What the 20 investor and $2 million rule actually counts.

Section 708(2) defines a personal offer with two conditions that both have to hold. The offer must be one that may only be accepted by the person to whom it is made. It must also be made to a person likely to be interested in it, having regard to previous contact between the person making the offer and that person, some professional or other connection between them, or statements or actions by that person indicating interest in offers of that kind. Both limbs are tested when the offer is made, against the individual recipient.

This is where a raise sitting well inside both ceilings still fails. A single email carrying an open application form, sent to a contact list of two hundred names, is not a set of personal offers: it can be accepted by anyone who receives it or is forwarded it, and the likely to be interested test applies to each recipient rather than to the list. That only twenty replied and only twenty were issued shares does not repair the analysis, because the ceilings are counted on issues while the personal offer condition is tested on offers.

An offer that holds up is addressed to a named person, says on its face that it may be accepted only by the addressee and may not be passed on, and carries an application form identifying that addressee. Where the relationship sits with an adviser rather than with the company, the offer is made by that person and the connection relied on is theirs.

Under section 708(3)(a) an offer by a body to issue securities breaches the 20 investors ceiling if it results in the number of people to whom securities of the body have been issued exceeding 20 in any 12 month period. The count is of people who have received securities rather than people who received offers, so a company can make far more personal offers than it can complete. It picks up every issue the company has made inside the window, not only the issues made under this limb, subject to the disregards in section 708(5).

The period is any twelve months, so it does not reset at the end of a financial year or at the close of a round, and the count is re-run as at each issue date. A company issuing in tranches can find its allowance restored because subscribers have dropped out of the look-back, or find that a friends and family round nine months earlier has consumed most of it. The first task on a raise is to reconstruct the last twelve months of issues from the members' register and the ASIC filings, before the first offer letter is drafted.

A further issue to someone already inside the window does not add to the twenty, although the money still runs against the other ceiling. Otherwise the count follows the legal person the securities are issued to, and related investors are not consolidated: a couple who subscribe in their own names, through the corporate trustee of their self-managed superannuation fund and through the corporate trustee of their family trust, use four of the twenty. Section 708(4) runs the parallel ceilings on the sale side, so a founder selling down alongside the raise is measured against their own limits and takes no shelter from the company's.

The two structural workarounds each have an answer in the Act. Putting the last few investors behind a nominee produces one name on the register, but the offer to each underlying investor still has to satisfy section 708(2). Splitting the raise across a second company runs into section 740, which lets ASIC determine that closely related bodies are aggregated for the purposes of the Chapter, so an issue by one is taken to be an issue by each of the others and the money received by each of them. Section 740(2) does the same for a body and its controller.

Under section 708(3)(b) an offer breaches the second ceiling when it results in the amount raised by the body by issuing securities exceeding $2 million in any 12 month period. Both ceilings have to be satisfied at once. Twelve investors at large commitments can breach on money while sitting inside the investor limit, and twenty-five small subscribers can breach on people while sitting inside the money limit.

Section 708(7) is explicit about what goes into the amount raised: the money payable for the securities when they are issued, any amount payable on a future call on partly paid shares, any amount payable on exercising an option, and any amount payable on exercising a right to convert into other securities. A convertible note carrying an undertaking to repay the money as a debt is a debenture, and a debenture is a security for the purposes of the Chapter, so the subscription money consumes the ceiling when the note is issued rather than when it converts. Options consume both ceilings at once: section 702 treats an offer to grant an option as an offer to issue the security constituted by the option, so the grantee is one of the twenty from the date of grant, and the exercise money enters the money ceiling on the same day.

That arithmetic belongs at the term sheet stage, because it cannot be repaired once the securities are issued. Model the ceiling on every amount an investor could be required to pay under the instrument, and re-run it each time the structure changes. If the raise does not fit, the subscribers who can qualify move onto another limb of section 708 and their money leaves the count with them.

Section 708(5) directs that, in counting issues and sales and the amount raised from them, you disregard issues and sales resulting from offers that do not need a disclosure document because of any other subsection of section 708, offers not received in Australia, and offers made under a disclosure document. A subscription under the sophisticated investor tests in section 708(8), under a licensee's assessment in section 708(10), from a professional investor under section 708(11), or under section 708(12) from a senior manager of the body or a related body, their spouse, parent, child, brother or sister, or a body corporate they control, consumes neither ceiling. Issues under an offer eligible to be made under the employee share scheme provisions in Division 1A of Part 7.12 are disregarded as well, by force of section 1100ZC(4).

