What Legal Documents Do I Need to Raise Capital?: The Essentials

by Ilyas Omari

March 20, 2023
Blog, SMEs

As a business owner raising capital is a crucial step towards the growth and success of your business. However, raising capital can be a daunting task as it is subject to considerable regulation in Australia, and you need to navigate through several legal requirements.

Having the right legal documents and guidance to raise capital is crucial for your business as it ensures investor confidence and is a helpful way of avoiding disputes down the track.

To make things easier for you, in this article, we’ll take you through the most important legal documents you’ll need when raising capital, and we’ll answer other frequently asked questions in relation to capital raising in Australia.

Read along!

What Legal Documents Do I Need to Raise Capital?

Term Sheet

A term sheet is a preliminary document that’s used during the negotiation stages of an investment deal to establish the key terms and conditions for an investor who will provide your business with capital. It should include any important proposal points relating to raising capital and key provisions to be included in the shareholders and subscription agreements before proceeding.

Furthermore, a term sheet can be used to set the framework for negotiations and to provide clarity regarding the investor’s expectations and the business’s obligations. A term sheet can cover essential elements such as the following:

Investment amount
Valuation
Equity ownership
Exit options
The classes of shares
It will outline the investor’s rights to join the board of directors
The level of influence or control investors will have over the decision-making process

Although term sheets aren’t legally binding documents, with the exception of a few clauses like confidentiality and exclusivity, it’s a good way to document the proposed terms before entering into a legally binding contract, to create a common understanding between the parties and to speed up the due diligence process. Furthermore, having a well-drafted term sheet can enhance your business’ credibility and professionalism, improving the chances of securing funding.

Shareholders Agreement

A shareholders agreement is a legal document that you can use to establish the relationship between you and the shareholders in your company. A shareholder agreement is a crucial document as it will impose clear obligations on the shareholders, and this will help ensure all investors are on the same page from the onset of the venture.

The agreement sets out the intentions, rights and responsibilities of each shareholder in a company. It is also a helpful way of avoiding disputes between parties. With a shareholders agreement in place, your shareholders will have a clear understanding that their investment in the company is determined by the number of shares they own and not by any pre-agreement promises.

Furthermore, having a shareholders agreement can provide reassurance to potential investors that there is a clear and agreed-upon framework for how the company will be run. The agreement can help prevent conflicts and disputes between shareholders by setting out clear procedures for decision-making, dispute resolution, and the transfer of shares. It can also provide a mechanism for protecting minority shareholders and their interests in the company.

Shareholder agreements can cover the following:

Those who are eligible to become shareholders
What happens if a shareholder files for bankruptcy, resigns, retires or is fired
Those eligible to serve on the board of directors
What happens if a shareholder passes away or becomes impaired
The restrictions on transferring, selling, and assigning shares by shareholders
The price of shares
Provisions regarding restraints
Dividend distributions
Shareholder salary payments
Mediation procedures for shareholders
Strategies for exiting

Subscription Agreement

A subscription agreement is a promise by your business to sell a certain number of shares at a certain price and a promise by a subscriber to buy the shares at that price. Investors like certainty, and a subscription agreement provides investors with terms of purchase that can’t be changed. As a business, it is a guarantee that investors will pay the fixed price that has been agreed to.

Furthermore, a subscription agreement can be used to provide investors with information regarding the business’s company’s business plan, financials, and risks involved in the investment, which helps to build their trust and confidence in the business. You can also use the agreement to set out terms, including the following:

The amount invested
The price per share
The company’s obligations
The investors’ obligations

By using a subscription agreement, you can ensure compliance with regulatory requirements and avoid potential legal disputes with investors in the future, which can help to maintain the company’s reputation and attract more investors in the long run.

Deed of accession( Shareholder Accession Deed)

A deed of accession( shareholder accession deed) is a legal document that outlines the terms and conditions for a new investor to join an existing shareholders agreement. This is a useful document because when a new investor signs a deed of accession, they agree to adhere to the existing shareholder’s agreement. Therefore, you won’t need to make all the shareholders re-sign the existing shareholders agreement, and the shareholders agreement won’t require amendment.

Furthermore, you can use the deed of access to specify the new investor’s rights and obligations as well as their share of ownership in the company, which helps to ensure that everyone is on the same page and avoids misunderstandings or conflicts in the future. The deed of accession also helps to maintain the existing shareholders’ control over the company by setting out the conditions under which new investors may enter, such as the minimum investment amount or the need for approval from existing shareholders. The document can also provide legal protection for all parties involved in the agreement, as it clearly sets out the terms and conditions for investment, ensuring that the company’s interests are protected.

Prospectus

A prospectus is a document that you are required to prepare if you’re planning to raise capital through an initial public offering (IPO). You should be aware that the prospectus you create must comply with section 710 of the Corporations Act 2001 (Cth). Information that is generally included in this document includes all relevant information about the company, including the following:

Business model
Financial performance
Financial position
Assets and liabilities
Profits and losses
The rights and liabilities associated with the shares being offered
Management team
Future prospects
Risks
Operations

The information that needs to be included has to enable investors to make an informed decision and assess the risks involved in investing in the company. Other benefits of a prospectus include the following:

The document also helps companies to comply with legal requirements and avoid potential legal and regulatory issues, such as claims of misleading or deceptive conduct
A prospectus can enhance the company’s reputation and credibility by demonstrating transparency and accountability to potential investors
Furthermore, it can assist in attracting a wider range of investors, including institutional investors, who often require detailed information before making investment decisions

Cap table

A cap table is a useful document for businesses when raising capital as it provides a clear breakdown of the company’s ownership structure, including the equity and percentage ownership of each shareholder. This is important when seeking investment as it helps potential investors understand the existing ownership structure and how their investment will impact it.

