers
• Capital raisings and debt restructuring
• Commercial agreements
• General corporate legal advice

We are seeking candidates who possess an outstanding analytical mind, strong interpersonal and communication skills, excellent drafting skills, attention to detail, personal integrity, self-motivation and the ability to work as part of a close-knit team. 

If you would like to be considered for this exciting and unique role, please email your CV in confidence to careers@sierralegal.com.au

We are pleased to announce the promotion of Jenny Lau as a Special Counsel of Sierra Legal. Jenny joined Sierra Legal in 2011. She was one of the first employees of the business and has been instrumental in its growth and development.  

A new form of crowd-sourced capital raising for small, unlisted public companies is now a possibility with legislation to amend the Corporations Act passing through Australian Federal Parliament.

In late 2016, the Australian Federal Government introduced into parliament, the Corporations Amendment (Crowd-sourced Funding) Bill 2016 (Cth) (the CSF Bill). The CSF Bill will amend the Corporations Act, and will establish a regime for equity crowd-sourced funding for certain ‘eligible’ Australian companies (the CSF Regime). The CSF Bill recently passed through both the Australian Federal House of Representatives and the Australian Senate, and will now be presented to the Governor-General for assent.

The CSF Bill is intended to remove the regulatory barriers to equity crowd-sourced funding and to therefore make available a new funding source for business in Australia. It also introduces to all Australians a form of investment that has previously only been available to sophisticated investors.

The CSF Regime

The key features of the CSF Regime are as follows:

Eligible Offers

An offer of securities under the CSF Regime will need to satisfy the following key criteria:

• the company making the offer will only be able to offer to issue its own securities;
• the company will need to be an eligible CSF company at the time when the offer is made (see below);
• the securities will need to be of a class specified in the regulations (which are yet to be finalised);
• the maximum amount to be raised by the new offer can be no more than $5 million (after deducting all amounts raised by the company during the previous 12 months through other offers under the CSF Regime, small scale “personal offers” under section 708(1) of the Corporations Act and exempt offers made through financial services licensees under section 708(10) of the Corporations Act); and
• the funds sought to be raised by the offer will not be able to be used, to any extent, by the company or a related party of the company, to invest in securities or interests in other entities or schemes.

Eligible CSF Company

A company will be an eligible CSF company if all of the following conditions are satisfied in relation to the company at the relevant time:

• the company is a public company limited by shares;
• the company’s principal place of business is in Australia;
• a majority of the company’s directors (not counting alternate directors) ordinarily reside in Australia;
• the company complies with the assets and turnover test, that is: (a) the value of the consolidated gross assets of the company, and of all its related parties is less than $25 million; and (b) the consolidated annual revenue of the company, and of all its related parties, is less than $25 million;
• neither the company, nor any related party of the company, is a listed corporation; and
• neither the company, nor any related party of the company, has a substantial purpose of investing in securities or interests in other entities or schemes.

Making Offers

A key feature of the CSF Regime is the establishment of separate and less onerous disclosure requirements for capital being raised under the CSF Regime. Therefore, the existing Pt 6D.2 (Disclosure to investors about securities) and Pt 6D.3 (Prohibitions, liabilities and remedies) of the Corporations Act will not apply to this form of capital raising.

An offer under the CSF Regime will need to be made via an offer document that will need to comply with the requirements set out in the CSF Bill and the new regulations.

An offer of a company’s securities under the CSF Regime will only be able to be made on a platform operated by a single crowd-sourced funding intermediary (CSF intermediary) and all applications made in response to the offer, and all application money in respect of such applications, will need to be sent or paid (as applicable) to the CSF intermediary and be dealt with by the CSF intermediary as specified by the CSF Regime.

CSF intermediaries will need to hold an Australian Financial Services Licence that specifically authorises crowd-sourced funding activities and the CSF Regime will impose additional obligations on CSF intermediaries (including obligations to have carried-out appropriate checks on the company seeking to raise capital).

Corporate Governance

As noted above, only unlisted public companies will be eligible to be CSF companies. Proprietary companies seeking to access the CSF Regime will need to convert to an unlisted public company.

Given the additional compliance costs that small companies need to incur after converting from a proprietary company to a public company, this aspect of the CSF Regime has attracted the greatest criticism.

