“Seed Capital” needed in most innovative projects

Undertaking an innovative project invariably costs more money than what the inventor originally envisaged. This is when the inventor will need assistance, normally from an accountant to raise capital from the public. A private company can raise capital utilising Section 708 of the Corporations Act. This process is referred to as seed capital.

This section enables a private company to raise capital from a maximum of 20 investors in a 12-month period, with the total amount of capital raised not exceeding $2million.

There are restrictions on how this capital can be raised. The capital raising must be undertaken by “personal offers” of shares in the company, which can only be accepted by the person to whom the offer was made.

The person to whom the offer is made is likely to be interested in the offer having regard to either of the following:

• Previous contact between the person making the offer and that person.

• Some professional or other connection between the person making the offer and that person.

• Statements or actions by that person that indicate that they are interested in offers of that kind.

These restrictions mean that the offers can only be made to people such as family, friends, employees, customers, suppliers and other people who have a direct awareness of the activities that have been undertaken by the company.

The legislation does not specify what documentation needs to be supplied to these potential investors. However, good corporate practice requires that the potential investor is supplied with at least a business plan, corporate chart, predictive accounting reports comprising budgets, cash flow forecasts and projected balance sheets.

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