Employee incentive schemes for unlisted entities: ASIC expands its disclosure relief

Background

On 31 October 2014, ASIC announced the release of new Class Order 14/1001, covering employee incentive schemes of unlisted entities, and updated the related Regulatory Guide 49. The new class order exempts certain securities offers by unlisted entities under employee incentive schemes from the disclosure, licensing and other requirements under the Corporations Act 2001 (Cth). Happily, the relief given under the new class order represents a significant widening of the scope of the exemptions available to unlisted entities seeking to offer equity interests to employees.

ASIC’s previous Class Order 03/184 (which provided exemptions for both listed and unlisted entities) gave only limited relief to unlisted entities for offers of options over shares to employees under an employee incentive scheme. This time around, ASIC has issued a separate class order specifically for unlisted entities, which significantly expands both the types of securities covered by the relief and the circumstances in which the relief may be relied upon.

Together with the tax changes proposed in the Commonwealth government’s ‘Industry Innovation and Competitiveness Agenda’ (released on 14 October), there are some substantial improvements for unlisted entities (and in particular, start-ups) who wish to offer their employees equity.

Unlisted entities should be aware, however, that some financial and other information will be required to be given to employees who are offered securities under the new Class Order.  These requirements stem from ASIC’s concern that disclosure by and pricing information about unlisted entities is generally more limited than that which is available for listed entities.

Significant positive changes for unlisted entities under Class Order 14/1001 include:

Financial products offered under a scheme

While under Class Order 03/184 relief was only available for offers of options over shares, ASIC has now extended the relief to cover offers of fully paid voting ordinary shares, units in such shares and incentive rights (performance rights and cash equivalents) (provided that they are offered for only nominal consideration).

Exercise of options

Previously, unlisted entities had to give an undertaking that, whenever the options were exercisable, either a prospectus would be available or the entity’s shares had to have been listed on a stock exchange for at least 12 months.  Unlisted entities now have two additional alternatives – they can provide either an independent expert’s report that values the underlying shares or a copy of an executed agreement under which shares in the same class as those subject to the options are to be acquired by a third party on arm’s length terms.  That executed agreement must specify a value for a share in that class.  The period for satisfying the listing alternative has also been shortened to three months.

Limit on shares issued under scheme

The overall limit on the number of the unlisted entity’s shares that can be issued in reliance on the Class Order is now significantly higher – previously, the number of shares (or shares subject to options) that would be issued under the offer (when aggregated with other issues made under an employee share scheme in the previous five years) could not exceed 5% of the unlisted entity’s issued shares in that class. Now, the limit is 20% of the shares in the same class of shares being offered, and the period for combining the current offer with previous issues is only three years (and only previous issues in reliance on the Class Order or similar ASIC relief are counted).

Utilisation of trust structures

Offers of securities to employees under an employee incentive scheme can now be made through trust arrangements.

Eligible participants

Eligible participants under an employee incentive scheme can include casual employees and contractors, so long as they work (or are reasonably expected to work) at least 40% of the number of hours worked by a full time employee.

General conditions

While on balance, ASIC has provided unlisted entities with significantly greater flexibility to offer employees equity under employee incentive schemes without requiring a prospectus, ASIC has also imposed some additional requirements, including:

• there is a $5,000 limit on the value of all offers made to any eligible participant in a 12 month period;
• offers under an employee incentive scheme must be made in an offer document, and that offer document has to be accompanied by a copy of the unlisted entity’s annual report, an up-to-date insolvency resolution and a directors’ valuation resolution;
• there is an ongoing requirement to provide annual reports, on request, during the period an employee participates in an employee incentive scheme; and
• offer documents must include prominent warning statements.