The Australian receipt limb and the disclosure document limb are the ones private companies overlook. Section 700(4) limits the Chapter to offers received in this jurisdiction, so an offer received offshore sits outside both ceilings, subject to what the law of that place requires of it, and a company that has previously raised under a lodged disclosure document does not carry those investors into the count. A mixed raise therefore runs as more than one register: each subscriber sits on exactly one pathway, and the company has to be able to say which pathway and why, as at the date of the offer made to that person.

The timing built into those pathways closes off the obvious repair. A certificate under section 708(8)(c) has to be given by a qualified accountant no more than six months before the offer is made, and the net asset and gross income figures it certifies sit in the regulations rather than in the Act, so the current thresholds are worth checking rather than remembering. Under section 708(10) the licensee's written statement of reasons and the investor's signed acknowledgment must both be in place before, or at the time when, the offer is made. An investor who was wealthy on the day but whose file holds no certificate dated before the offer is an investor inside the twenty.

Section 734(1) prohibits advertising, or publishing a statement that directly or indirectly refers to, an offer or intended offer of securities that would need a disclosure document but for section 708(1). Two features of the drafting matter. The relief that lets a lodged disclosure document be circulated, and that permits limited statements before and after lodgement, is an exception to section 734(2) and does not reach subsection (1), so a small scale raise has no advertising safe harbour. And section 734(2B) makes an offence based on subsection (1) one of strict liability.

The prohibition bites on the publication itself, whatever becomes of the offers afterwards, and it makes the personal offer analysis harder to evidence for every offer that follows. The forms it takes are mostly ordinary business conduct: a post saying the company is raising, a paragraph in a customer newsletter, a profile on a marketplace that anyone can register to view.

Section 734(3) sets the factors for deciding whether a statement indirectly refers to an offer or is reasonably likely to induce people to apply: whether it forms part of the body's normal advertising of its products or services and is genuinely directed at keeping or attracting customers, whether it communicates information that materially deals with the affairs of the body, and whether it is likely to encourage investment decisions made on the basis of the statement rather than on information in a disclosure document. A contract win is not caught merely because a raise is on foot, but the same announcement rewritten to signal momentum to prospective investors reads differently against those factors. Nothing withdraws a publication that has gone out, so where the raise has been announced first, the round has to move to a limb section 734(1) does not reach, such as offers made only to investors qualifying under section 708(8) or (11), or on to a disclosure document.

A second prohibition sits outside Chapter 6D and is missed more often. Section 992A prohibits offering a financial product for issue or sale to a retail client, or inviting that person to apply for one, in the course of or because of unsolicited contact, which section 992A(4) defines as a telephone call, a face-to-face meeting or any other real-time interaction in the nature of a discussion where the person did not consent or the requirements in section 992A(5) are not met. Those requirements include consent given before the contact started, as a positive and voluntary act, within six weeks before the contact occurs. The offence is one of strict liability, and section 992AA gives the client a right of return and refund. An investor inside the twenty will usually be a retail client, so section 708(2) invites reliance on previous contact and connection while section 992A puts the unprompted call or meeting itself at risk.

The file is built while the offers are going out, because none of it can be assembled afterwards. It earns its keep at the next transaction, when an institutional round or a trade sale brings a warranty that the securities were issued in compliance with the Act and a buyer's adviser works the register holder by holder, asking on what basis each issue was made without disclosure. A register that cannot answer produces indemnities, escrow against the exposure, a price adjustment, or a repapering exercise run with early investors under no obligation to co-operate. The record that answers has five parts.

If an issue would take the company past either ceiling, section 708(1) was never available for the offer that produced it. That offer needed disclosure and none was lodged, which contravenes section 727(1), and section 727(4) then bites on the allotment itself, because a person relying on section 708(1) must not issue or transfer securities without disclosure where that would breach a ceiling. Contravention is an offence, and section 727(6) makes it a civil penalty provision as well. Section 1324 lets ASIC, or a person whose interests are affected, apply for an injunction, and it extends to a person knowingly concerned in the contravention, which reaches the directors who resolved on the allotment.

Because the ceiling is breached by the offer that produces the excess, the exposure sits on the issue that crosses the line rather than on the raise as a whole. The response on discovery is to stop short of that issue. From there the workable paths are to hold the subscription until the investor can be qualified under another limb and a fresh offer is made on that basis, to reduce the raise, or to prepare a disclosure document and run the balance as a regulated offer.

Four questions settle most of this before the first offer letter goes out. What securities has the company issued in the last twelve months, and which limb of section 708 did each issue rely on? What does the ceiling arithmetic look like on the full economics of the instrument, including option exercise money and conversion money? Which subscribers are being taken outside the count, and what evidence will exist for each of them on the day their offer is made? And has anything been published about the raise, or any investor telephoned about it without consent recorded beforehand?