Raising capital is one of the most legally complex activities a growing business undertakes. It involves securities law, disclosure obligations, investor agreements, and corporate governance — all interacting in ways that are not always obvious.
Getting the legal framework right when raising capital matters for two reasons. First, getting it wrong can void the raise, expose directors to liability, and create exactly the investor disputes you were trying to avoid. Second, the documentation produced in a capital raise — the cap table, the shareholder agreements, the constitutional provisions — shapes the governance of the business for years.
This article covers the main capital raising pathways available to Australian private companies, the legal constraints that apply, and the key documents involved.
The Regulatory Framework: Why Fundraising Is Regulated
Raising money from investors in Australia is regulated by the Corporations Act 2001 (Cth). The underlying purpose is to protect investors from misleading or incomplete information about the businesses they are investing in.
The general rule is that an offer of securities (shares, convertible notes, or other financial instruments) requires a disclosure document — a prospectus, or in certain cases a simpler document — unless an exemption applies.
Most private company capital raises in Australia are structured to rely on one of the available exemptions, rather than producing a full prospectus. Understanding which exemptions apply — and the conditions attached to them — is the core legal question in most early-stage raises.
The Main Exemptions for Private Capital Raises
Sophisticated Investor Exemption
A company can offer securities to a “sophisticated investor” without a disclosure document. A sophisticated investor is one who:
- Has net assets of at least $2.5 million, or
- Has gross income of at least $250,000 per year for each of the last two financial years
A qualified accountant must certify that the investor meets the threshold before the offer is made. The certificate must be current (within the last two years) and must be obtained from a qualified accountant who is not the investor themselves.
The sophisticated investor category covers most professional and institutional investors, high-net-worth individuals, and experienced angel investors. It is the most commonly used exemption for early-stage and growth-stage capital raises.
Professional Investor Exemption
A “professional investor” — including AFSL licensees, registered managed investment schemes, superannuation funds, and bodies regulated by APRA — can receive offers without a disclosure document. This exemption is used primarily in institutional and sophisticated institutional raises.
20 Investors / $2 Million Exemption (Small-Scale Offering)
A company can make offers to no more than 20 investors and raise no more than $2 million in any 12-month period without a disclosure document. This is the “20/2 exemption.”
It is a useful tool for small raises from friends and family, or for bridging rounds while a larger structured raise is prepared. Its limitations — the $2 million cap and the 20-investor restriction — mean it is not suitable for most growth-stage raises.
Note: All offers made under the small-scale offering exemption in the previous 12 months count toward the 20-investor and $2 million limits, regardless of which exemption was intended to apply. Maintaining a clear cap table and investor count is essential.
Employee Share Schemes
Offering shares or options to employees is subject to a separate exemption framework and specific taxation rules. Employee share schemes (ESS) are a common tool for attracting and retaining talent in early-stage businesses.
The ESS tax rules are complex — the timing of the taxing point (when the employee is taxed on the benefit) depends on whether the plan involves shares or options, whether there are performance conditions, and whether the startup concession applies. The startup concession allows qualifying employees of eligible startup companies to defer tax on ESS interests until they sell.
Key Capital Raising Instruments
Ordinary Shares
The straightforward way to raise equity — the investor pays cash and receives a percentage of the company. The company’s existing shareholders are diluted.
Key issues in a share issue:
- Pre-emptive rights: Most shareholders agreements and company constitutions give existing shareholders the right to participate in new share issues proportionally before outside investors can invest. These rights may need to be waived or structured around in a new raise.
- Share class: Investors — particularly institutional or lead investors — may require preference shares rather than ordinary shares. Preference shares can carry preferential economic rights (liquidation preference, preferred dividend), protective provisions (veto rights on certain decisions), or anti-dilution protections.
- Valuation: The price of each share implies a valuation of the company. Negotiating valuation — and the methodology used to arrive at it — is often the most commercially contested aspect of a raise.
Convertible Notes
A convertible note is a form of debt that converts into equity at a later date, typically on a defined trigger event (a “qualifying round” of equity funding above a defined threshold, an IPO, or a defined maturity date).