The benefits of a cap table include the following:

Determining the company’s valuation and the potential dilution of existing shareholders as new investors come on board
Identifying any potential issues related to equity grants or options that may affect ownership and control of the company
Assist in tracking the progress of the company’s fundraising efforts, including the types and amounts of capital raised, and the terms of any equity or debt financing
It can help in decision-making related to future fundraising rounds, mergers and acquisitions, and other corporate actions
It can provide valuable insights into the company’s ownership structure, investor preferences, and potential conflicts of interest
It can help prevent disputes between shareholders by providing clarity on ownership percentages and rights
It allows the company to model different financing scenarios and see how they would impact the ownership structure of the company

Furthermore, a cap table is a crucial tool for compliance purposes, especially when it comes to regulatory requirements around shareholder disclosures and reporting. A clear cap table can help ensure that the company is meeting its obligations and avoiding any potential legal or regulatory issues.

Information memorandum disclaimer (IM)

An information memorandum disclaimer is a document that you can use to provide crucial information to your potential investors that you want to remain confidential. You can include company information and information in regard to the investment opportunity your company is offering. This document is commonly used when securities are only being offered to a selected group of investors such as sophisticated investors, institutional investors, and high net worth individuals.

IM’s are useful because they help establish credibility and trust between the company and investors by demonstrating transparency and professionalism. Furthermore, it serves as a critical marketing tool to attract potential investors and secure funding for the company’s growth and development.

IM’s typically include the following information:

Financial projections
Market analysis
Management team profiles
Other relevant information to help investors make informed investment decisions

What else can you do to raise capital?

Regardless of which capital raising structure you’re looking to undertake, you should hire a lawyer to be involved throughout the process to ensure your best interests are secured. A lawyer can also help in the following ways:

A lawyer can provide legal advice and guidance on the various options for raising capital in Australia, such as through equity or debt financing
A lawyer can help draft and review legal documents related to fundraising to ensure compliance with regulatory and legal requirements
A lawyer can provide guidance on regulatory requirements and compliance with Australian Securities and Investments Commission (ASIC) rules.

Overall, a lawyer can help a business navigate the complex legal requirements and potential risks involved in raising capital. Furthermore, more specifically, a startup lawyer knows the right questions to ask to ensure your business avoids any legal hassles from the get-go.

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Why are legal documents important for raising capital?

If you are looking for investors to invest in your business, you must be equipped with the right legal documents. Putting in place the right legal documents will not only protect your interests but also enhance your business’s value and reputation. Other benefits of legal documents for raising capital include the following:

Using legal documents for raising capital will ensure that you’re complying with legal requirements.
Legal documents protect investors by providing them with key information about the investment opportunities, including the risks associated with the investment. This helps investors make informed decisions and protects them from potential fraud or misrepresentation
Legal documents can be used to clearly establish legal rights and obligations to that all the parties have a clear understanding of their respective roles, and responsibilities
Legal documents provide clarity and transparency in relation to the terms of the investment such as the amount of capital being raised
Legal documents provide confidence to institutional investors who are likely to require legal documents before they choose to provide capital to your business

For access to all the documents you need when raising capital for your business, sign up to Lawpath. Furthermore, you receive a free legal document when you sign up.

Frequently Asked Questions (FAQs)

What process must a company take to raise capital?

To find out what process a company must take to raise capital, read our article about how to raise capital.

When can you raise funds without a disclosure document?

According to ASIC, you can raise funds without a disclosure document in the following circumstances:

You don’t need a disclosure document if you’re making a personal offer. The following two conditions are related to this condition:

During the past 12 months, fewer than 20 people have received offers or invitations
This new offer can’t raise more than $2 million in 12 months in accordance with section 708 of the Corporations Act

What documents are required for seed funding?

The two primary documents that would be most beneficial for seed funding are a business plan and a pitch deck.

A business plan is important for capital raising because it provides a detailed and structured roadmap of the company’s objectives, strategies, and financial projections. It helps investors understand the potential risks and rewards of investing in the company and provides a basis for assessing the company’s ability to generate returns on investment.

A pitch deck is important for capital raising because it helps to communicate a clear and compelling story about the business and its potential to investors. It provides an opportunity to showcase key information and metrics in a concise and visually appealing way, which can increase the likelihood of securing an investment.

Conclusion

In conclusion, raising capital is a crucial step in growing your business, but it’s important to ensure you have the right legal documents in place to avoid potential disputes and provide investors with confidence. As a business owner in Australia, navigating the legal requirements can be complex, but with the help of Lawpath, you can access all the necessary documents required to raise capital with ease.

Furthermore, by using Lawpath, you can ensure that you have all the legal documents required to comply with Australian regulations and secure the investment your business needs to succeed. To get started, you can get a free legal document with Lawpath to take the first step towards a successful capital raise.