Before You Take That First Cheque: What Australian Founders Need to Know About the Fundraising Rules

For many early-stage founders, the first time they encounter the Corporations Act 2001 (Cth) in any depth is when they start thinking seriously about raising money. The conversation usually begins with a relatively simple question: can we take investment from people outside our existing circle? The answer is yes, but the path to doing so involves understanding a set of rules that are easy to overlook and costly to get wrong.

This article explains the key restrictions that apply to Australian startups raising capital and, more practically, the exemptions under section 708 of the Corporations Act that allow founders to raise funds in Australia without issuing a formal prospectus.

Chapter 6D and What It Means for Your Raise

Chapter 6D of the Corporations Act governs the offer of securities to investors. Its central requirement is that any offer of securities that needs disclosure must be accompanied by a disclosure document, most commonly a prospectus. Preparing a compliant prospectus is an expensive, time-consuming exercise that involves significant legal work, liability exposure for directors, and a formal lodgement process with ASIC. It is not something that a pre-seed or seed-stage startup can practically undertake.

The good news is that Chapter 6D also contains a suite of exemptions that, when properly understood and applied, allow startups to raise meaningful amounts of capital without ever needing to touch a prospectus. Most of those exemptions live in section 708 of the Corporations Act.

Before getting to the exemptions, though, it is worth understanding the baseline restriction that proprietary companies face.

The General Rule: Proprietary Companies Cannot Offer Securities to the Public

Most Australian startups are incorporated as proprietary limited companies (Pty Ltd). Under the Corporations Act, a proprietary company is expressly prohibited from engaging in any activity that would require the lodgement of a disclosure document, except for (i) an offer of its shares or options to existing shareholders or employees of the company or employees of the company’s subsidiary or (ii) a crowd-funding offer, which complies with the requirements of the Corporations Act.

Further, Chapter 6D provides for the general requirement of disclosure to investors in respect of an offer of securities for issue, unless one of the existing exemptions applies.

In practical terms, this means a proprietary company cannot make a public offer of its shares or other securities, unless the offer falls under one of the exemptions in the Corporations Act.

This is the legal backdrop against which section 708 operates. The exemptions in section 708 remove the requirement for disclosure in defined circumstances. Because no disclosure is required, the proprietary company prohibition which only applies to activities that would require a disclosure document, is simply not triggered. The result is that a proprietary company can lawfully make offers to investors who fall within a section 708 exemption.

The Section 708 Exemptions Startups Actually Use

Section 708 contains many exemptions, but in practice, startups tend to rely on a core set. Here is how each of them works.

Sophisticated Investors (s708(8))

The sophisticated investor exemption under s708(8) allows offers of securities to sophisticated investors and operates through two independent limbs. Either limb is sufficient on its own.

Under the first limb, a sophisticated investor is someone who has obtained a qualified accountant’s certificate confirming that they have net assets of at least AU$2.5 million or gross income of at least AU$250,000 per annum for each of the last two financial years.

If the certificate pathway is used, no liability attaches to the company for relying on a certificate that later turns out to be inaccurate, provided the reliance was reasonable.

For founders, this exemption is the workhorse of most angel and early VC rounds. Most sophisticated angel investors in Australia are familiar with the requirement and will have a certificate ready, or will know how to obtain one quickly from their accountant.

Under the second limb, the exemption will also apply where the minimum amount payable for the securities on acceptance of the offer is at least AU$500,000 or where the amount payable, together with amounts previously paid by that investor for the company’s securities of the same class that are already held by the investor, totals at least AU$500,000. This limb operates independently of the certificate pathway: no accountant’s certificate or assessment of net assets is required where the investment meets this threshold.

Professional Investors (s708(11))

Section 708(11) allows making an offer of securities to a person who falls within the definition of ‘professional investor’ or to a person who has or controls gross assets of at least AU$10 million, including relevant assets held by an associate or under a trust the person manages.

A professional investor is a defined category that includes (among others) certain AFS licensees, APRA regulated bodies (subject to exclusions for trustees of certain superannuation vehicles), registered entities under the Financial Sector (Collection of Data) Act 2001, certain superannuation trustees/funds where the fund/trust/scheme has net assets of at least AU$10 million, listed entities (and related bodies corporate), exempt public authorities and equivalent foreign entities.

Separately, the exemption extends to any person (irrespective of whether they fall within the professional investor definition) who has or controls gross assets of at least AU$10 million, including assets held by an associate or under a trust that the person manages. This is a distinct qualifying criterion that operates alongside the professional investor definition.

