House of Representatives

Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007

Corporations (Fees) Amendment Bill 2007

Corporations (Fees) Amendment Act 2007

Corporations (Review Fees) Amendment Bill 2007

Corporations (Review Fees) Amendment Act 2007

Explanatory Memorandum

(Circulated by the authority of the Parliamentary Secretary to the Treasurer, the Hon Chris Pearce MP)

Chapter 5 Fundraising

Outline of chapter

5.1 This Bill contains six measures amending a number of provisions in the Corporations Act relating to fundraisings by corporate entities. The amendments are generally intended to facilitate fundraising by providing relief from unnecessary regulatory requirements such as the need, in some circumstances, to provide a disclosure document, removing unnecessary inconsistencies between different parts of the Corporations Act, or relaxing certain unnecessary restrictions (for example, time periods and amounts that can be raised under particular provisions).

Context of amendments

General background

5.2 The measures in this chapter relate to the fundraising provisions in the Corporations Act (mainly Chapter 6D, but also some parts of Part 7.9). Chapter 6D was inserted in the Corporations Act by the Corporate Law Economic Reform Program Act 1999 . It builds on the previous general prospectus disclosure rules, but includes a number of additional provisions relating to the use of new instruments such as short form prospectuses and offer information statements, clarification of the persons liable for contraventions of the provisions and a new definition of sophisticated investors.

5.3 The introduction of the Government's new regime for the regulation of financial services in Chapter 7 of the Corporations Act occurred in 2001 through the Financial Services Reform Act 2001 . One of the elements of this Act was that interests in managed investment schemes were taken out of the Chapter 6D fundraising regime and placed under a new disclosure regime in Part 7.9 of the Corporations Act. The Part 7.9 regime targets certain investment products marketed mainly to small retail investors. It was considered that such products had somewhat different disclosure requirements which justified treating them differently from the securities subject to Chapter 6D.

5.4 The Chapter 6D and Part 7.9 provisions have on the whole worked well and have supported a strong market in fundraisings since they were introduced. According to a recent survey conducted by KPMG, total equity fundraisings in Australia in 2005/06 amounted to A$42.5 billion, which represents an increase of 42 per cent since 2000/01.

5.5 Over time, however, it has become apparent that there are some shortcomings in the practical application of the provisions. Some of these affect the smooth operation of market processes, while others are more substantial in their effects, resulting in the skewing of market outcomes. The measures contained in this Chapter are intended to address a number of these shortcomings.

Rights issue disclosure for quoted securities and other financial products

5.6 Rights issues are a method of fundraising in which existing members in a company or managed investment scheme are given the opportunity to purchase new shares or units in proportion to their holdings on specified terms. The current legislation requires that rights issues must be accompanied by a prospectus or Product Disclosure Statement. As a result, the use of rights issues as a fundraising instrument has to some extent been superseded by other forms of fundraising with less onerous disclosure requirements. An example is a placement of shares to institutional investors, which can be accomplished without a prospectus or Product Disclosure Statement. One of the consequences of such placements is that existing members may be disadvantaged. Members with small holdings, for example, are generally not able to participate in institutional placements and therefore cannot acquire shares or units at the discount typically offered in such placements.

5.7 It is proposed to abolish the requirement to issue a prospectus or Product Disclosure Statement for rights issues of quoted securities or interests in managed investment schemes. The scope of the exemption is limited to quoted securities and interests in managed investment schemes on the grounds that the combination of an original prospectus or Product Disclosure Statement on listing and the continuous disclosure rules ensure the provision of an appropriate flow of information to members which will facilitate informed decision-making in relation to a rights issue.

Small scale offerings

5.8 This measure will facilitate small-scale fundraisings by granting some further measure of relief from the full disclosure requirements of the Corporations Act. The objective is to promote the creation and expansion of new businesses through easier access to capital.

5.9 The disclosure requirements in the Corporations Act do not apply to professional and sophisticated investors as defined in the legislation. New businesses, especially in 'sunrise' industries such as information technology or biotechnology, often rely on such investors to provide seed or start-up capital. The current definitions of professional and sophisticated investors in Chapter 6D and Chapter 7 of the Corporations Act are not entirely consistent.

5.10 The Corporations Amendment Regulations 2005 (No. 5) introduced changes which significantly expanded the scope of the wholesale investor category in Chapter 7 of the Corporations Act to whom the disclosure framework specified in that chapter does not apply. These changes were not applied to the sophisticated investor and professional investor exemptions in Chapter 6D. There does not appear to be any justification for this difference in the disclosure exemptions, and it is therefore proposed to align the definitions between the two chapters.

5.11 The use of Offer Information Statements, as defined in Chapter 6D of the Corporations Act, permits reduced disclosure requirements compared to a full prospectus. The market to date has not made wide use of this instrument, and it is proposed to provide further incentives to promote the wider use of offer information statements.

Secondary sale issues

5.12 This measure intends to facilitate the operation of the provisions in the Corporations Act relating to secondary sales of existing securities (as opposed to sales of shares to be newly issued). It includes a number of separate sub-measures.

5.13 Secondary sales of securities can be effected without a disclosure document under section 708A of the Corporations Act provided that a number of requirements set out in this section are satisfied.

5.14 Section 708A does not extend to secondary sales of securities that were initially transferred without disclosure by a person controlling the entity that issued the securities (a controller). Controllers therefore typically have to obtain relief from ASIC on a case-by-case basis to allow on-sale of those securities without disclosure. Submissions have been made that there is no justification for not allowing controllers to benefit from the general relief from the disclosure requirements provided in section 708A.

