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It is one thing to want to raise capital, it's another to be investor ready. Before you can launch your Crowd Sourced Funding (CSF) raise, you need to make sure your company structure can host new shareholders and is ready to bring new investors onboard.
Below OnMarket's check list to complete before you can call yourself investor ready.
#1 What is the value of your company?
One of your biggest challenges is to set a reasonable market valuation as part of your offer. When we talk of valuation, we are referring to your pre-money valuation. If your business is valued too highly, investors will shy away as they will receive too little equity in return. On the other hand, if you value it too low, you may give away more equity than you need to.
For example, if you raised $500,000 for 10% equity, your post-money valuation would be $5,000,000 (10% of $5,000,000 equals $500,000). Your pre-money valuation would be $4,500,000 (post-money valuation less your raise amount).
#2 What is the right number of shares?
You need enough shares to be able to issue new ones without excessively diluting your share in the company.
Building off our example above, if you currently had 1,000 shares in your company (which many companies start out with), each share would have an implied value of $4,500. This may not be an issue when dealing with a few investors, but when it comes to an Equity Crowdfunding raise, this can instantly factor out smaller investments.
If this relates to you, you need to create extra shares through a division of shares or a share split, and then register this with ASIC. This can take weeks to complete, so we recommend acting sooner rather than later.
For a bit of insight, based on our experience, most companies typically issue shares in a CSF raise at a share price between $0.50c and $1.
#3 What type of shares do you have?
Under the Act, you only issue ordinary shares (those that have voting rights). Although, you may have other types of shares in existence, such as class A shares. Other hybrid, derivative, and debt financing instruments including SAFEs, and options, convertibles and loans are also permitted.
#4 How many directors do you have?
Under the CSF regime, proprietary companies need a minimum of 2 directors, while public unlisted companies need a minimum of 3. Also, at least half of your directors must ordinarily reside in Australia.
#5 How many shareholders do you have?
Normally, proprietary companies must have less than 50 non-employee shareholders. However, any shareholders a propriety company onboards through a CSF raise is excluded from this shareholder cap - one of the many benefits of raising capital via Equity Crowdfunding.
#6 Who manages your share registry?
This question is particularly important for proprietary companies. If you have a small number of shareholders, your registry might be managed internally or through an accountant. However, any shareholders onboarded through a CSF raise will need to be tagged as CSF shareholders and require additional information in the register.
You must also notify ASIC of any changes to your share register and share structure. This can include the following:
Issuing additional shares following a CSF raise.
If you cancel any shares.
When you start to have CSF shareholders.
When you cease to have CSF shareholders.
This is a lot to take in, and ASIC disclosures can be very onerous work. This is why employing a share registry is on our investor ready checklist. OnMarket can make warm introductions to our partners that we regularly work with - if you'd appreciate this, just let us know.
#7 Are your books ready?
Are your financial reports compliant with the Australian Financial Reporting Standards? Are you complying with the reporting requirements of your company type?
Here are a few examples of obligations. We recommend checking with your accountant or ASIC if any questions arise.
Small proprietary companies need to have management accountants to this standard and that are signed off by the directors.
Large proprietary companies, or proprietary companies that have previously raised $3M or more must appoint an auditor and need to have audited accounts.
Public unlisted companies must hold an annual general meeting, distribute copies of the company’s annual reports to shareholders within four months of the end of the financial year, as well as lodge a copy of the company's constitution with ASIC... and notify ASIC of any changes to the constitution.
#8 Are your governance documents in shape?
After your raise is successful, you may have hundreds, or even thousands of shareholders. As a result, it is important your company is ready to manage them through its governing documents. Before raising, it is critical you review these governing documents and update them accordingly.
If you do not yet have a constitution, then you will need to get a constitution drafted and adopted by the company before you can begin raising capital.
If you have a constitution, you should consider clauses relating to shareholder rights that will govern how your company and your shareholders will engage.
These clauses include pre-emptive rights, founder rights, shareholder meetings, drag-along and tag-along rights, and other transfer restrictions.
So, what if you have a shareholder’s agreement instead, or as well? We ask that companies have a constitution in place before raising capital. If you already have a constitution and a shareholder agreement you may not need to make any changes. Simply review both documents and ensure they work together, that the clauses such as those listed above are covered, and that the shareholder agreement allows for new shareholders to be added easily.
No matter what your circumstances, we recommend that you seek professional advice when considering your governing documents to avoid speed-bumps throughout your capital raising campaign.
#9 Who is raising?
You are raising, but do you have more than one entity and who are the related parties?
Your corporate structure is in an important element to a raise as investors need to know what entity they are investing in – including its assets and liabilities.
Whether a proprietary or public unlisted company, after a successful CSF raise, your company will be subject to the rules on related party transactions. Take note, that you will need to receive shareholder approval before giving any financial benefits to related parties (which includes directors and their spouses, children or parents and related companies), unless an exception applies.
#10 Temporary Concessions
Did you register as, or convert to, a public unlisted company after 29 September 2017 (CSF regime commencement date) and before 19 October 2018 (the date the CSF regime was extended to proprietary companies)? If so, does your company have temporary concessions that apply to your corporate obligations?
#11 Are your ASIC records up to date?
This includes directors and their details, shareholders as required, the registered and principal place of business, the number of existing shares, etc. It's important not to leave this until the last minute as it can (and has) cause serious delays.
Once you have completed this checklist, depending on your company's current growth stage, you can look to raise capital.
Click here to uncover the vital questions you must ask yourself before raising capital.
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