This exemption is typically more relevant where the investor entity has or controls gross assets of at least AU$10 million (which would include many established VC funds), or where the investor falls within one of the other professional investor categories such as APRA-regulated bodies or qualifying superannuation fund trustees. However, in practice, many VC investments also qualify under the AU$500,000 minimum investment limb of the sophisticated investor exemption, which may be simpler to document.

Where investors qualify as professional investors or meet the AU$10 million gross assets threshold, no certificate or financial threshold calculation is required.

Small Scale Offerings: The 20/2/12 Rule (s708(1))

This exemption permits a company to make personal offers of securities without disclosure, subject to quantitative limits. It is commonly known as the ‘20/2/12’ rule, which is a shorthand for its three constraints: no more than 20 investors, no more than AU$2 million raised, within any rolling 12-month period.

It is important to understand what counts toward the cap. The 20-person limit counts the number of offers made and accepted by individual investors. An offer that is accepted counts, while one that is declined does not. The AU$2 million cap is an aggregate cap across all offers made under this exemption in the relevant 12-month period. Amounts raised under other exemptions in s708 do not count toward the AU$2 million limit.

This exemption is particularly useful for very early raises, friends and family rounds, or situations where the startup is testing investor appetite before running a more formal process. It allows a company to take small cheques from a defined group of people without needing any investor to hold a certificate or meet a financial threshold.

By way of an example, suppose two founders of a newly incorporated Pty Ltd want to raise AU$200,000 from close contacts to fund initial product development. They approach five people (family members and long-standing friends), each investing between AU$10,000 and AU$50,000. None of these investors holds a sophisticated investor certificate. Because the round involves only five investors and a total of AU$210,000, it falls comfortably within the 20/2/12 limits. The company can accept those investments without a prospectus or any investor certificates, provided it keeps accurate records of each offer and the date it was made.

Senior Manager Exemption (s708(12))

An offer of securities to a senior manager of the company or its related bodies corporate, or to a spouse, parent, child, brother or sister of such a senior manager, does not require disclosure. “Senior manager” under the Corporations Act means a person who makes, or participates in making, decisions that affect the whole or a substantial part of the business of the company, or who has the capacity to affect significantly the company’s financial standing. In a startup context, this typically captures the founding team, the CEO, and may capture other C-suite executives.

This exemption is commonly used where founders are issuing shares to themselves, and where the company wants to bring in a key executive as a co-founder or early employee and offer them equity as part of their initial engagement, before a formal ESOP is in place.

Employee Share Schemes: Section 708 and Division 1A

Offers of securities to employees, directors, and contractors under an employee share scheme are not automatically exempt from the disclosure requirements simply because they are made in an employment context. Whether a particular ESOP offer is exempt, and which exemption applies, depends on the circumstances of the offer and the recipient. In summary, there are two main pathways: relying on an existing section 708 exemption that the recipient independently satisfies, or structuring the offer under the standalone Division 1A regime. The choice matters because it affects the company’s headroom under the small scale offering limits.

The first pathway is straightforward: if an ESOP offer is made to a person who independently qualifies under one of the other section 708 exemptions, the company can rely on that exemption. For example, if a senior executive receiving options also qualifies as a sophisticated investor or is a senior manager of the company, the offer can be made under the relevant exemption. Similarly, small offers to employees that fall within the 20/2/12 parameters can be made under the small scale offering exemption, though founders should be careful to note that those offers will count toward the rolling 20-investor and AU$2 million caps, reducing the headroom available for other investors in the same period.

The second and often more complicated pathway for ESOP offers is Division 1A of Part 7.12 of the Corporations Act. Division 1A provides a standalone exemption for offers of securities made to employees, contractors, and directors under eligible employee share schemes, subject to conditions set out in that Division.

Importantly, offers made under Division 1A do not count toward the 20/2/12 small scale offering caps, unless the offer is made in reliance on the 20/2/12 exemption. This means a startup can issue options to its entire team under Division 1A while simultaneously running a seed round using the small scale offering or sophisticated investor exemptions, without the ESOP offers eating into those allowances.

To qualify under Division 1A, the offer must be made under a scheme that meets certain requirements, including that the company provides participants with an offer document containing prescribed information and if required, makes a simplified disclosure to the participants. The conditions differ depending on whether the company is offering shares or options, and there are many restrictions which the company must comply with.

Given the interaction between Division 1A and the other exemptions, and the documentary requirements that Division 1A imposes, most startups establish their ESOP plan with legal assistance to ensure the conditions are satisfied from the outset.

The practical upshot is this: if your startup is granting options to a team of fifteen employees at the same time as closing a seed round with ten angel investors, structuring the employee grants under Division 1A means the two processes do not interfere with each other. If instead the employee grants were captured under the 20/2/12 exemption, they would consume fifteen of your twenty available investor slots for the year, leaving very little room for the angel round.