5.15 A further requirement for the secondary sales exemption in subsection 708A(5) is that the securities must have been listed for at least 12 months prior to sale. It has been proposed that this requirement is excessively restrictive and that the required listing period could be reduced while still satisfying the underlying policy rationale for the provision.

5.16 Certain types of quoted securities are classified as 'continuously quoted securities' in the Corporations Act if they satisfy a number of conditions. An example of such conditions is that the body issuing the securities must be listed on a financial market. An offer of continuously quoted securities enjoys substantial relief from the disclosure requirements in Chapter 6D and Part 7.9 of the Corporations Act where the securities have been quoted for at least 12 months. The reason is that such securities have been subject to the continuous disclosure rules for a significant period of time, during which they have had to disclose all price-sensitive information to the market on an ongoing basis.

5.17 Submissions have been made that the 12 month period is unnecessarily long and could be reduced without undermining the protection offered to investors through the provision. An appropriate period of 3 months has been suggested.

5.18 Listed entities are subject to the continuous disclosure requirements in the Corporations Act, whereby they must release all price-sensitive information to the market on an ongoing basis. Under the Australian Securities Exchange Listing Rules, there are certain situations where listed entities are allowed to withhold such information from the market. An example would be an important transaction where the negotiations had not been concluded yet and disclosure of information relating to the transaction might cause it to fail.

5.19 The Corporations Act requires that before secondary sales of securities and other financial products effected without disclosure can proceed, such information which has been withheld in accordance with the Listing Rules must be released to the market. The rationale for this requirement is to ensure that investors accepting such offers for sale are fully informed as to the state of the entity and its business. The information is released by providing a notice to the Australian Securities Exchange complying with certain conditions relating to content and timing of its release. This notice is generally known as a 'cleansing notice'.

5.20 Submissions from stakeholders have pointed out that some technical problems arise relating to the timing of the release of the cleansing notice to the market. The current wording of the relevant provision in the Corporations Act states that the notice must be released on the day before trading of these securities commences. This forces investors purchasing securities or other financial products offered to them in a secondary sale effected without disclosure to hold them for one day after they are transferred before they can be traded, even though existing securities of the same entity can be traded at the same time. This in effect requires holders of such securities to identify individually which securities can and which cannot be traded, which is impossible given the fungible nature of securities. Changes to the timing provisions relating to the release of the cleansing notice are necessary to improve the working of this part of the Corporations Act.

Employee unlisted share schemes

5.21 Employee share schemes are facilities that allow employees of a company to participate in the ownership of their employer through the acquisition of shares in the company. Based on the benefits employee share schemes may bring to the wider economy the Australian Government has a general policy of supporting the use of employee share schemes.

5.22 The following issues may arise under the Corporations Act in relation to the operation of an employee share scheme:

·
Disclosure : Broadly speaking, unless a relevant exception applies, companies are required to issue a prospectus for their employee share scheme unless it involves no more than 20 employees in any 12 month period and raises no more than $2 million.
·
Licensing : Where the employee share scheme offer document contains financial product advice about the scheme, the licensing provisions in the Corporations Act may require the issuer to hold an Australian Financial Services Licence for giving that financial product advice. Actual operation of the scheme may also require an Australian Financial Services Licence for deALIGN in securities or for providing a custodial or depository service.
·
Hawking : The offer of securities or other financial products under an employee share scheme may breach the hawking provisions in the Corporations Act.

5.23 Class Order CO 03/184 issued by ASIC provides some relief from these requirements for listed companies, subject to certain conditions. The rationale for this relief is that listed companies are subject to the continuous disclosure requirements, and therefore provide an adequate flow of information to the market (including their employees) on an ongoing basis.

5.24 Unlisted companies currently do not enjoy any relief from the disclosure, licensing and hawking provisions listed above.

Advertising rules for offers of securities requiring a disclosure document and for offers or issues of other financial products

5.25 There are currently differences in the requirements relating to advertising and publicity for offers of securities requiring a prospectus, compared to those for offers or issues of other financial products. The requirements applying to other financial products are less restrictive and allow product providers more freedom in designing their advertisements. There does not appear to be any justification for the differences in the two advertising regimes.

Stapled securities disclosure

5.26 A stapled security consists of a unit in a managed investment scheme and a security such as a share. These two instruments cannot be disposed of separately but are 'stapled' together and must be traded as a single unit. The two components of the stapled security are frequently an interest in the trust holding the assets of the entity (an interest in a managed investment scheme) and a share in the company carrying out the asset management and/or development functions (a security). The offer of such a stapled security must be made under a Product Disclosure Statement (for the interest in a managed investment scheme component) and a prospectus (for the security component).

5.27 Due to differences in the disclosure regimes for prospectuses and Product Disclosure Statements, issues may arise in the preparation of a combined prospectus/Product Disclosure Statement. One of these issues is that there are no provisions allowing a Replacement Product Disclosure Statement to be prepared, whereas Chapter 6D contains provisions permitting lodgement of a replacement prospectus. As a result, a replacement combined prospectus/Product Disclosure Statement cannot be prepared if it is necessary to correct an error or omission in the original documents. To lodge a replacement document, ASIC is required to issue a stop order over the existing document, followed by the lodgment of a new Product Disclosure Statement. This triggers a new exposure period and lodgment fee.

5.28 There does not appear to be any justification for the differences between the prospectus and Product Disclosure Statement regimes in relation to replacement documents for stapled securities offers. Substantial relief could be provided to the market by aligning the two regimes in this regard.

