Key issues
- The Federal Government has proposed to increase the monetary value limit available to unlisted companies for issuing equity to employees under an employee incentive scheme (EIS).
- The Federal Government has also indicated that it will simplify the current regime regulating EIS for unlisted companies by implementing a dedicated exemption for disclosure, licensing, advertising and on-sale obligations under the Corporations Act 2001 (Cth)(Corporations Act).
- Startups and small businesses are set to be the main beneficiaries of the proposal.
The proposed changes
Startups and small businesses are set to benefit from the proposal by the Federal Government to increase the monetary value limit available to unlisted companies for issuing equity to employees under an EIS.
Under the current regulatory framework (see our previous article for more information regarding the current framework), unlisted companies can only offer their employees eligible financial products in the company (by way of shares, options and performance rights) (Financial Products) up to a limit of $5,000 per employee in a 12 month period. Yesterday, Treasurer Josh Frydenberg announced that the Federal Government proposes to double this value limit to $10,000 per employee per year.
While the precise details are yet to be provided, the Federal Government has also indicated that it will simplify the current regime regulating EIS for unlisted companies by implementing a dedicated exemption for disclosure, licensing, advertising and on-sale obligations under the Corporations Act.
As it currently stands, an offer document for an offer of Financial Products under an EIS by an unlisted company must include, amongst other things:
- a directors’ solvency resolution made no earlier than one month before the offer;
- the annual report of the company (or a special purpose financial report and the most recent directors’ valuation resolution); and
- details of the risks of acquiring Financial Products under the relevant EIS.
These requirements can make it somewhat onerous and expensive for small businesses to effectively utilise an EIS. Given employees are often involved in the operations of the company on a daily basis; there is a view that the disclosure requirements for employees of a company should not be as extensive as those for third parties.
The Federal Government also announced measures which would expand EIS to include contribution plans, whereby an employee can make a monetary contribution to acquire Financial Products and also allow small businesses to offer Financial Products under an EIS without publicly disclosing commercially sensitive financial information (unless they are otherwise obligated to). However, the precise details of the amendments are currently unclear and there may be restrictions on these proposed changes.
Conceptually, the proposed new rules have the potential to make EIS more flexible and therefore an attractive way for unlisted companies to remunerate and incentivise employees.
Why use an EIS?
An EIS is often seen as a tool to incentivise, reward and retain employees, particularly for companies in the early stages of development. By offering employees securities in the company they work for, the employee’s interests become more aligned with those of the company. This can often improve productivity as employees have a direct interest in the performance of the company and are encouraged to work towards a common goal of growth and success of the business.
EIS also provides flexibility for startups and small businesses to remunerate employees, relieving the pressure on cash flow, and is also a means by which a company can raise working capital, if necessary.
Reducing the disclosure obligations and increasing the value limit to $10,000 has the potential to make it easier and more attractive for small businesses to utilise an EIS in the hope of seeing these benefits.
What can we make of the proposed changes?
The current regulatory regime, particularly the offer document disclosure requirements, are often considered by unlisted companies as too onerous and accordingly, those companies look to rely on other disclosure exemptions in the Corporations Act (namely small scale offers, offers to senior managers and offers to sophisticated investors) instead of utilising an EIS.
Based on the announcement by the Federal Government, if the proposed changes to the regulation of EIS for unlisted companies take effect, the reduced disclosure requirements and increased value threshold will provide greater flexibility for unlisted companies to utilise EIS. The announcement indicates a positive step to reduce the complexity and restrictions currently inhibiting unlisted companies from taking full advantage of the potential benefits of an EIS.
For more information or discussion, please contact HopgoodGanim Lawyers’ Corporate Advisory and Governance team.