The document provides advice on common mistakes made when raising capital under Section 708 placement rules in Australia. It summarizes Morgan Cradock's report on the "Top 11 Small Scale Offer Document Mistakes", including: not being open to third party investors; believing a Small Scale Offer Document is not needed to raise capital; and providing insufficient details on the use of funds. The report aims to help businesses successfully raise capital while complying with Australian securities regulations.

1. Top 11
Small Scale Offer
Document Mistakes
morgan cradock
Morgan Cradock’s “Top 11 Small Scale Offer Document Mistakes”
provides advice on how – and how not – to approach the process of
raising capital under the Section 708 placement rules.
+61 (0)2 4946 8765 www.morgancradock.com PO Box 3177 Valentine NSW 2280 AUSTRALIA

2. morgan cradock
About
The Report
Morgan Cradock is an investment advisory firm that specialises in
working with privately-held emerging and middle market companies.
We are a notified operator and publisher of Business Introduction and
Matching Services in Australia; as notified to the Australian Securities
& Investments Commission. We provide the following services:
• Raising Equity Capital
• Strategy Consulting
• Deal Transaction Advisory
• Small Scale Offer Document Services
We created the “Top 11 Small Scale Offer Document Mistakes”
report based on our experience advising more than 100 emerging
growth businesses on their capital formation strategies.
If you are seeking assistance with a Small Scale (defined as up to
$5 million in a 12 month period) offering in Australia, please do not
hesitate to contact us at +61 (0)2 4946 8765 or write to Michael
Cradock at michael@morgancradock.com.
© Copyright Morgan Cradock, 2009

3. morgan cradock
Top 11 Small Scale
Offer Document Mistakes
Mistake #11:
An entrepreneur not being open to leveraging
through the participation of third party investors
On the one hand, there is this image of a venture capitalist (VC) as
one who seeks to control the investment with an iron fist; while at
the extreme is this picture of the investor being totally passive and
patient. Neither is true except in exceptional cases.
Typically the VC will only invest after the first two to three financing
rounds have been completed by large private (angel investors) as
well as founders, friends and family investors. The goal is that
the company’s valuation will increase in each subsequent funding
round such that when the VC does invest the larger sums of money
required for, say, global expansion, the VC will only receive a minority
interest. By definition, therefore, they have no control.
A good VC brings vast commercial experience and robust
examination of all major decisions. Rather than control their desire is
almost always to add value and they do this through participation at
the table via a directorship or some informal executive role.
© Copyright Morgan Cradock, 2009

4. morgan cradock
Top 11 Small Scale
Offer Document Mistakes
Mistake #11 continued...
An individual (and earlier stage) private investor, particularly one who
has some strategic interest in the business will be equally valuable.
The best deals arise when the
investor can bring you contacts in the
The best deals industry, resources like knowledge
about inventory management,
arise when the
warehouse logistics, supply chain and
investor can bring IT scalability.
you contacts in the
industry, resources Very, very few investors have any
like knowledge desire to remove the chief executive
about inventory or founders unless there is absolute
chaos and financial disaster ahead
management,
of them. Dare we say you may well
warehouse logistics, welcome the investors’ intrusion?
supply chain and IT
scalability. With these common misconceptions
behind us, let’s move on to the next 10
mistakes made on the capital raising
pathway and what to do about them.
© Copyright Morgan Cradock, 2009