Convertible notes are popular in early-stage raises because they avoid the need to agree on a valuation at the time of investment — instead, the conversion price is determined by the valuation established in the next round, usually with a discount to reward the earlier investor for their earlier-stage risk.
Key terms in a convertible note:
- Interest rate — the note typically bears interest, either payable periodically or added to the principal and converted with it
- Discount rate — the percentage discount applied to the next-round price when the note converts (commonly 10-25%)
- Valuation cap — a maximum conversion valuation, protecting the convertible note holder from significant dilution if the company raises at a very high valuation
- Maturity date — the date by which the note must convert or be repaid if no qualifying round has occurred
SAFE Notes
A Simple Agreement for Future Equity (SAFE) is a simpler alternative to a convertible note — it is not debt (no interest, no maturity date) but an agreement by the company to issue equity to the investor at a future date, on conversion terms defined upfront (cap, discount).
SAFEs originated in the US startup ecosystem (popularised by Y Combinator) and have been increasingly used in Australian early-stage raises. They are simpler to document and negotiate than convertible notes but carry their own complexities — including around how multiple SAFEs interact when they convert, and how they interact with existing shareholders’ pre-emptive rights.
Venture Capital and Private Equity
Institutional venture capital (VC) and private equity (PE) raises involve sophisticated investors making larger investments, typically in exchange for preference shares with significant protective provisions.
VC term sheets are detailed and heavily negotiated. Key provisions include:
- Liquidation preference — investors receive their investment back (sometimes at a multiple) before ordinary shareholders receive anything on a sale or wind-up
- Anti-dilution — protection against dilution if the company subsequently raises at a lower valuation than the current round
- Board seats and information rights — investors at this stage typically require board representation and regular financial reporting
- Drag-along rights — the ability to compel other shareholders to vote in favour of a sale
- ESOP requirement — VC investors typically require an employee option pool to be established or enlarged before the investment closes, which dilutes existing shareholders
Key Documents in a Capital Raise
Term sheet / Letter of Intent — the non-binding document that records the key economic and structural terms of the investment. Agreed before detailed documentation is prepared.
Subscription agreement — the agreement under which the investor subscribes for shares (or the instrument, in the case of notes or SAFEs). Sets out the conditions to closing, the representations and warranties given by the company, and the mechanics of the investment.
Shareholder agreement — if a shareholder agreement does not already exist, a raise is typically the trigger to put one in place. The incoming investor will almost certainly require one. Existing shareholders need to review carefully what new rights they are agreeing to give the investor.
Updated constitution — the company’s constitution may need to be amended to create a new class of preference shares with the rights agreed in the term sheet.
Investor disclosure document — even where a prospectus is not required, a well-structured information memorandum or investor deck, with appropriate disclaimers, protects the company against later claims that information was withheld or misrepresented.
Common Legal Mistakes in Capital Raises
Raising without considering the exemptions. Making offers to investors without understanding which exemption applies — and whether the conditions are satisfied — can result in a void raise and personal liability for directors.
No shareholder agreement. Closing a raise without putting a shareholder agreement in place creates a governance vacuum that typically generates problems later.
Missing pre-emptive rights. Existing shareholders’ pre-emptive rights need to be managed before new shares are issued. Overlooking this step can result in existing shareholders having valid claims against the company.
Misrepresentation. Representations made to investors — in pitch decks, financial models, investor updates — need to be accurate. Inaccurate statements may constitute misleading conduct under the ACL, regardless of the sophistication of the investor.
The Bottom Line
Raising capital from external investors is one of the most significant legal steps a private company takes. The regulatory framework is detailed, the documentation has long-term governance implications, and the consequences of getting it wrong — a void raise, investor disputes, or director liability — can be severe.
Getting legal advice before the raise begins — not after the term sheet is signed — tends to produce the best outcomes. The structure of the raise, the choice of instrument, and the terms of the shareholder agreement are all more easily negotiated before commitments are made than after.
This article contains general information only and does not constitute legal advice. Envision Legal accepts no liability for any loss arising from reliance on this content. You should seek independent legal advice tailored to your specific circumstances. For enquiries, contact Envision Legal.