The 20 investors and $2 million rule (s708(1)), explained

The starting point in the Corporations Act is that a company selling shares has to give investors a disclosure document first, and selling without one is an offence (s727). A private company (a Pty Ltd) is boxed in further: it must not do anything that would need a disclosure document at all (s113(3)). So it cannot fall back on a prospectus. The exemptions in section 708 are not one option among several for a private company. They are the only door.

Section 708(1) is the exemption for small, personal raises. People call it the 20/12 rule or the small-scale offers exemption. The idea is simple: an offer to a handful of people you know is not really an offer to the public, so it should not need public-offer paperwork.

The exemption works as long as your offers do not push the company past either of two ceilings (s708(3)): more than 20 people issued shares in any 12 month period, or more than $2 million raised in any 12 month period. Three things follow from the way that is written.

• Issues count, not offers. An offer that is declined uses nothing. A place is taken when the shares are issued and the money is raised.
• People means distinct investors. Someone issued shares twice inside the window is one of the 20, though both amounts count toward the $2 million.
• The window rolls. From every issue, look back 12 months. It covers all of the company's securities across every raise. A company that issued to 15 people last October has five places until next October, whichever raise they came from.

Section 708(5) takes some issues out of the count altogether: anyone you could sell to under another part of s708, shares issued under a disclosure document, and offers not received in Australia. So certified sophisticated investors, people investing $500,000 or more, investors vouched for by a licensed adviser, professional investors and your own senior managers all sit outside the count. Shares and options given to employees under a scheme that meets the employee share scheme rules (Division 1A of Part 7.12) are outside it too (s1100ZC(4)), with one narrow exception for schemes that qualify only under the small monetary cap in s1100R(2).

Crowd-sourced funding is its own thing. CSF offers are made under a separate part of the Act (Part 6D.3A), and the Act does not say whether shares issued that way count toward the s708 limits. What it does say runs the other way: money raised under s708(1) or s708(10) in the previous 12 months counts toward the $5 million CSF cap (s738G). If you have done both, ask your lawyer how to count.

One thing that widens the dollar count: it includes money the investor will pay later as well as what they pay now. Calls on partly paid shares, the exercise price of options and the amount payable on converting a note all count when the security is issued (s708(7)). A $500,000 convertible note uses $500,000 of the $2 million on the day it is issued.

This rule decides how you can actually run a small-scale raise, and it catches more people than the numbers do. The exemption only covers personal offers, and s708(2) says what that means. Only the person you make the offer to can accept it. And you have to make it to someone likely to be interested, judged by one of three things: you have dealt with them before, you have some professional or other connection with them, or they have said or done something showing they are interested in offers like this.

In practice you can approach your own network, people your adviser knows, and people who have asked to hear about raises. You cannot email a bought list, post the offer on LinkedIn, or put an application form on your website, because none of those people is someone you had reason to think would be interested. Section 734(1) makes the same point from the other direction: you must not advertise, or publish anything that refers to, an offer that only escapes needing a disclosure document because of s708(1). It is an offence, and it applies from the moment you intend to use even one small-scale place.

On Struck every invitation is logged with who sent it, to whom and when. That log is your evidence that each offer was personal. A raise that will rely on any small-scale place cannot show a public raising signal; only a raise set to wholesale only, where every investor holds current exempt evidence, can.

The test runs offer by offer. If issuing to the next person would take the company past 20 investors or past $2 million in the window, that offer is not covered, and it would need a disclosure document that a private company cannot give. Issuing anyway breaks s727(4), which is a criminal offence and a civil penalty provision, and s113(3) as well.

You cannot reset the count by using a related company. ASIC can decide that closely related companies have their share issues added together, and that a company and the person who controls it have theirs added together, for all of these rules (s740). When the places run out, the practical answers are to move investors onto another route, usually the accountant's certificate, or to wait for old issues to fall out of the 12 month window.

A company that invests for itself is one person. So is a trustee investing for a family, discretionary or unit trust: the trustee goes on the register and the beneficiaries are not counted. Joint holders of one parcel are one person for the 50-shareholder limit on a private company (s113(2)), but s708 has no matching rule, so whether joint holders are one or two for the 20 is not something the Act settles.

A bare trust is different. That is a trustee holding a parcel for named people who are the real investors, the usual shape of an angel syndicate. Those people each have an interest in the shares, and Struck takes the cautious reading that each of them uses a place unless they are exempt in their own right. The Act does not spell this out either way, so a raise that wants to count the trustee as one person should get advice first. The glossary entry on bare trusts has more.

Shares issued without a disclosure document come with a string attached. If they are sold within 12 months and either the company issued them, or the buyer took them, with the aim of selling them on, the sale itself needs a disclosure document (s707(3)). And the law presumes that aim whenever there is a sale inside the 12 months, unless the seller can show otherwise (s707(4)).

So an investor who took shares under s708(1) should expect to hold them for a year, or sell only to someone who is exempt in their own right under s708(8), (10) or (11). The small-scale exemption is expressly not available for a resale of this kind; s708(1) says so in its last sentence. Listed companies can clear the restriction with a cleansing notice (s708A). A private company cannot.

A company that needs more has four ways forward.

• Exempt investors. The accountant's certificate and the other routes in s708(8) to (11) have no cap. Most larger private raises are built on them.
• Crowd-sourced funding. A public company, or a private company with at least two directors, with assets and turnover each under $25 million, can raise up to $5 million in 12 months from retail investors through a licensed CSF platform (s738G, s738H). Each retail investor is capped at $10,000 per company per year (s738ZC), and small-scale and adviser-vouched raises in the previous 12 months eat into the $5 million.
• An offer information statement. A shorter disclosure document, available while the company and its related companies have raised $10 million or less this way (s709(4)). A private company still cannot use one.
• Becoming a public company and issuing a prospectus.

Each raise shows the company's remaining places and remaining dollars as headroom, counted from settled subscriptions across every raise the company has run, on a rolling 12 month window. Exempt investors with current evidence sit outside the count, an expired certificate puts an investor back inside it, and an allocation that would take the company over either limit is blocked before an offer goes out. The guide on qualifying investors under s708 walks through recording each investor.