Summary of new law

Rights issue disclosure for quoted securities and other financial products

5.29 The first measure amends the disclosure requirements relating to rights issues by listed entities. It provides that such rights issues may be conducted without the provision of a prospectus or Product Disclosure Statement. The relief is limited to rights issues of securities and interests in managed investment schemes.

5.30 The technical amendments required to achieve the desired exemption are relatively complex. This is mainly because rights issues can be conceived of as consisting of two elements, a 'right' to apply for securities or interests in managed investment schemes and an offer of securities or interests in managed investment schemes. Relief from the disclosure requirements must be achieved separately for these two elements.

5.31 Rights issues often occur in connection with significant transactions which have not been fully disclosed to the market, for example because negotiations for the transaction have not been completed. Provision is therefore made requiring that such information be disclosed before a rights issue can proceed. The appropriate mechanism for achieving this is a requirement for providing a cleansing notice modelled on the requirements of section 708A of the Corporations Act before the rights issue offers are made.

5.32 Furthermore, in certain circumstances rights issues may potentially lead to a shareholder or underwriter acquiring control or significantly increasing voting power. It is vital to ensure that members are provided with full information on the consequences of any potential effects on control of the entity. The requirement for a cleansing notice to be provided is therefore augmented with appropriate additional requirements to ensure that disclosure of this information occurs.

Small scale offerings

5.33 The second measure applies the relevant provisions included in Corporations Amendment Regulations 2005 (No. 5) to the definitions of sophisticated and professional investors in Chapter 6D, which will expand the number of investors able to take advantage of the relief provided to these categories of investors.

5.34 In order to encourage the wider use of the Offer Information Statement the maximum amount of money that may be raised using an Offer Information Statement (when combined with other funds previously raised) is increased to $10 million from $5 million. However, it is noted that due to the reduced disclosure requirements Offer Information Statements are not appropriate for use in listing entities on a financial market.

Secondary sale issues

5.35 The third measure provides that controllers may arrange sales of securities they hold without disclosure subject to the existing section 708A conditions, but subject to the requirement that the controller and the company provide a cleansing notice as set out in paragraph 708A(5)(e) in order to provide up to date price sensitive information to the market.

5.36 An entity wishing to rely on the disclosure exemption in section 708A should have some track record of complying with its continuous disclosure obligations. The required period for quotation of the securities sold is therefore reduced to three months to provide such a track record while providing some relief from the current requirement of 12 months.

5.37 A corresponding reduction is made to section 713 as a similar logic applies in that context. This means that continuously quoted securities as defined in the Corporations Act can benefit from reduced disclosure requirements provided they have been quoted for a period of at least 3 months.

5.38 Similar requirements apply to financial products covered under Part 7.9 of the Corporations Act. Corresponding amendments are made to that part of the Act reducing the quotation period to three months before secondary sales of such financial products without disclosure can proceed. Further amendments ensure that financial products falling under the definition of continuously quoted securities can benefit from reduced disclosure requirements provided they have been quoted for a period of three months.

5.39 The problem arising in relation to the timing of the provision of the cleansing notice is addressed by changing the wording of the relevant provisions so that the release of the notice may occur at any time before trading of the securities commences. This removes the need to wait for one day before starting trading. Corresponding requirements apply to other financial products in Part 7.9 of the Corporations Act and similar relief is provided for such products as well.

Employee unlisted share schemes

5.40 The fourth measure provides relief from certain of the licensing and hawking restrictions of the Corporations Act for employee share schemes for unlisted companies. This relief is made subject to the condition that such employee share schemes must be accompanied by a disclosure document such as an Offer Information Statement or a prospectus. Listed entities may also take advantage of this relief if they wish, subject to the same condition.

5.41 It is considered that Offer Information Statements as defined in Chapter 6D of the Corporations Act provide an appropriate level of disclosure for employees of companies and their financial advisers regarding the information required to make a decision as to whether to participate in an employee share scheme.

5.42 Offer Information Statements impose a lower level of disclosure than a full prospectus. This is due to the defined scope of the contents of an Offer Information Statement as set out in section 715, which reduces the requirement for legal advice and assistance in ensuring that the contents of the document are consistent with the requirements of the law. There is a cap on the total amount of funds that can be raised under an Offer Information Statement, which is currently $5 million and will be raised to $10 million under an associated measure. The Corporations Act provides a methodology for calculating the amount of funds raised for the purposes of this requirement. To facilitate the use of Offer Information Statements for employee share schemes, this measure removes amounts raised under an employee share scheme from this calculation.

5.43 The relief provided is made subject to a number of requirements which are also applied in ASIC Class Order CO 03/184 relating to employee share schemes for listed companies. Employee share scheme offers satisfying these criteria are defined as eligible offers.

5.44 At this stage only employee share schemes involving the issue of securities may use an Offer Information Statement as their disclosure document. Employee share schemes involving a sale of securities (for example through a wholly-owned trustee) will still have to provide a prospectus.

5.45 The following relief from the licensing requirements for eligible offers as defined above is provided:

·
Relief for an issuer from the requirement to hold an Australian Financial Services Licence for the provision of general advice in connection with the offers.
·
Relief for an issuer and its controlled entities from the requirement to hold an Australian Financial Services Licence for deALIGN in a financial product where the operation of an employee share scheme requires the purchase or disposal of shares which occurs:

-
through a person who holds an Australian Financial Services Licence authorising the holder to deal in financial products; or
-
in an overseas jurisdiction through a person who is licensed or otherwise authorised to deal in financial products in that jurisdiction.

