The Legals of Capital Raising for Aussie Startups

Australian startups face a complex yet rewarding journey in capital raising. If you want to grow your business or start a new project, raising money is important. However, it comes with legal challenges.  

In Australia, there are strict rules about how startups can raise money. If they break these rules, they could face big fines or legal problems later. 

In this article, we’ll break down the legal considerations for capital raising in Australia and how you can prepare your startup to successfully navigate this process. 

Why Capital Raising is Critical for Startups 

Capital is the lifeblood of any startup. Whether you're bootstrapping, approaching angel investors, or gearing up for a venture capital round, raising funds allows your business to scale, develop products, expand into new markets, and hire the right talent. However, the capital raising process in Australia is not as simple as pitching to investors. There are a variety of legal factors that must be addressed to ensure compliance with Australian laws. 

Types of Capital Raising for Australian Startups 

Before diving into the legal aspects, it’s important to understand the types of capital raising available to Australian startups: 

Equity Financing – Selling shares of your company to investors in exchange for capital. 

Debt Financing – Borrowing funds from investors or financial institutions with the agreement to repay the debt, usually with interest. 

SAFE Notes – a Simple Agreement for Future Equity (SAFE), is a type of investment contract commonly used by startups to raise capital from early-stage investors. With a SAFE agreement, you can secure funding for your startup while offering investors the right to convert their investment into equity in the future.  

Convertible Notes – A hybrid approach where investors provide a loan that converts into equity at a later date. 

Crowdfunding – Using a licensed equity crowdfunding platform to raise small amounts from a large group of investors. 

Angel Investors and Venture Capital – High-net-worth individuals or firms that invest in early-stage companies in exchange for equity. 

Each method comes with its own legal obligations, so it's crucial to pick the right option that suits your startup’s growth stage and financial needs. 

Legal Considerations for Capital Raising in Australia 

Disclosure Requirements 

In Australia, raising capital from the public often triggers disclosure requirements under the Corporations Act 2001. Generally, if you're offering shares to more than 20 investors over a 12-month period and raising over $2 million, you'll need to prepare a prospectus or an information memorandum. These documents provide detailed information about your business, financials, and the risks involved with investing in your company. 

If you are raising a small amount of money or making a private offer, you might not need a prospectus. However, it is important to get legal advice. This will help you confirm if you are exempt from this requirement. 

Shareholder Agreements 

When raising equity, it’s essential to have a solid shareholder agreement in place. This legal document outlines the rights and obligations of all shareholders, including those who are providing capital. A well-drafted shareholder agreement can help prevent future disputes by clearly defining how decisions will be made, what happens in case of an exit, and the process for transferring shares. 

Failing to create a proper shareholder agreement could lead to major issues later, especially if there’s a disagreement among shareholders or if you’re preparing for an eventual sale. 

Pre-emptive Rights 

If your company already has existing shareholders, be sure to review any pre-emptive rights before issuing new shares. Pre-emptive rights give current shareholders the first opportunity to purchase additional shares before they’re offered to new investors. These rights are often outlined in your company’s constitution or shareholder agreement, and ignoring them could invalidate your share issue or lead to legal disputes. 

Compliance with ASIC Regulations 

The Australian Securities and Investments Commission (ASIC) oversees capital raising activities and enforces compliance with the Corporations Act. You’ll need to notify ASIC about any changes to your company's shareholding structure by lodging the appropriate forms (e.g., ASIC Form 484). Failure to do so can result in hefty fines and non-compliance with Australian laws, which can also damage your business's reputation with investors. 

Tax Implications for Investors and Founders 

Capital raising can also trigger significant tax implications for both investors and founders. Some of the key tax considerations include: 

Capital Gains Tax (CGT) – Investors may be subject to CGT when selling shares, particularly if they make a profit. It’s important for both founders and investors to understand the tax obligations and to structure the deal accordingly. 

R&D Tax Incentive – Australian startups engaged in research and development (R&D) may be eligible for the R&D Tax Incentive, which provides a tax offset for eligible R&D activities. This can be an attractive benefit for investors and may boost your capital raising efforts. 

Employee Share Schemes (ESS) – If your startup offers shares or options to employees as part of their compensation, you’ll need to comply with Australia’s ESS rules. These schemes come with tax benefits for employees but also require careful planning and structuring. 

Crowdfunding: A Growing Trend in Australia 

In recent years, equity crowdfunding has become a popular way for startups to raise capital. Licensed platforms allow startups to raise funds from everyday investors without needing to issue a prospectus. However, equity crowdfunding comes with its own set of legal requirements, including limits on how much you can raise and caps on how much individuals can invest. You’ll also need to comply with ASIC’s crowdfunding regulations, so it’s important to have legal advice before launching a campaign. 

Protecting Intellectual Property (IP) During Capital Raising 

When raising capital, startups often have to share confidential information with potential investors. Protecting your intellectual property (IP) is important during this process.  

Sharing too much information without legal protection can endanger your business. Before sharing any sensitive information, make sure you have a Non-Disclosure Agreement (NDA). This will help protect your ideas. It also stops others from using your information without permission. 

How Allied Legal Can Help with Capital Raising 

At Allied Legal, we understand that capital raising is a critical yet legally complex part of your startup’s growth. Our experienced commercial and startup lawyers are here to guide you through every step of the process, from preparing prospectuses and shareholder agreements to ensuring compliance with ASIC regulations. 

We can assist you with: 

Drafting and reviewing shareholder agreements 

Navigating ASIC requirements and notifications 

Providing advice on tax implications 

Structuring crowdfunding campaigns and ensuring compliance with Australian laws 

Protecting your intellectual property during the capital raising process 

Our goal is to make your capital raising process as smooth and secure as possible, so you can focus on what matters—growing your startup. 

If you’re ready to take your startup to the next level through capital raising, Allied Legal is here to help. Get in touch with our team today to discuss your legal needs and make sure your fundraising efforts are legally sound and structured for success.