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New law makes raising building capital harder

PROPERTY developers face tougher times finding high net worth investors for projects without offering a prospectus following changes to the Corporations Law’s so called Gold Card exemptions.

The Gold Card exemption is a colloquialism for laws that allow developers to market to mem-bers of the privileged club with $500,000 or more to invest without lodging a prospectus.

Many property developers used the exemption when put-ting together syndicates, avoid-ing the costly classification of a managed investment scheme which requires registration under the Corporations Law.

In the past, the majority of the syndicates have allowed invest-ors to pay the $500,000 by instalments. These instalments usually matched the construct-ion payments under the relevant building contract.

But these strategies must now be reconsidered with the Corporate Law Economic Re-form Program tightening the Corporations Law. Under the changes, investors must now pay the full $500,000 up-front on acceptance of an interest in the project which cannot be paid in instalments, otherwise developers must register a prospectus.

Phillips Fox partner Peter Beekink said the assumption was made by the Australian Investment and Securities Commission that those who could afford to pay at least $500,000 up front would have the capabilities to do their own research and would not need a prospectus. Those that fit under this threshold must be issued a prospectus.

ASIC national co-ordinator fundraising, mergers and acquisitions Richard Cockburn said the changes made it harder and more costly to raise money.

“It can quite easily cost you a million just to issue a prospectus,” he said.

At the higher end, syndicators will only be able to target those who have more money to invest.

“The assumption was that if you were cluey enough to have $500,000 you would be cluey enough to invest it,” Mr Cockburn said.

“The theory is that at that level of the market the players have reasonably equal bargain-ing power. The trouble is that investor protection imposes costs. Someone has to pay for the protection that investors get.”

Gold cardholders could be your AMP, the institutional investor or the private individual.

Mr Cockburn said the commission was lightening up on regulations involving both the higher and lower end of the capital-raising spectrum.

“There are small private fund raising which if they fail won’t have any major detrimental effect. At the lower end, for raising of less than $5million, there’s an offer and information statement. Then you’ve got the normal prospectus middle bit. And above that you’ve got the higher end.

“The commission is operating in that middle section. You’ve got the bits below where the cost benefits are wrong because while the people need protection the cost of providing it for small investors for relatively low dollar transactions are.

“What CLERP did, if I can use the analogy, is raise the skirt a little bit so that there are a few more exemptions at the bottom and pulled the top down a little bit so that there are a few more exemptions at the top.

“So we are a bit like a young lady in summer time – a bit more exposed than we were.”

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