·
Relief for an issuer and its controlled entities from the licensing requirement for the provision of a custodial and depository service, including licensing relief for deALIGN in a financial product in the course of providing such a custodial and depository service.

5.46 Amendments are made providing relief from the hawking provisions in the Corporations Act for eligible employee share schemes, to allow companies to contact their employees and make participation offers to them.

5.47 Contribution plans are exempted from the managed investment and licensing provisions in the Corporations Act. A contribution plan is an arrangement under which funds are deducted from employees' salaries, including through salary sacrifice arrangements, and used to pay for shares under an employee share scheme. Without the relief provided such plans may need to be registered under the managed investments provisions of the Corporations Act in Chapter 5C and may also attract the licensing requirements in Chapter 7 of the same act.

Advertising rules for offers of securities requiring a disclosure document and for offers of other financial products

5.48 The fifth measure aligns the advertising requirements for offers of quoted securities with the advertising requirements that apply to other financial products. Amendments are also made aligning the advertising provisions applying to offers of unquoted securities after the lodgment of a disclosure document with those applying to other financial products.

5.49 The provisions regarding advertising of unquoted securities prior to the lodgment of a disclosure document remain unchanged. The strict pre-lodgment advertising restrictions for unquoted securities were introduced to ensure that the requirement to have balanced and complete disclosure in the prospectus was not negated by the content of advertisements not subject to such restrictions or requirements. These restrictions have accordingly been considered a fundamental part of the Chapter 6D disclosure regime.

5.50 ASIC's stop order powers are extended to allow it to intervene in case of misleading and deceptive advertising of securities, as it is currently able to do in the case of other financial products under Chapter 7 of the Corporations Act.

Stapled securities disclosure

5.51 The sixth measure rectifies the issue regarding lodgment of replacement combined prospectus/Product Disclosure Statements by extending the application of the provisions relating to replacement prospectuses to allow for Replacement Product Disclosure Statements for stapled securities.

Comparison of key features of new law and current law

Measure New law Current law
Rights issue disclosure Rights issues for quoted securities and other financial products are not required to provide a prospectus or Product Disclosure Statement. Instead they are required to provide a cleansing notice to the market. The notice must include information relating to the potential effect of the rights issue on the control of the entity. Rights issues for quoted securities and other financial products are required to provide a prospectus or Product Disclosure Statement.
Small scale offerings

The definitions of professional and sophisticated investors in Chapter 6D are aligned with those in Chapter 7.

The total amount of money that may be raised under an Offer Information Statement is $10 million.

The definitions of professional and sophisticated investors in Chapter 7 are broader in scope than those in Chapter 6D.

The total amount of money that may be raised under an Offer Information Statement is $5 million.

Secondary sale issues

Controllers of listed entities are able to take advantage of the disclosure relief available for secondary sales of securities and other financial products, subject to the requirement that a cleansing notice is provided by both the controller and the entity that issued the securities or other financial products.

Secondary sales without disclosure are possible for securities and other financial products quoted for a minimum of 3 months. The reduced disclosure requirements applying to continuously quoted securities and other financial products are available after they have been quoted for a minimum of 3 months.

Controllers of listed entities must provide a disclosure document for secondary sales of securities or other financial products, or obtain specific relief from ASIC.

Secondary sales without disclosure are possible for securities and other financial products quoted for a minimum of 12 months. The reduced disclosure requirements applying to continuously quoted securities and other financial products are available after they have been quoted for a minimum of 12 months.

The cleansing notice required for secondary sales of securities and other financial products must be provided on the day before the sales offers are made (but not later than 5 days after the securities or other financial products were issued).

Secondary sale issues (continued) The cleansing notice required for secondary sales of securities and other financial products without disclosure may be provided at any time before the sale offers are made (but not later than 5 days after the securities or other financial products were issued).
Employee share schemes

Employee share schemes and contribution plans enjoy relief from a specified range of licensing and hawking requirements in the Corporations Act.

Amounts raised under an employee share scheme are not counted for the calculation of the total amount raised under an Offer Information Statement.

Employee share schemes and contribution plans for unlisted companies do not enjoy any relief from the licensing and hawking requirements in the Corporations Act.

Amounts raised under an employee share scheme are counted for the calculation of the total amount raised under an Offer Information Statement.

Advertising rules

The prospectus advertising requirements are aligned with those for Product Disclosure Statements, except for advertising prior to lodgement of a prospectus.

ASIC stop-order powers are extended to cover advertising of securities.

The restrictions on advertising of offers of securities subject to a prospectus are more prescriptive than those applying to offers of other financial products made under a Product Disclosure Statement.

ASIC's stop-order powers do not extend to advertising for offers of securities.

Stapled securities disclosure Replacement Product Disclosure Statements may be lodged to correct an error or omission in the original statement in the case of stapled securities. No provision is made for a Replacement Product Disclosure Statement.

Detailed explanation of new law

Rights issue disclosure for quoted securities and other financial products

5.1 A definition of a rights issue to which the intended relief will apply is provided in section 9A. The definition states that it encompasses offers of securities or of interests in a managed investment scheme of the same class to existing holders of these products in proportion to the extent of their holdings. The definition is worded to include assignees of the existing holders. This ensures that certain types of rights issues where the rights can be sold (so-called 'renounceable' rights issues) fall within the scope of the relief offered.

