Capital raising for a private company, step by step

Chapter 6D requires a regulated disclosure document unless an exemption applies. The exemptions a private company most commonly relies on sit in s708 of the Corporations Act: the sophisticated investor test, the wholesale client test carried across from s761G and s761GA, and the small scale personal offer exemption for a limited number of investors. Under the sophisticated investor test, an individual, or an entity acting through a qualifying certificate, with net assets of at least $2.5 million or gross income of at least $250,000 in each of the last two financial years, certified by a qualified accountant, can be offered securities without a disclosure document. The wholesale client test under s761G looks instead at the size of the investment itself: an offer where the minimum investment is at least $500,000 also falls outside the disclosure regime. Separately, the small scale personal offer exemption lets a company raise from no more than 20 investors in any 12 month period, up to a cap of $2 million, without triggering disclosure at all, which is useful for a first close among founders, family and close associates ahead of a wider wholesale round.

These tests aren't a formality to wave through. The company, and any adviser arranging the offer, needs to hold or sight the certificates and evidence before the offer is made, not after, with a clear record showing each investor approached actually met the relevant test at the time. Getting this wrong doesn't just create a compliance problem. It can unwind the exemption for the whole offer.

Once the investor pool and offer basis are settled, the term sheet does the real negotiating. It is non-binding on price and structure but binding on the handful of clauses that protect either side through the gap between agreement and completion, including exclusivity, confidentiality and cost allocation.

The commercial terms it needs to fix, roughly in order of how often they become contentious, allocate risk between the founders and the incoming investor. A term sheet that leaves any of them vague simply moves the argument to the shareholders deed, later and with more at stake:

Private companies raising from wholesale investors between formal equity rounds, or where the parties can't yet agree a valuation, commonly use a convertible note rather than issuing shares outright. The investor advances funds as debt, carrying interest and a maturity date, but the note is drafted to convert into equity, usually on the next priced equity round or on a defined trigger event such as a sale or listing, rather than being repaid in cash. The mechanics that matter are the conversion trigger, whether conversion is automatic or optional, any discount applied to the price of the next round to compensate early investors for the risk they took before a valuation existed, and whether the note carries a cap on the conversion price so early investors aren't diluted down if the next round prices well above expectations.

The trade off is real. A convertible note defers the valuation argument, which suits founders and investors who genuinely can't agree a number yet, but it leaves both sides holding an instrument whose eventual equity value depends on a future event neither controls. Directors issuing convertible notes need to be equally clear on ranking. An unsecured convertible note sits behind secured creditors and, in some structures, behind other classes of note, and that ranking should be spelled out in the instrument itself, not left to be inferred later.

A private wholesale raise runs through a reasonably fixed sequence regardless of the instrument chosen. Preparation comes first: a clean capitalisation table, a financial model an investor can pull apart, and either a disclosure exemption record showing how each investor qualifies, or, less commonly for this kind of raise, a full disclosure document. Only once that groundwork exists does outreach to the investor list begin, and it needs to be sequenced so no offer goes out to anyone who hasn't first been tested against the relevant exemption.

Term sheet negotiation follows, then a due diligence phase the investor runs on the company, covering financial, legal and commercial matters, running in parallel with drafting the definitive documents: the subscription agreement and any amended shareholders deed. Completion is a single mechanical step at the end, funds released against executed documents and shares or notes issued and registered, followed by the housekeeping that's easy to skip under time pressure: updating the register, notifying ASIC of the new issue, and confirming the investor's rights are correctly reflected in the company's constitution or deed.

The diligence a genuinely sophisticated investor runs on a private company rarely centres on the pitch. It centres on:

None of this is adversarial. It is the standard the sophisticated investor test in the Corporations Act assumes an investor is capable of applying for themselves, in exchange for going without the protection of a disclosure document.

A private capital raise succeeds or stalls on discipline applied well before the first investor conversation: the right exemption pathway chosen and evidenced, a term sheet that resolves the contentious clauses rather than deferring them, an instrument whose conversion and ranking mechanics are actually drafted rather than assumed, and a process sequenced so diligence and documentation run to a timetable rather than to whichever party is under less pressure. That discipline, more than the pitch, is what converts investor interest into a completed raise.