Key Legal Risks in Secondary Capital Raisings (And How to Mitigate Them)

Secondary capital raisings, the placements, rights issues and convertible note offerings that listed companies undertake after their IPO, are a routine part of corporate life. They are also a source of significant legal risk. The pressure of timing, disclosure obligations and shareholder fairness can compound quickly. Here are the risks we see most often, and how to mitigate them.

Risk 1: Continuous disclosure breaches

A capital raise is often triggered by a material change in the company's circumstances. That change is itself disclosable. Announcing the raise without first cleansing the market on the underlying information is a continuous disclosure breach.

Mitigation: Map the full disclosure picture before announcement. Where in doubt, include a cleansing notice. Coordinate the timing of price-sensitive announcements with the raise.

Risk 2: Listing Rule capacity issues

Listing Rule 7.1 limits the amount of equity a company can issue without shareholder approval to 15% of issued capital in any 12-month period. Listing Rule 7.1A provides an additional 10% capacity for eligible smaller companies, but only with prior shareholder approval and only for cash consideration.

A raise that exceeds capacity, or relies on capacity that does not exist, must be restructured or approved by shareholders.

Mitigation: Run a Listing Rule capacity calculation before announcing the raise. Where capacity is tight, consider a rights issue (which is exempt from capacity limits) or seek shareholder approval.

Risk 3: Section 708 misuse

For a placement to retail investors to avoid a disclosure document, every investor must qualify under section 708. Sophisticated investor certificates must be properly issued. Personal offers must comply with the 20-investor / $2 million / 12-month rule.

Mistakes here are unforgiving. A non-compliant placement can trigger investor rescission rights and ASIC action.

Mitigation: Use a disciplined investor onboarding process, with proper certificates and clear records. Where investors do not qualify, exclude them or use a different structure.

Risk 4: Shareholder fairness

Even where a raise is technically compliant, it can be open to challenge if the structure unfairly disadvantages certain shareholders. Placements at deep discounts to favoured investors, with no equivalent retail offer, are a classic example.

ASX, ASIC and shareholder activists are increasingly attentive to fairness issues, particularly during periods of market stress.

Mitigation: Pair a placement with a Share Purchase Plan (SPP) or rights issue to give retail shareholders a similar opportunity. Document the fairness considerations in board minutes.

Risk 5: Forward-looking statements

Capital raise documents and presentations often include forward-looking statements about earnings, project milestones or strategic plans. These statements must have a reasonable basis. Where they do not, they can give rise to misleading or deceptive conduct claims.

Mitigation: Subject all forward-looking statements to a "reasonable basis" review. Document the assumptions and inputs. Consider whether a verification record is required.

Risk 6: Selective disclosure during the marketing process

The pre-bid marketing process for a placement can involve sharing information with prospective investors. Where that information is price-sensitive and not yet disclosed publicly, it creates a selective disclosure problem.

Mitigation: Use a well-managed pilot fishing or wall-crossing process. Ensure all marketing material has been cleared for selective disclosure. Track who has been told what, and when.

Risk 7: Underwriting and broker arrangements

Underwriting agreements contain conditions, termination rights and "out clauses" that can be triggered by market events. Broker arrangements include fees, options and rights that can have continuing dilutive effects.

Mitigation: Review underwriting agreements carefully. Understand the trigger events. Ensure broker fees and options are properly authorised under Listing Rule 7.1 or are otherwise compliant.

Risk 8: Post-raise compliance

After the raise, the company must complete cleansing notices, lodge ASX appendices, update its register, and meet ongoing disclosure obligations. Errors at this stage can disqualify the use of disclosure exemptions retrospectively.

Mitigation: Run a post-raise compliance checklist. Allocate ownership of each lodgement and notice. Confirm completion before standing down.

How Luma Legal can help

We advise listed companies, boards, brokers and investors on capital raising transactions from start to finish. We focus on getting the structure right, managing the regulatory risk, and protecting your position throughout.