5.2 Offers must be made to all such holders in Australia and New Zealand. A provision is included allowing entities conducting a rights offer to exclude persons in specific overseas jurisdictions otherwise entitled to participate in the issue subject to certain conditions. This is mainly intended to avoid them having to bear the costs of complying with the disclosure and other regulatory requirements in jurisdictions where there are only a limited number of existing holders of securities or interests in a scheme. In the case of renounceable rights issues, the rights attributable to such excluded persons must be sold and the net proceeds given to them. This provision is modelled on existing relief provided in the Australian Securities Exchange Listing Rules. [Schedule 1, Part 1, item 10]

5.3 Offers of securities under a rights issue are exempted from the disclosure requirements in Chapter 6D of the Corporations Act, subject to a number of conditions required by section 708AA. These include requirements that the securities must not have been suspended from trading for more than a specified maximum number of days, and that they have not been exempted from the disclosure requirements to which they would normally be subject.

5.4 ASIC may also make a determination disallowing the disclosure relief, if the entity has breached any of a number of key provisions in the Corporations Act. These include provisions such as the financial reporting requirements in Chapter 2M, the requirement for a trust deed and trustee in relation to an offer of debentures under Chapter 2L, as well as key requirements in relation to the continuous disclosure provisions. A provision is included stating that such a determination is not a legislative instrument. This provision is declaratory of the law and solely intended to assist readers, as these determinations are not legislative instruments within the meaning of section 5 of the Legislative Instruments Act 2003 .

5.5 A final condition is that the entity must provide a cleansing notice to the market within 24 hours before it makes offers of the securities under the rights issue. Conditions apply to the content and preparation of the cleansing notice, defining what kind of information must be disclosed and what action must be taken if a notice is found to be defective. Finally, a specific requirement is imposed to disclose information relating to any potential effects the rights issue may have on the control of the company. The majority of the conditions imposed on the relief provided under this measure are modelled on the conditions applying to secondary sale offers of securities that may be conducted without disclosure under section 708A in Chapter 6D of the Corporations Act. [Schedule 1, Part 1, item 78]

5.6 The same relief subject to the same conditions is provided for rights issue offers of interests in a managed investment scheme under a rights issue by section 1012DAA. ASIC may make a similar determination as outlined above. A provision is included stating that such a determination is not a legislative instrument. This provision is declaratory of the law and is solely intended to assist readers, as these determinations are not legislative instruments within the meaning of section 5 of the Legislative Instruments Act 2003 . [Schedule 1, Part 1, item 137]

5.7 The 'rights' element of a rights issue is defined as the right to acquire securities or interests in a managed investment scheme. These rights are included in the definition of securities in Chapter 7 of the Corporations Act by paragraph 761A(e). This ensures that the investor protection requirements contained in that Chapter apply to certain activities in relation to such rights. A financial adviser offering advice in relation to the rights to a retail client would, by virtue of this provision, be subject to the full licensing, conduct and disclosure requirements of Chapter 7. [Schedule 1, Part 1, item 96]

5.8 The rights are exempt from the disclosure requirements in Chapter 6D by virtue of subsection 700(1). This ensures that the exemption from the prospectus disclosure requirements which extends to the offer of securities under a rights issue also applies to offers of the rights created as part of the rights issue. [Schedule 1, Part 1, item 71]

Small scale offerings

5.9 This measure amends the amount specified in subsection 709(4) that may be raised under an Offer Information Statement from $5 million to $10 million. [Schedule 1, Part 1, item 84]

5.10 It also aligns the definition of sophisticated investor in section 708 in Chapter 6D with that in Chapter 7 by allowing the inclusion of the net assets and gross income of a company or trust controlled by the investor in the total net assets and gross income of the investor. As in Chapter 7, the concept is expanded to include offers of securities to a company or trust controlled by a person who satisfies the conditions for being classified as a sophisticated investor. [Schedule 1, Part 1, items 75 and 76]

5.11 The general definition of a professional investor in subsection 708(11) in Chapter 6D of the Corporations Act is aligned with that used in Chapter 7 so that it states that a person who has or controls gross assets of at least $10 million is a professional investor. [Schedule 1, Part 1, item 77]

5.12 The opportunity has been taken to correct a grammatical error in Note 1 to subsection 709(4). [Schedule 1, Part 1, item 85]

Secondary sale issues

5.13 Section 707 in Chapter 6D of the Corporations Act provides that secondary sales of securities by a controller must be accompanied by a disclosure document. The provisions allowing certain secondary sale offers to be effected without disclosure are not applicable to controllers (sections 708-708A).

5.14 This amendment changes section 708A to allow controllers to benefit from the existing relief from the requirement to issue a disclosure document for secondary sales of existing securities subject to the same conditions. [Schedule 1, Part 1, item 79]

5.15 The existing relief from the disclosure requirements is (among others) subject to a condition that the entity that issued the securities provides a notice known as a cleansing notice to the market operator disclosing certain price-sensitive information that has been withheld from the market. Withholding of such information may be permitted under defined circumstances by the listing rules issued by the market operator.

