If you haven’t updated your employee share plan yet, now is the time to act. On 1st October 2022, significant amendments to the Corporations Act came into effect, altering the regulations governing employee share schemes (ESS) in Australia. These changes were designed to make it easier for startups and other businesses to attract and retain top talent by reducing the red tape and streamlining the regulatory requirements relating to the disclosure, licensing, advertising, anti-hawking, and on-sale requirements of shares, options and incentive rights offered under employee share plans. In this insight, we’ll explore some of the key features of the new ESS regime and explain why updating your share plan is crucial for your company’s success.
Simplifying Compliance
The updated ESS regime cuts through many of the complexities that previously surrounded the issuance of financial products and services, providing relief for companies using employee share plans. While the simplified compliance regime applies to companies of all sizes, it is especially useful for startups and smaller businesses. By complying with the new provisions, startups and scale-ups can offer a range of securities including options, shares and incentive rights to a greater pool of participants than previously possible without needing to issue a prospectus or hold an Australian financial services license.
Expanded Eligibility
Under the new regime, the scope of eligible participants has expanded significantly. Offers can now be made to current or prospective directors, employees, or service providers, regardless of their employment status (part-time, full-time, or casual). Additionally, offers can extend to certain family members and controlled body corporates of primary participants. This widened pool of eligible participants opens up new opportunities for companies to engage and motivate their teams.
Streamlined Disclosure
While the new ESS regime has streamlined disclosure requirements, those requirements are less burdensome than the traditional disclosure obligations under the Corporations Act. The new ESS disclosure obligations are also less onerous, particularly for unlisted bodies than under previous relief provisions which applied under Class Orders (CO14/1000 and CO 14/1002) (see further below on this point). With its simplified compliance obligations, reliance on the new regime is an attractive option for companies looking to incentivise and reward their employees, directors, and other eligible participants.
Enhanced Flexibility
The new ESS regime embraces flexibility by differentiating between offers for ESS securities requiring monetary payment and those not. The new regime also works alongside existing disclosure exemptions under the Corporations Act including the small-scale offering, senior manager, and sophisticated investor exemptions. This means companies now have various alternative pathways to choose from to avoid the burdensome traditional disclosure obligations under the Corporations Act. This in turn means businesses can tailor their ESS offerings on a participant-by-participant basis according to their unique needs.
The risks of getting it wrong
Before the introduction of the new ESS regime, class orders [CO 14/1000] Employee incentive schemes: Listed bodies and ASIC Class Order [CO 14/1001] Employee incentive schemes: Unlisted bodies (Class Orders) provided regulatory relief from certain obligations under the Corporations Act. However, those Class Orders now only apply to ESS offers made on or before 1 March 2023 and accepted before 1 April 2024.
Consequently, companies should revamp their employee share plans to ensure they are eligible for relief under the new ESS regime. Getting it wrong can have serious consequences: companies can be found to have fallen foul of their disclosure obligations under the Corporations Act, relief under the ESS regime can be revoked and directors may be held personally liable. Due to the way the new ESS regime intersects with existing exemptions under the Corporations Act, those risks may not always be avoided simply by relying on the small-scale offering, senior manager, and sophisticated investor exemptions.
The new ESS regime presents a golden opportunity for companies to revitalise their employee share plans and gain a competitive edge in attracting and retaining top talent. However, to be eligible to rely on the new regime and to mitigate the risks of getting it wrong, companies need to refresh their employee share plans. Contact us to learn how to embrace these changes and propel your business to new heights.