5. morgan cradock
Top 11 Small Scale
Offer Document Mistakes
Mistake #10:
Believing That You Don’t Need a
Small Scale Offer Document to Raise Capital
If you are raising capital from an individual, as opposed to a
venture capital fund, then you need to comply with Section 708 of
the Corporations Act that is governed by the Australian financial
regulators, the Australian Securities & Investments Commission. A
business plan is a component of the Small Scale Offer Document
Package, but in and of itself it does not provide sufficient risk
disclosures.
Many companies naively ignore the Corporations Act legal
requirements hoping that they will be in the majority of cases that
“fly under the ASIC radar”. The risk of running this gauntlet is to be
forced to repay shareholder’s funds, face the embarrassment and
discredit this will cause you and your family forever, pay a hefty fine
to ASIC, and, if this wasn’t bad enough, risk going to jail for 5 years.
Mistake #9:
Assuming a Small Scale Offer Document
is ALL You Need to Raise Capital
A Small Scale Offer Document, because of its boiler-plate and rigid
structure with exhaustive disclaimers, is in many ways a document
that highlights everything that can go wrong. As such, it needs to be
supplemented by more promotionally-focused materials, such as a
Key Investment Highlights Summary, a PowerPoint 10 Minute Pitch,
and/or multi-media including a website and/or a video presentation of
the investment opportunity.
© Copyright Morgan Cradock, 2009

6. morgan cradock
Top 11 Small Scale
Offer Document Mistakes
Mistake #8:
Providing Insufficient Detail
in The Use of Funds Section
You cannot have a vague plan of what you will do with the money
once you have raised it. Investors are assessing the management’s
skill set and in particular the ability to execute on a plan. All too
often entrepreneurs issue their Small
Scale Offer Document with scant details
Investors are in the Use of Funds Section. This is the
assessing the one opportunity to provide an executive
summary of where the investment funds
management’s
will be directed and, more importantly,
skill set and in what milestones will be achieved in the
particular the coming 12 to 18 months before another
ability to execute financing round is required.
on a plan.
Note: Once the first round for investment is
complete this is not the end of the capital-raising
journey. More likely than not you will be raising
another three, if not four to five further rounds, of capital to successfully provide a
liquidity event (returning invested cash plus profit) for your investors.
© Copyright Morgan Cradock, 2009

7. morgan cradock
Top 11 Small Scale
Offer Document Mistakes
Mistake #7:
Selling Securities to
Unsophisticated Investors
Within the Corporations Act, Section 708(5) proscribes very
specifically regarding the various types of offerings that do not need
disclosure to investors, “excluded offers”. One of the most important
categories of investors where a Small
Scale Offer Document is not needed is the
Limiting your sophisticated investor category.
offering to only
sophisticated What is a “Sophisticated” Investor?
investors is When marketing to individual private
beneficial both equity investors (e.g. “angel” investors),
from a fundraising the following three definitions of
and legal liability sophisticated investor apply:
perspective. 1. Has net assets of a least $2.5 million; or
2. Has a gross income for each of the last
2 financial years of at least $250,000;
or
3. The amount invested is at least $500,000.
By restricting your private offering to sophisticated investors, you help
ensure that you retain your excluded offer status.
Limiting your offering to only sophisticated investors is beneficial
both from a fundraising and legal liability perspective. Sophisticated
investors are capable of investing larger sums, they tend to be more
familiar with the risk and illiquidity associated with private equity
investments, and they are in a better financial position to withstand a
potential loss of investment.
© Copyright Morgan Cradock, 2009

8. morgan cradock
Top 11 Small Scale
Offer Document Mistakes
Mistake #6:
Publicly Advertising a Private Offering
to Potential Investors
Your success in offering an investment opportunity to third party
investors – in terms of fundraising as well as legal liability – is not
only affected by how you create the Small Scale Offer Document, but
also by how you market your opportunity.
You cannot Under The Corporations Act Section
advertise your 708(2), Personal Offers (or Small Scale
Offers in more commonly used business
offering in the language) must only:
newspaper, TV, or
radio or you risk • Be made to a person who is likely
a jail sentence of to be interested in the offer
up to 5 years.
This means that you cannot advertise
your offering in the newspaper, TV, or
radio or you risk a jail sentence of up to 5 years. Instead of generally
advertising an investment opportunity, issuers are required to limit the
marketing of their opportunity to people with whom they have a pre-
existing business or personal relationship.
If an issuer does not have a pre-existing network of prospective
investors, the company can demonstrate such a relationship through
a “matching service” that is acting on behalf of the issuer.
© Copyright Morgan Cradock, 2009

