Disclosure or disqualification: the cost of fundraising failures
A recent Federal Court case provides a timely reminder of the importance of complying with legal disclosure requirements when raising funds.
In Australian Securities and Investments Commission v Open4Sale Global Ltd (No 2) [2025] FCA 1038, the Federal Court found two directors of an unlisted public company had breached sections 727(1) and 727(2) of the Corporations Act 2001 (Cth) (Corporations Act) on more than 100 instances. These breaches related to various offers of securities to investors without compliant disclosure documents.
Key Findings
The Court disqualified the directors from managing corporations, restraining them from future non-compliant fundraising for 12 and eight years respectively. It also imposed significant pecuniary penalties on both directors in their individual capacities.
The Court identified a number of concerns with the company’s operations, including that offers were made without a disclosure document. During the relevant period, there were no audited financial statements in existence for the company, meaning it was not possible to utilise an information statement meeting the requirements of the Corporations Act.
No pecuniary penalties were made against the company itself, with the Court finding that the removal of the individual wrongdoers from the company’s board of directors was a sufficient deterrence measure.
Consequences for directors
The judgment underscores that directors must ensure that their company complies with all legal requirements when offering securities to investors, or they can potentially face personal liability, disqualification and substantial pecuniary penalties (in this instance, of up to a combined $2.8 million).
The Court refused relief under sections 1317S and 1318 of the Corporations Act, which allow for relief from liability for contravention of civil penalty provisions if certain requirements are met. The Court found the directors acted with blatant disregard for the law and was not satisfied that they had acted honestly.
This judgment reiterates that all directors must ensure rigorous compliance with fundraising and disclosure obligations, especially when dealing with retail investors. It serves as a clear reminder that poor governance, inadequate record-keeping and non-compliance with disclosure laws can result in serious regulatory consequences.
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