NEWS FLASH – Trust and Capital Raising Alert

22 Aug 2017

ASIC has finally taken steps to close a loophole in the capital raising rules. Although the actions were taken to close down the controversial fund raising activities of Kwickie (the video chat phone app) and Guvera (the defunct music streaming start-up), it will apply equally to fund raisings activities in other companies. The aim is to protect unsophisticated investors from investing in speculative and risky ventures without the benefit of the information required to be provided in a properly compliant disclosure document.

Accountants and broking firms have long used the ploy of creating a unit trust structure to subscribe for shares as a mechanism to avoid a company having to issue a prospectus. Although the trust may fall within the exceptions of section 708 of the Corporations Act (the section that exempts a company from issuing a prospectus in certain circumstances) the subscribers to units in that trust may (and usually will) be unsophisticated and accordingly would not themselves fall within the exceptions. In this way, the ultimate investors (being the very people the rules are designed to protect) are being asked to part with their money in circumstances where they do not have all, or perhaps any, information available.  The issue is that these structures are usually used to raise money for the riskiest of investments and sold on the attraction of mammoth returns. Precisely the circumstances in which a disclosure document is needed the most!

Although the ultimate responsibility lies with each investor to obtain professional advice before making an investment, often these investors rely on the advices of the very accountant or broker seeking to exploit the loophole. It’s the classic Catch 22 situation - not only does the investor not have full disclosure but he cannot even seek the guidance of his own trusted professional adviser.  Little wonder they and their money are soon parted!

But these days are now gone.  If you are a professional or company officer or adviser, beware – this type of practice could now be deemed unlawful and a contravention of the Corporations Act. If you are an investor and invited to subscribe for units in a trust that will in turn subscribe for shares in a company that has not issued a prospectus – treat such a request with caution and immediately consult a professional adviser (not being the person that presented you with the opportunity). 

For further information please contact Kemp Strang Consultant oshryi [at] kempstrang [dot] com [dot] au (Ivan Oshry).

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