5.16 In the case of secondary sales conducted by controllers, a requirement is imposed through subparagraph 708A(5)(e)(ii) that both the controller as well as the entity that issued the securities must provide a cleansing notice to the market operator for release to the market. [Schedule 1, Part 1, item 83]

5.17 The same amendments are made to the relevant provisions in Part 7.9 to allow secondary sales by controllers of other financial products, subject to the same condition that both the controller as well as the entity that issued the financial products must provide a cleansing notice to the market operator for release to the market. In particular, subsection 1012DA(1A) is inserted and paragraph 1012DA(5) is amended. [Schedule 1, Part 1, items 138 and 142]

5.18 The disclosure relief applying to certain secondary sales of existing securities is subject to a requirement that the securities must have been quoted for a period of 12 months. This period is reduced to 3 months by the amendment of paragraph 708A(5)(a) as part of this measure. [Schedule 1, Part 1, item 80]

5.19 Corresponding relief from the disclosure requirements is also provided for certain secondary sales of other quoted financial products such as interests in a managed investment scheme. A similar amendment is made to paragraph 1012DA(5)(a) reducing the required period of quotation from 12 to 3 months. [Schedule 1, Part 1, item 139]

5.20 Offers of continuously quoted securities enjoy substantial relief from the disclosure requirements in Chapter 6D and Part 7.9 provided the financial products have been quoted for at least 12 months. This period is reduced to 3 months through an appropriate amendment to the definition of 'continuously quoted securities' in section 9 of the Corporations Act. [Schedule 1, Part 1, item 1]

5.21 The cleansing notice for secondary sales of securities can be provided at any time before the sales offers are made, rather than on the day before the offers are made. This is achieved by the amendment of paragraph 708A(5)(e). [Schedule 1, Part 1, item 83]

5.22 The same amendment is made in relation to the timing of the release of a cleansing notice for secondary sales of other financial products. This is achieved by the amendment of paragraph 1012DA(5)(e). [Schedule 1, Part 1, item 142]

5.23 The opportunity has been taken to make two minor corrections: to the definition of 'regulated person' in section 1011B and to paragraph 1012A(3)(c). [Schedule 1, Part 1, items 134 and 135]

Employee unlisted share schemes

5.24 A definition of an eligible employee share scheme is inserted in section 9 of the Corporations Act. All relief given under this measure only applies to employee share schemes falling in this category. The main requirements are that a disclosure document must be provided under the scheme, that offers are restricted to employees as defined in the Corporations Act, and that the offers are of fully paid shares and a limited number of other types of instruments. This definition is largely modelled on the one in ASIC's Class Order CO 03/184 which provides certain relief for employee share schemes of listed entities. [Schedule 1, Part 1, item 4]

5.25 A definition of a contribution plan is inserted in section 9. This includes conditions which must apply to the features and operation of the plan in order for it to qualify for the relief offered under this measure. Important features include, for example, that the deductions made under the plan must be authorised by the employee and may be discontinued at any time at the election of the employee. [Schedule 1, Part 1, item 3]

5.26 Amounts raised under an eligible employee share scheme are exempted from the calculation of the total funds raised under an Offer Information Statement by virtue of an amendment to subsection 709(5). [Schedule 1, Part 1, item 86]

5.27 Appropriate licensing relief is provided for the company or controlled entity (for example a trustee) operating the scheme through an amendment to subsection 911A(2). This includes relief for the following activities: the provision of general advice relating to the scheme; deALIGN in a financial product where the purchase or disposal of the products occurs through a licensed broker in or outside Australia; the operation of a custodial or depository service in connection with the scheme; and deALIGN in an interest in a contribution plan. Providing deALIGN relief where trading in the financial products occurs through a licensed broker outside Australia is required to ensure that employees of multinational companies can participate in schemes operated by the parent entity outside Australia. [Schedule 1, Part 1, item 106]

5.28 Relief is provided from the hawking provisions in the Corporations Act in relation to offers of securities as well as other financial products. This relief is provided through the amendment of subsection 736(2), section 992A and subsection 992AA(2). These provisions prevent sales offers from being made through unsolicited meetings or telephone calls. Applied to employee share schemes, these provisions could prevent companies from informing their employees about their schemes and inviting them to participate. [Schedule 1, Part 1, items 92, 131 and 132]

5.29 Contribution plans are exempted from the operation of the managed investment scheme requirements in Chapter 5C of the Corporations Act by virtue of an amendment to the definition of 'managed investment scheme' in section 9. The requirements of Chapter 5C would otherwise impose extensive regulatory requirements which are not justified in the special circumstances under which such plans operate. [Schedule 1, Part 1, item 6]

5.30 Contribution plans are exempted from the operation of most of Part 7.9 of the Corporations Act by virtue of new section 1010BA. Part 7.9 would otherwise require a Product Disclosure Statement to be prepared. This is unnecessary in view of the fact that the employee share scheme as a whole is required to be covered by a disclosure document under the conditions attached to this measure. [Schedule 1, Part 1, item 133]

Advertising rules for offers of securities requiring a disclosure document and for offers of other financial products

5.31 The provisions relating to advertising for offers of quoted securities under Chapter 6D prior to lodgement of the disclosure document are amended to align with those relating to advertising for offers or issues of other financial products in Part 7.9. This is achieved by the amendment of paragraph 734(5)(a).

5.32 The advertisement must include a statement regarding the following prescribed matters: the identity of the issuer of the securities and the seller, if there is one; that a disclosure document will be made available later, and when and where it will be available; that a person should consider the disclosure document in deciding whether to acquire the securities, and that anyone who wants to acquire the securities must do so using the application form in the disclosure document. [Schedule 1, Part 3, item 210]

5.33 Subsection 734(6) which relates to advertising of offers of quoted and unquoted securities conducted under Chapter 6D after lodgement of the disclosure document is amended in a similar fashion, taking account of the fact that the document has already been lodged. Thus the prescribed statement must say that the disclosure document is already available, and where it can be obtained. [Schedule 1, Part 3, item 212]

5.34 The measure ensures that ASIC's stop-order powers in Chapter 6D extend to defective advertisements for offers of quoted securities prior to lodgement of the disclosure document as well as of quoted and unquoted securities after lodgement of the disclosure document. This is achieved by the amendment of section 739. [Schedule 1, Part 3, item 213]

