Improving Employee Share Schemes – Time For a Rethink

by Employee Share Ownership on November 10, 2016

The Treasury recently released two consultation on improving employee share schemes that resulted from the commitment that was made in the Innovation Agenda announcement.

Below are the 2 links to the consultation:

  1. One is due on 7 December 2016, click here.
  2. One was due on 2 November 2016, click here.

Below are details of our submission and our thinking in this area.  We hope that it helps start-ups and unlisted companies in making submissions on this area.

Key Issue for Start-ups and Unlisted Companies

The current barrier to the implementation of ESS has been the disclosure regime for unlisted companies and start-ups.

The current ASIC Class order has a cap for unlisted companies of $5,000 which means that most unlisted that want to issue shares under a plan need to file a Offer Information Statement (OIS) if they can not fall within the exemptions in section 708.  Most companies can only use this exemption and those in s708 whilst they are in the first years of growth.  Once they have value or a certain number of employees the exemptions and Class Order relief are no longer relevant.  The $5,000 is not sufficiently high for the purposes of start-ups because the ESS is primarily used to attract and retain talent and the cap is just too small to be effective once the company’s shares have value.

The current disclosure document that would be used – the OIS – has a number of limitations:

  1. Cost – most companies in the start-up or SME phase do not have to have audited accounts that are required for the OIS or the cost of drafting and creating the OIS is too high for companies where cashflow is a significant issue. An OIS would commonly cost $15,000 or more to create and a specific audit would be a similar amount.
  2. Disclosure of sensitive information – this is mentioned in the exposure draft and is a key barrier to companies using the OIS regime. Part of the attraction of the unlisted regime is the non-disclosure of competitive information.

Key Principles that Should Apply

  • Simplicity – the regime that applies should apply to all unlisted companies so that companies are able to keep track of and abide by the regulatory requirements. The potential complexities of the current draft are that companies need to consider if they fall within the start-up regime, when that ends and when the current drafted legislative release can apply.  It would be simpler if the key issue around the disclosure provision is addressed;
  • Informing employees adequately – employees need to be adequately informed to make a decision to accept the offer and this information is not readily available for unlisted companies. The current offer document under the ASIC Class Order for listed companies covers all of the necessary requirements apart from the provision of financials.  The Class Order relief already has in built in it non-disclosure of sensitive information.  The Class Order could be updated so that the Offer Document is the same as for listed entities with the requirement that unlisted companies also include the financials for the company and there is an annual update of share price and financial information.  Providing employees with information at the time of the offer does not inform employees about the ongoing financial viability of the company and does not protect the employee as well as potentially it could.  Ongoing information to employees would also improve the effectiveness of the ESS.
  • Cost – the current draft proposal does not address one of the key barriers which is cost. An OIS would still be needed and this would still incur significant cost.


EOA would respectfully recommend that the current cap in s708(1) be increased to 50 investors in 12 months up to a $4 million cap. This would assist companies with employee share schemes (most SMEs have less than 50 employees and would also address the issues with capital raising through crowd sourced equity). Alternatively, the ASIC Class Order relief for unlisted is updated to have an unlimited cap (i.e. the $5,000 is removed). The Offer Document would be similar to the listed company relief with the additional requirement to include financials in the Offer Document and provide an annual update to employees. The final alternative which requires no amendment to legislation is to clarify the application of the current s708(15). The current exemption relates to offers for no consideration and could apply to free shares given to employees where equity is used as a top up because cashflow is insufficient to meet a market competitive salary.  The current interpretation of this exemption is that consideration is given through the employee’s work.

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