New laws reduce red tape for operation of Employee Share Schemes

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A focus on Australian startups: ESS eligibility requirements for unlisted entities - what’s changed?

Equity can be a powerful tool in attracting, remunerating, incentivising and retaining top talent – this is especially the case for startups. In Australia, one of the ways to do this is by establishing an employee share scheme (ESS) which allows companies to offer key employees or service providers equity in the Company.

The current Australian regime that regulates the operation of ESS interests under the Corporations Act 2001 (Cth) (the Act) has traditionally been limited in flexibility and application. This has made it challenging for companies to unlock the full potential an ESS can provide. On 1 October 2022, changes to the Act in relation to ESS will come into effect to tackle this problem! With the aim to encourage growth amid young companies, these changes include (we’ll call these the New ESS Laws):

• expanding the types of offers under an ESS which qualify for relief from a range of regulatory requirements; and
• broadening regulatory relief for offers under an ESS that do not require payment to participate.

Modifications to existing disclosure requirements

While entities that operate an eligible ESS are exempt from the same disclosure requirements which apply generally to financial services providers, a different set of streamlined disclosure requirements are still needed to ensure participants are making informed decisions.

For unlisted entities, the new reforms will ensure that businesses are properly informing participants about the risks of acquiring any ESS interest – especially because the underlying value of ESS interests in private entities are difficult to ascertain.

The new reforms also provide further relief by removing any disclosure requirements for an eligible ESS that does not require payment to participate.

The takeaway from above is that at least 14 days before the option becomes exercisable or the incentive right vests, unless one of the existing exemptions can be applied to an offer, the company must provide each participant with the following documents:

• information to support a valuation of the ESS interest;
• Company financial statements; and
• a solvency statement.

Companies are also required to provide the above information within 30 days after a request for the information has been made by a participant before the options expire.

But what are the existing exemptions?

The exemptions under Chapter 6D of the Act will continue to apply (for now). This means that unless an exemption applies, offers of securities must be made under a disclosure document.

These exemptions include making offers under one of the following rules:

• small scale offerings (that is offers made to 20 individuals in 12 month period);
• to sophisticated and professional investors;
• to senior managers and other people associated with them (e.g. their spouse and close relatives), or a body corporate controlled by them;
• to wholesale investors.

So what does this mean for you?

The New ESS Laws are a welcome change, and are expected to provide greater flexibility for startups to offer equity packages to employees and staff. The improved and ‘streamlined’ legal requirements will give start-ups that extra push in finding talented individuals who will help their companies take off and thrive!

Now is the time to get in touch with your advisors to see what these new ESS laws mean for you.