Reference no: EM133214934

AR Ltd (ARL) is a company involved in the resources industry in Western Australia, particularly gas exploration. The company's board consists of Merrick (Chair), Jeremy (CEO and MD), and 3 non-executive directors: Jane, Susan and Will. Jane is an independently wealthy businesswoman who has investments in many mining companies, including 10% of the shares in ARL. Jeremy and Merrick both own 25% of the shares each. The company's remaining shareholders are a mix of employees and independent shareholders. ARL's main asset consists of rights to explore and exploit potential gas reserves in the northwest of Western Australia. However, the company needs further finance in order to proceed to Stage 2 of its exploration plan. Jeremy has been unsuccessful in seeking bank finance to fund the expansion of the company's activities and is looking to bring in further investors.

Jeremy proposes that the company raise $10 million to help fund expansion activities. This will be structured by issuing Equity Option Certificates (EOC) that give the holder the right to acquire 1,000 shares for every certificate held, at the option of the holder at any time within the next 3 years. The certificates are particularly attractive to investors because prior to the termination date (in 3 years' time), they pay interest of 10% on the face value of the certificate (the face value is $10,000). If the conversion option is not exercised by the certificate holder within 3 years, then the certificate will be redeemed (i.e. repaid) by ARL at face value. The board of ARL approves of Jeremy's plan and Jeremy works on an advertising campaign to promote the fundraising round. Jeremy believes that the company's senior executives will likely participate in the fundraising (perhaps buying up to $3 million in EOCs).

Jeremy has also entered into an arrangement with a local Perth accountant (Steve), who holds an Australian Financial Services License and can give investment advice. Steve will promote the investments to his clients. Steve has been experimenting with digital advice by getting investors to input basic information into his 'intelligent advice software' online platform and then an investment recommendation is issued. This form of advice is much cheaper for Steve to operate, because he doesn't have to ask a lot of questions from the investors and doesn't need to personally interact with the investors, so he can reach more potential clients. Steve believes many of his clients earn well over $500,000 per year and live in expensive homes on the Swan River in Perth worth over $3 million, so they don't need detailed individual investment advice. Steve tells Jeremy that with interest rates at record lows, the EOCs will be very attractive and he undertakes to sell at least $5 million to his clients. The EOCs will be issued by ARL to Steve's clients.

While Steve's commitment to selling at least $5 million of EOCs is helpful, ARL is still $2 million short of its funding target. Jeremy decides to start promoting the offer on online investment discussion boards and in local mining magazines. Jeremy receives considerable interest from these promotional activities, and he sends out 50 information booklets with the information memorandum and then enters into an agreement with 20 investors to buy up the remaining $2 million worth of EOCs.

Jeremy receives the money from the investors and then spends it on buying a corporate jet for ARL. This will save him lots of time when travelling from his office in Perth to the company's mine site. This was not disclosed in the information memorandum provided to investors, which stated that 'all funds raised from the fundraising would be used to expand the company's mining activities'. The information memorandum also stated that the company's exploration site 'showed excellent prospects for success and was on track to be ready for Stage 3 exploration within 12 months'. This was rather optimistic, because Stage 3 would only be undertaken if the Stage 2 exploration was successful, of which there was no guarantee. Jeremy's plans for the company was to rapidly expand the exploration and then sell the company to a large established mining company like Woodside or BHP. If the company was able to sell some or all of its assets to a large miner, then this would generate enough money to pay off the EOCs that were held to maturity, but this was a very risky proposition. Jeremy was confident about this prospect as he had had several discussions with senior mining executives from BHP and Woodside who had expressed passing interest in potentially buying a stake in ARL in the future if the Stage 2 was successful. 12 months later, the COVID-19 pandemic hits and this halts exploration at the mine. Stage 3 exploration is delayed indefinitely. Investors have been complaining about ARL's ability to repay the EOCs.

This attracts ASIC's attention. You are a lawyer at ASIC. Advise your manager of what potential legal issues arise under the Corporations Act 2001 (Cth).