In order to alleviate some of the concerns, the CSF Bill provides that a company that is registered as, or that converts to, a public company limited by shares after the commencement of the CSF Regime may be eligible for corporate governance and reporting concessions for a period of 5 years. The concessions include:

• an exemption from needing to hold an Annual General Meeting (AGM) under the usual rules;
• the option to only provide financial reports to shareholders online; and
• the company not being required to appoint an auditor or have audited financial reports until more than $1 million has been raised from CSF offers.

Retail Investor Protection

The CSF Regime also includes certain protections for retail investors including:

• retail investors will only be able to invest up to $10,000 per company; and
• retail investors may withdraw an application for securities under the CSF Regime within 5 business days after the application is made, giving retail investors a chance to reconsider their investment decision.

Final Comments

Despite the regulatory compliance concessions in the CSF Bill, the Senate Economics Legislation Committee Report that was concluded in February 2017 notes that the CSF Bill still fails to address the needs of start-ups and small businesses, most of which are proprietary companies. Their view is that the Government should go back to the drawing board, consult with industry and come back with a framework that is suitable for both private and public companies.

Despite these views, the CSF Bill has now passed through Federal Parliament and the key operative provisions of the CSF Bill will commence on the earlier of a day to be fixed by Proclamation, or 6 months after the day of assent.

We will keep you updated in relation to the commencement of the CSF Regime and the introduction of any regulations that may impact the operation of the CSF Regime.

In the meantime, if you have any questions on this article or crowd-sourced equity funding, please do not hesitate to contact Troy Mossley (Senior Associate - tmossley@sierralegal.com.au), Michael Jeffery (Director – mjeffery@sierralegal.com.au) or Craig Sanford (Director – csanford@sierracorp.com.au).

Here are 10 key things that have led to ASIC requiring replacement prospectuses to be issued. This is based on personal experience in being involved in 4 recent IPOs/reverse listings on the ASX, and from a review of some replacement prospectuses that were issued last year.

1. More detailed disclosure of key risks in the Chairman’s letter

ASIC required a summary of certain key risks that were specific to the relevant offer to be included in the Chairman’s letter section of a prospectus. This was required notwithstanding that the risks had already been disclosed elsewhere in the prospectus.

2. More detailed disclosure around valuations/estimates

ASIC required more detailed disclosure around the basis or justification for valuations or estimates included in prospectuses where those valuations or estimates were made by directors or management (rather than independent third parties).

3. More detailed explanations relating to financial matters

In a number of prospectuses, additional disclosure was required on the level of debt owed by relevant companies, and to further explain issues relating to bad and doubtful debts, proposed debt forgiveness mechanisms and the remaining useful life of key assets.

4. More disclosure in relation to intellectual property

Further information and disclosures were required in relation to the status of intellectual property rights/assets used by the company issuing the prospectus. In at least one case where the issuer had no registered intellectual property rights, ASIC also required this fact to be disclosed.

5. Inadequate historical financial information

A number of replacement prospectuses needed to be issued last year due to the initial inclusion of inadequate historical financial information (particularly where the issuer was proposing to acquire operating companies or businesses in conjunction with the issuer’s capital raising). In May 2016, ASIC released Consultation Paper 257, which contains ASIC’s current views relating to the disclosure of historical financial information.

6. Inclusion of audited, amalgamated accounts for the last 2.5 to 3 years

In a number of instances where the issuer was a newly incorporated Australian public company that was incorporated to acquire an operating group of companies via a restructure, ASIC required the details of the audited, amalgamated accounts for the last 2.5 to 3 years for the post-restructure group to be prepared and included in the relevant prospectus.

7. Disclosure of directorships with companies in voluntary administration

In a recent replacement prospectus, ASIC required the disclosure of a director’s former directorships with companies that had gone into voluntary administration.

8. Inclusion of references where there was no independent expert or market report

ASIC required the inclusion of a list of reference sources for certain technical statements made in a prospectus relating to a medical product (where the relevant prospectus did not contain an independent expert or market report). The references were added in the main body of the replacement prospectus after each relevant statement, and a list of reference sources also needed to be included in a separate section towards the end of the replacement prospectus.

9. More detailed “Use of Funds” information

The “Use of Funds” details in prospectuses are heavily scrutinised by ASIC. ASIC will often require more detailed information on how the relevant issuer intends to use funds to achieve its future strategies and how these strategies will be impacted if less than the maximum amount is raised under the relevant prospectus.