Using Multiple Exemptions in the Same Round

One of the most important things for founders to understand is that these exemptions are not mutually exclusive. A startup can rely on multiple exemptions simultaneously, and in fact, most funding rounds involve exactly that.

Consider a practical example. An early-stage startup is running a seed round targeting AU$1.5 million. Its investors include:

· three sophisticated angel investors who each provide certificates from their accountants. The startup relies on the sophisticated investor exemption for each of them;

· one VC fund that satisfies the criteria for professional investor. The startup relies on the professional investor exemption; and

· the CEO, who is being brought in as a co-founder and is subscribing for shares at the same time as the round closes. The startup relies on the senior manager exemption.

All of these can happen within the same raise. The startup does not need to choose one exemption and apply it to the entire round. Each investor is assessed against the relevant exemption that applies to them.

Now add a second scenario: the same startup also wants to take a small cheque from a family member of one of the founders who does not have a sophisticated investor certificate and is not a senior manager. Provided the company has not already used up its 20/2/12 allowance, the family member’s investment can be captured under the small scale offering exemption, provided it does not push the total raised under that exemption above AU$2 million in the 12-month period.

This layered approach is standard practice in early-stage fundraising, and is one of the reasons why founders benefit from structuring their rounds with legal input: to ensure that each investor is properly categorised, the right exemption is being applied, and the conditions for each exemption are documented correctly.

A Note on Record-Keeping and Process

Relying on a section 708 exemption is not simply a matter of knowing the category applies. The company needs to ensure that the conditions are met and documented before the offer is made, not after the fact. For sophisticated investor certificates, this means obtaining the certificate before accepting the investment. For the small scale offering exemption, this means tracking the rolling 12-month headcount and dollar amounts carefully across all prior offers.

At a minimum, companies should maintain a fundraising register (e.g., a spreadsheet or a purpose-built register) recording each offer made, the date of the offer, the investor’s name, the amount invested, the exemption relied on, and the supporting documentation obtained. For sophisticated investor certificates, the company should retain a copy of each certificate on file. For the small scale offering exemption, the register should include a running tally of offers and amounts within each rolling 12-month window.

It is good practice to have each investor sign a brief acknowledgement confirming the basis on which the offer is made, for example, that the investor has provided a sophisticated investor certificate or that the offer falls within the small scale offering limits. These acknowledgements serve as contemporaneous evidence that the company turned its mind to the relevant exemption before accepting funds.

Records relating to fundraising should be retained for at least seven years from the date of the relevant offer, consistent with the general record-keeping obligations under the Corporations Act. In practice, companies should retain these records indefinitely, as they may be required for due diligence at any future funding round or exit.

The most frequent mistakes include: (i) accepting funds before obtaining a sophisticated investor certificate; (ii) failing to track the 20/2/12 caps across successive raises within the same 12-month period; (iii) relying on verbal confirmations rather than written records; and (iv) neglecting to record which specific exemption was relied on for each investor. These gaps may not surface immediately, but they create significant problems at later funding rounds when incoming investors or their lawyers review the company’s fundraising history.

Founders should be aware that Series A and later investors will typically conduct due diligence on prior fundraising compliance as part of their investment process. Incomplete or absent records can delay a round, reduce investor confidence, or in serious cases lead to warranty claims. Maintaining clean records from the outset is materially easier and cheaper than reconstructing them after the fact.

Breach of the fundraising provisions can give rise to civil liability and, in some cases, criminal penalties. More practically, getting the exemptions wrong creates complications at a later funding round when incoming investors conduct due diligence on the cap table.

Practical Takeaways

The section 708 framework gives Australian startups a workable path to raise early capital without the cost and complexity of a prospectus. Understanding which exemptions apply, how to document reliance on them, and how to combine them across a single raise is the core of what legal counsel does in a fundraising context.

Founders who are planning a raise should:

identify which exemption applies to each prospective investor before making the offer;

· obtain certificates, confirmations, or other documentation required by the relevant exemption before funds are accepted;

· keep a running record of all offers made, including dates, amounts, and the exemption relied on;

· check whether any offers made in the preceding 12 months affect the availability of the small scale offering exemption for the current raise; and

· if issuing options or shares to employees concurrently with a funding round, consider whether structuring the ESOP under Division 1A is appropriate so that employee grants do not consume headroom under the 20/2/12 exemption.

None of this is prohibitively complex, but it does require attention to process. Before making your first offer to an investor, ensure your fundraising register is in place, confirm that each prospective investor falls within an identified exemption, and have the supporting documentation ready to file.

If you are planning a capital raise and want to ensure your offer structure is properly documented and compliant and to discuss your raise, you are welcome to reach out to me at Piper Alderman directly.