5.35 Further provisions are included in section 739 to clarify the meaning of 'defective' in the context of ASIC's stop order power. The term 'defective' in this context includes making a misleading or deceptive statement, omitting material that is required, or making a statement about future matters without having reasonable grounds for doing so. It is made clear that this is not intended to limit what may constitute a misleading statement to these cases. [Schedule 1, Part 3, item 215]

5.36 The opportunity is taken to correct a minor formatting error in paragraph 734(5)(b). [Schedule 1, Part 3, item 211]

Stapled securities disclosure

5.37 A cross reference to a definition of a Replacement Product Disclosure Statement is included in section 761A (the definitions section) at the beginning of Chapter 7 of the Corporations Act. The new definition of this term is in section 1014H. [Schedule 1, Part 1, items 94 and 146]

5.38 The measure inserts a new Subdivision DA in Division 2 of Part 7.9 of the Corporations Act containing the main provisions relating to Replacement Product Disclosure Statements. New section 1014G clarifies that Replacement Product Disclosure Statements may only be issued for offers of stapled securities where a Product Disclosure Statement has been lodged as well as a prospectus.

5.39 A Replacement Product Disclosure Statement is defined in new section 1014H as a document replacing a Product Disclosure Statement in order to make certain corrections or fill certain gaps in the original Product Disclosure Statement. Particular attention is drawn to the fact that a Replacement Product Disclosure Statement may contain changes to important information supplied in the original Product Disclosure Statement concerning minimum amounts that must be raised if the financial product is to be issued or sold, or concerning plans to list the financial products on a financial market.

5.40 A deeming provision is included in the new section 1014 stating that a reference to a Product Disclosure Statement throughout the Corporations Act is taken to be a reference to the Replacement Product Disclosure Statement once the latter is lodged. This ensures that all the relevant provisions in the Corporations Act apply appropriately to Replacement Product Disclosure Statements, even where no specific amendments have been made to achieve this.

5.41 A statement that the document is a Replacement Product Disclosure Statement is required to be placed at the beginning of the document. A requirement to identify the original Product Disclosure Statement which is being replaced is included. Otherwise the main provisions in the Corporations Act relating to the preparation and contents of Product Disclosure Statements apply to Replacement Product Disclosure Statements in the same way. These requirements are included in new section 1014K.

5.42 The new provisions import a number of further requirements deALIGN mainly with the lodgement of certain Product Disclosure Statements with ASIC and the manner in which a Product Disclosure Statement must be given to a person to ensure that they also apply to Replacement Product Disclosure Statements. This is achieved by new section 1014L. [Schedule 1, Part 1, item 146]

5.43 Under certain provisions in the Corporations Act, if a Product Disclosure Statement states that a financial product will be tradable on a financial market, then the product must be able to be traded, or else an application has to be made within seven days after a certain relevant date to a market operator to enable such trading to occur. Further, if the product is not able to be traded at the end of three months after a certain relevant date, the issue or transfer of such financial products is void, and the person to whom the products were issued or transferred must be repaid if any payment has been received.

5.44 Subsection 1016D(3) is amended to clarify that, if such a statement is express or implied in a Replacement Product Disclosure Statement, the relevant date is the date of the Replacement Product Disclosure Statement, and not that of the original Product Disclosure Statement. [Schedule 1, Part 1, item 148]

5.45 Further provisions prescribe certain actions applying to a person making an offer of financial products under a Product Disclosure Statement that states that the products will only be issued or sold if a minimum number of products are applied for or a minimum amount is raised, and where these conditions have not been fulfilled within 4 months after a certain relevant date.

5.46 Subsection 1016E(4) is amended to clarify that, if such a statement is express or implied in the Replacement Product Disclosure Statement, the relevant date is the date of the Replacement Product Disclosure Statement, and not that of the original Product Disclosure Statement. In such cases the person making the offer must either repay monies received from any applicants, or provide a new disclosure document as prescribed and give any applicants one month to withdraw their application and be repaid. [Schedule 1, Part 1, item 150]

5.47 A minor formatting error in subsection 1016D(3) is corrected. [Schedule 1, Part 1, item 147]

Application and transitional provisions

Rights issue disclosure for quoted securities and other financial products

5.48 The amendments relating to rights issues commence on Royal Assent. [Clause 2]

5.49 The amendments abolishing the requirement for a prospectus or Product Disclosure Statement for a rights issue will apply to rights issues offered on or after the day on which the relevant items commence. [Schedule 1, Part 6, item 229]

Small scale offerings

5.50 The amendments relating to small scale offerings commence on Royal Assent. [Clause 2]

5.51 The amendments apply to offers of securities made on or after the day the amendments commence. [Schedule 1, Part 6, item 237]

Secondary sale issues

5.52 The amendments relating to secondary sale issues commence on Royal Assent. [Clause 2]

Employee unlisted share schemes

5.53 The amendments relating to the contribution plans operated as part of employee share schemes commence on Royal Assent. [Clause 2]

5.54 The amendments apply to employee share schemes offered on or after the day on which the amendments commence and to contribution plans offered on or after the day on which those amendments commence. [Schedule 1, Part 6, item 227 and 228]

Advertising rules for offers of securities requiring a disclosure document and for offers or issues of other financial products

5.55 The amendments relating to advertising rules for offers of securities requiring a disclosure document and for offers or issues of other financial products commence on proclamation or six months after Royal Assent, whichever is earlier. [Clause 2]

