Fundraising Law Reform

The Corporate Law Economic Reform Program (CLERP) amendments saw the formation of chapter 6D 'Fundraising' in the Corporations Act 2001. In particular, Part 6D.3 of the Corporations Act 2001 introduced self-contained provisions to deal with the issue of liability for misstatements and omissions in disclosure documents. These replaced the previous sections regarding misleading and deceptive conduct, similarly, the misleading and deceptive conduct provisions in the State and Territory Fair Trading Acts no longer apply to security dealings. The aim of these amendments was to create a more efficient and improved fundraising market. The explanatory memorandum to the CLERP Bill stated reasons for amendments included the complications and costs associated with preparing prospectuses, and more importantly the uncertainty regarding the liability rules for fundraising and the consequences for misstatements and omissions in disclosure documents. Uncertainty caused by the overlapping application of the Trades Practices Act 1974 (Cth) and the Corporations Act regarding misstatements was a major issue and the CLERP amendments aimed to remove the uncertainty and create a more efficient fundraising market through improved disclosure.

The amendments attempt to simplify the issue of disclosure by introducing different types of disclosure options in order to provide the appropriate information to investors to ensure they have the information available to them to make an informed decision. Section 705 of the Corporations Act 2001 lists the disclosure documents to use if an offer of securities requires disclosures to investors. These documents are a prospectus, short form prospectus, profile statement and an offer information statement. Section 710 of the Corporations Act 2001 states that a prospectus must contain all the information that investors and their professional advisers would reasonably require to make an informed assessment of the matter set out in the table in that section. The general prospectus standard of disclosure is all information that investors and their professional advisors would reasonably require to make an informed assessment of the assets and liabilities, financial position and performance, profits and losses and prospects of the issuer.

A short form prospectus is a disclosure document that refers to material in documents lodged with the ASIC instead of that information being included in the prospectus. Section 712(1) of the Corporations Act 2001 allow for this type of disclosure document to be used. Also, details must be provided to potential investors regarding where they can obtain a full copy of the prospectus if so desired. Another form of disclosure documentation is a profile statement. With ASIC approval, a profile statement can be sent out with offers instead of a prospectus as per Section 721 of the Corporations Act 2001. Section 714 outlines the content that needs to be included in a profile statement. Content includes details such as the nature of the security, any amounts payable in respect of the securities and the ability for a person to obtain a copy of the prospectus free of charge. The final form of disclosure documents are the offer information statements. Section 709(4) of the Corporations Act 2001 allows a body offering to issue securities the ability to use an offer information statement providing the total amount raised by issuing the securities does not exceed $5million. The contents required of an offer information statement are set out in section 715. The statement must include details such as the identity of the issuing body and the nature of the securities, what the raised funds will be used for and the nature of the risks involved in investing in the securities.

Section 727(1) of the Corporations Act 2001 prohibits a person from offering securities or distributing an application form for an offer of securities that needs disclosure under Part 6D.2 unless a disclosure document for the offer has been lodged with the ASIC. The requirement to lodge a disclosure document with the ASIC is covered by Section 718. Furthermore, Section 719(1) of the Corporations Act 2001 requires the lodgement of a supplementary or replacement document with the ASIC should the person making the offer become aware a misleading or deceptive statement in the disclosure document, an omission of information required as per the Act or if new information has arisen that would materially affect the decision making of the investor. The above requirements brought in by the CLERP amendments offer investors greater protection. The compulsory lodgement of a disclosure document with the ASIC provides an opportunity for any misstatements or omissions to be discovered and fixed before the disclosure document are made available to potential investors. This helps minimise the risk to investors. The Trades Practices Act did not have the same requirements and therefore investors were at a greater risk and also those offering the securities may have been at a greater risk of facing liability due to the increased chance of a defective document being made available to the public. It must be noted that Section 708 of the Corporations Act 2001 provides details on offers that do not require disclosure.

With the changes made regarding disclosure documents it was imperative that the Corporations Act 2001 contained appropriate prohibitions, liabilities and remedies for any breach of the disclosure document laws. The issue of liabilities for misstatements and omissions in disclosure documents is an important one and was fundamental in the reasons for the CLERP amendments in 1999. As mentioned earlier, the uncertainty caused by the overlapping Acts was a catalyst for the amendments and the introduction of the self-contained provisions which deal with liability for misstatements and omissions in disclosure documents. These self-contained provisions are located in Part 6D.3 of the Corporations Act 2001, Prohibitions, liabilities and remedies. As the name suggests, this part lists the prohibitions, liabilities for breaching these prohibitions, defences and remedies regarding disclosure documents and fundraising. In my opinion, these self-contained provisions allow for a most consistent and efficient means for dealing with the issue of liability for misstatements and omissions in disclosure documents.

Section 728 of the Corporations Act 2001 covers misstatement in, or omission from, disclosure documents. Section 728(1) covers misleading or deceptive statements, omissions and new matters. It states that a person must not offer securities under a disclosure document if there is a misleading or deceptive statement in the disclosure document, any application form that accompanies the disclosure document or any document that contains the offer if the offer is not in the disclosure document or the application