10. More detailed information about regulatory environment

ASIC has required the inclusion of more detailed information of an issuer’s present and future products and how applicable licensing and other regulatory requirements could impact on future revenue and strategies.

It is very common for ASIC to pick up issues during the exposure period, even with the most well drafted and comprehensive prospectuses. However, keeping in touch with the areas that ASIC is focusing on (and following the guidance included in the numerous Regulatory Guides that ASIC has released) will reduce the chances of additional disclosure being required.

Author: Samantha Khoo, Senior Associate, Sierra Legal Pty Ltd.

If you have any queries about this article or in relation to prospectuses in general, please contact Samantha Khoo (Senior Associate - skhoo@sierralegal.com.au), Michael Jeffery (Director – mjeffery@sierralegal.com.au) or Craig Sanford (Director – csanford@sierralegal.com.au).

Troy Mossley, a lawyer specialising in mergers & acquisitions, joint ventures, shareholder arrangements, capital raisings, private equity investments, due diligence, and general corporate and commercial advice, joined Sierra Legal's team of advisers.

Sierra Legal would like to congratulate Faster Enterprises Ltd (FE8) on being admitted to the official list of the ASX.  The listing follows a corporate restructure and the close of offers under a prospectus resulting in FE8 raising over $5 million.

Sierra Legal assisted FE8 with all legal aspects of the transaction including:

• The corporate structure of various companies, trusts and properties;
• The preparation of the capital raising prospectus; and
• Obtaining all necessary ASX approvals.

FE8 shares commenced trading on the ASX on Monday, 21 November 2016.

For further information, please contact Craig Sanford, Michael Jeffery or Jenny Lau.

Following on from the recent appointment of Sierra Legal to the Medibank legal panel, we are incredibly proud to announce that Sierra Legal has also been appointed to the legal panel of BP Australia.

Sierra Legal was selected as just one of a few firms in Australia that will be advising BP on corporate and commercial matters.

For further information, please contact Craig Sanford (Director) or Michael Jeffery (Director).

We are extremely pleased to announce that Sierra Legal has been appointed to the panel of legal advisers to Medibank.

Medibank joins Sierra’s growing client base of large national and multi-national organisations (including Australian Unity, Hisense, Pact Group and Simoco) that seek counsel from our exceptional legal team in relation to a broad range of corporate and commercial matters, recognising the unique value we add.

We are very excited by this opportunity to build a long and mutually beneficial relationship with Medibank.

We are pleased to announced that Samantha Khoo has recently been promoted to Senior Associate.  Sam has been with Sierra Legal for the past 2 and a half years and is admitted as a solicitor in Queensland, Australia as well as in England & Wales.

Congratulations Sam!

Sierra Legal would like to congratulate Voltage IP on receiving confirmation that it will be re-admitted to official quotation on the ASX.  The relisting follows the successful acquisition of KLE Products and the close of offers under a prospectus resulting in VIP raising over $3.5 million.

Sierra Legal assisted VIP with all legal aspects of the transaction, including:

• the acquisition of KLE Products;
• shareholder meetings to obtain the necessary approvals;
• the preparation of the capital raising prospectus; and
• obtaining all necessary ASX approvals (including re-compliance with Chapters 1 and 2 of the ASX Listing Rules).

The ASX has announced that trading in VIP shares will recommence on Tuesday, 2 February 2016.

For further information, please contact Craig Sanford (Director) or Michael Jeffery (Director).

We are pleased to announce the promotion of Mike Jeffery as a Principal of Sierra Legal.  Mike joined Sierra Legal in 2011.  He was the first employee of the business and has been instrumental in its growth and development.

Sierra Legal has been advising Frontier Capital Group (formerly known as Precious Metal Resources) in relation to the acquisition of CK Graphic (a Malaysian digital visual communication company) and a contemporaneous $4 million capital raising.  The transaction (which constituted a back-door listing) required FCG to re-comply with Chapters 1 and 2 of the ASX Listing Rules.  On 31 March 2015, is was announced that the shares in FCG will be re-admitted to the official list of the ASX on 7 April 2015.

Sierra Legal is celebrating its 5th anniversary this March! We would like to thank our clients, staff, family and friends for their ongoing support.  We look forward to continuing to deliver exceptional work for many more years!