5.56 The amendments apply to an advertisement or publication made after commencement. [Schedule 1, Part 6, item 242]

Stapled securities disclosure

5.57 The amendments relating to Replacement Product Disclosure Statements for stapled securities commence on Royal Assent. [Clause 2]

5.58 The amendments apply to any Product Disclosure Statement lodged with ASIC at the time of commencement or thereafter. [Schedule 1, Part 6, item 230]

Consequential amendments

Rights issue disclosure for quoted securities and other financial products

5.59 A reference to the new definition of 'rights issues' is inserted in the general definitions section 9 at the beginning of the Corporations Act. [Schedule 1, Part 1, item 9]

5.60 A number of references to offers of securities that may be made without disclosure are updated to include the new section removing the requirement for a disclosure document for a rights issue. [Schedule 1, Part 1, items 20, 21, 72, 74, 89 and 136]

5.61 ASIC has powers to exclude an offer of continuously quoted securities (and certain other financial products) from the reduced disclosure requirements contained in sections 713 and 1013 FA if that body has contravened certain provisions in the Corporations Act. Failure to comply with key provisions applying to rights issues conducted without disclosure are included in the list of contraventions based on which ASIC may make such a determination. [Schedule 1, Part 1, items 87, 88, 143 and 144]

5.62 Giving a cleansing notice that does not comply with the new rights issues disclosure provisions does not constitute a contravention of section 727 or section 1021C which state that it is an offence to offer securities or other financial products without providing appropriate disclosure as required by Chapter 6D or Part 7.9. [Schedule 1, Part 1, items 90, 91, 152, 153 and 154]

5.63 Amendments are made clarifying that certain enforcement provisions relating to offences, such as a failure to provide a disclosure document or statement, or providing a defective disclosure document or statement, apply to the new rights issue provisions, and that the defendant bears the evidential burden in relation to these provisions. [Schedule 1, Part 1, items 151, 155 and 159]

5.64 Amendments are made ensuring that a failure to comply with the requirements applying to the cleansing notice required for rights issues without disclosure constitutes an offence under the relevant provisions of the Corporations Act. [Schedule 1, Part 1, items 161, 162, 163, 164, 165 and 166]

5.65 Entities breaching the continuous disclosure requirements may be subject to an infringement notice issued by ASIC imposing a pecuniary penalty and requiring certain compliance action to be taken. Failure to comply with the notice provides an opportunity for specific proceedings to be taken against the breaching entity. In such circumstances no other proceedings than those specified may be started against the entity. It is clarified that a determination by ASIC made under the new rights issues disclosure provisions preventing an entity from benefiting from the relief provided may still be made, even if other proceedings may not be started. [Schedule 1, Part 1, item 167]

5.66 The maximum penalty is specified for the offence of breaching the requirement to correct a defective cleansing notice provided under the new rights issues disclosure provisions. The penalty is the same as that for a failure to do the same in relation to a secondary sale of securities without disclosure conducted under the existing provisions in section 708A. [Schedule 1, Part 1, items 172 and 175]

Small scale offerings

5.67 A consequential amendment is made to the table at section 705 reflecting the change in the amount that can be raised through an Offer Information Statement. [Schedule 1, Part 1, item 73]

Secondary sale issues

5.68 Amendments are made to reflect the reduced requirement for the securities and other financial products subject to the secondary sales provisions to have been quoted for 3 months instead of 12 months. [Schedule 1, Part 1, items 2, 81, 82, 140 and 141]

Employee unlisted share schemes

5.69 The definition of employee share schemes in section 9 is adapted to reflect the possibility of schemes offering options over unissued shares as a consequence of the definition of what constitutes an eligible employee share scheme. [Schedule 1, Part 1, item 5]

Advertising rules for offers of securities requiring a disclosure document and for offers of other financial products

5.70 An amendment is required to make certain conditions and powers apply to ASIC's expanded stop order powers with respect to advertisements for offers under Chapter 6D. These conditions relate to ASIC's obligation to hold a hearing and its power to make interim orders in certain circumstances. [Schedule 1, Part 3, item 214]

Stapled securities disclosure

5.71 A number of notes are inserted alerting readers to the operation of the new provisions relating to Replacement Product Disclosure Statements. [Schedule 1, Part 1, items 7, 93 and 145]

5.72 A reference to the definition of Replacement Product Disclosure Statements in Chapter 7 is placed in the general definitions in section 9 in the Corporations Act. [Schedule 1, Part 1, item 8]

5.73 A reference to the definition of a Replacement Product Disclosure Statement in the new section 1014H is placed in the definitions section in Chapter 7. [Schedule 1, Part 1, item 94]

5.74 The appropriate operation of the continuous disclosure requirements in relation to information that would have to be disclosed in a Replacement Product Disclosure Statement is ensured through an appropriate amendment. [Schedule 1, Part 1, item 70]

5.75 An appropriate amendment ensures that certain remedies applying in cases of a defective Product Disclosure Statement or Supplementary Product Disclosure Statement also apply to a Replacement Product Disclosure Statement. [Schedule 1, Part 1, item 149]

5.76 An appropriate amendment ensures that certain enforcement provisions relating to Product Disclosure Statements and Supplementary Product Disclosure Statements that do not satisfy some of the contents provisions of the Corporations Act also apply to Replacement Product Disclosure Statements. The provisions relate to requirements such as that a Product Disclosure Statement must be dated, carries an appropriate title as prescribed and is not combined with a Financial Services Guide except as allowed under the Corporations Act. [Schedule 1, Part 1, items 156, 157 and 158]


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