9. morgan cradock
Top 11 Small Scale
Offer Document Mistakes
Mistake #5:
Using Unregistered
“Matching Services” to
Market Your Offering
In order to broaden their network of potential investors, issuers will
often use “business brokers”, “finders” or “intermediaries” to help
promote their offering.
It is unlawful for an individual and/or firm to conduct a business as a
Business Introduction Service Operator without registering with the
Australian Securities & Investments Commission (ASIC).
More importantly, the company who hires a Business Introduction
Service Operator that has not notified ASIC of its compliance with
the relevant rules and Class Order [CO 02/273], puts the whole
capital raising in jeopardy, with significant risk of recession of the
transaction.
© Copyright Morgan Cradock, 2009

10. morgan cradock
Top 11 Small Scale
Offer Document Mistakes
Mistake #4:
Not Having a Solid
Board of Directors in Place
Investors are investing in the management team’s ability to execute
on a strategic framework against which decisions are made that
influence the direction and nature of the business. Our experience
of the single most important factor of why some companies fail to
raise equity capital while others are highly successful and have their
opportunities completed within months, is the Board composition.
The Board of Directors provides the necessary guidance, counsel
and accountability for the management team staying within the
parameters of the strategic framework. Getting this governance and
skill set in place before marketing the opportunity will dramatically
increase the success of attracting all the necessary private equity.
© Copyright Morgan Cradock, 2009

11. morgan cradock
Top 11 Small Scale
Offer Document Mistakes
Mistake #3:
Assuming Only Attorneys Can Prepare
Small Scale Offer Documents
While there is much to be said for the higher-end securities law
understanding and perspective when preparing a Small Scale Offer
Document, it is wrong (and extremely costly) to assume that only
securities lawyers can prepare Small
Scale Offer Documents.
The core aspects
As advised above, the core aspects of
of the Small the Small Scale Offer Document are as
Scale Offer much business and marketing challenges,
Document are as as they are legal ones. And it is the rare
much business attorney with fluency in both. And for
and marketing the resource-constrained entrepreneur,
those types of attorneys are extremely
challenges, as
expensive – with hourly billing rates in
they are legal excess of $400/hour. It is not unusual for
ones. And it is the a high-end securities law firm to charge
rare attorney with $60,000+ for a full Small Scale Offer
fluency in both. Document package. There are very good
options out there at significant fractions of
this price.
We’re not suggesting one of these options be the CEO writing the
Small Scale Offer Document themselves; far from it. Aside from the
poor use of expensive CEO time, they often don’t know what they
don’t know when it comes to sufficient risk disclosures.
© Copyright Morgan Cradock, 2009

12. morgan cradock
Top 11 Small Scale
Offer Document Mistakes
Mistake #2:
Thinking That the Small Scale
Offer Document is “Just a Template”
While some aspects of the Small Scale Offer Document are
standard, its core, and material aspects – the proposed capital
structure and terms of investment, the business plan and financial
projections, and the risk disclosures – are completely customised
and unique to each offering. It is a true art with a blend of skill sets
and experience necessary to fully assemble the Small Scale Offer
Document that conveys an attractive investment opportunity.
Mistake #1:
Assuming That a Small Scale Offer Document
is “Locked” and Not to Be Edited
Probably the #1 mistake we see in Small Scale Offer Documents for
operating companies is their lack of updating. Especially in tightened
credit markets, where fund-raising time lines are elongated, it is not
unusual for an investment offering to take 6 months (or sometimes
much longer) to complete. The business updates that occur during
this offering time need to be disclosed to both the existing and
prospective subscribers to the offering via circulating amendments to
the original document.
© Copyright Morgan Cradock, 2009

13. morgan cradock
Top 11
Small Scale Offer
Document Mistakes
+61 (0)2 4946 8765 www.morgancradock.com PO Box 3177 Valentine NSW 2280 AUSTRALIA