Venture capital investment in Australia: market and regulatory overview

Market overview

1. What are the main characteristics of the venture capital market in your jurisdiction?

Venture capital (VC) and private equity (PE)

Australia does not formally distinguish between VC and PE (and, in particular, there is no difference in the way they are regulated from a financial services point of view), but some key distinguishing features are:

VC funds invest at earlier stages of a company’s life cycle, when investment is riskier (but with the potential for higher returns).

VC funds tend to take minority stakes, while PE funds are more likely to take majority stakes.

The investors in VC funds are more likely to be high net worth individuals or Australian superannuation funds, and only occasionally offshore institutional investors, while investors in PE funds are more likely to include offshore institutional investors.

As a result of the above, PE funds tend to have more complex structures than VC funds.

Market trends

The level of VC fundraising has steadily increased over recent years. According to the 2019 Yearbook for the Australian Investment Council (the industry body that represents all private capital including VC and PE) (2019 Yearbook), VC funds raised AUD1.3 billion in 2018, which was the highest amount on record and the first year where aggregate capital raised exceeded AUD1 billion.

Most VC investment in Australia (including through angel networks) still occurs at the seed and Series A stages. According to the 2019 Yearbook, these accounted for about 74% by deal volume and about 36% by deal value. Series B rounds accounted for 28% of deals by value in 2018, which may be part of a long-term trend as many VC funds have recently raised capital targeting later stage investments.

A big trend in the past two years has been the rise of venture debt funds, with a number of venture debt funds having been raised focusing on the Australian market in the past couple of years, as well as the entry into the market of US providers of debt to venture backed businesses.

The bulk of investment has been in the internet, software, other IT, telecoms and healthcare sectors. However, according to the 2019 Yearbook, internet investments are starting to shrink in favour of software and other IT investments.

The vast majority of VC investment is into Australian entities. This is largely driven by restrictions on the types of investments that the dominant vehicle for Australian VC funds, the “early stage venture capital limited partnership” (ESVCLP), can make (see below, Types of company).

Sources of funding

VC funding comes from a mix of domestic high net worth investors and family offices, Australian superannuation funds and some overseas institutional investors.

Types of company

The most commonly used vehicle for VC funds in Australia is the ESVCLP. The ESVCLP has a number of legal restrictions on the kinds of investments that it can make. Among other things:

Investments must be in shares or units, options or convertible notes that qualify as equity for tax purposes.

Investments must have an Australian nexus (subject to certain exceptions).

Investee companies generally must not engage in ineligible activities (such as property development, banking, and insurance).

Investee companies must not have total assets in excess of AUD50 million.

In addition, ESVCLPs must adopt an investment plan, which must be approved by an Australian government agency called Innovation and Science Australia, which must take into account the extent to which the fund will focus on early stage VC. While Innovation and Science Australia has not clearly defined what constitutes “early stage VC”, they have regard to the (among other things):

Stages of development of the entities in which the partnership proposes to invest.

Levels of cash flow of those entities.

Levels of technology of those entities.

Proportions of intellectual property (IP) to total assets of those entities.

Levels of risk and return of those entities.

Amount of tangible assets and collateral of those entities against which borrowings can be secured.

An investment plan must also outline a number of other matters, including the industry sectors that the fund will focus on, the skills and experience of the investment team, the fund’s portfolio construction, and so on. The ESVCLP must comply with its investment plan.

Together, these requirements have driven the sorts of investments that VC funds established as ESVCLPs can make.

In addition, the government has implemented a series of VC programmes (the Innovation Investment Fund Programme, the Renewable Energy Venture Capital Programme and the Biomedical Translation Fund Programme) under which it has provided matching capital, up to a cap, to specially licenced fund managers. These programmes have requirements that are similar to the ESVCLP investment requirements.

Standardised investment terms

The Australian Investment Council has published a set of open source seed financing documents, which take a balanced approach on most issues and which certain VC funds have committed to use. Other VC funds have adopted their own precedents, as have a number of law firms. Further, the later the stage of investment, the less appropriate standard investment documents are, as shareholders’ agreements become more bespoke.

Tax incentive schemes

2. What tax incentive or other schemes exist to encourage investment in portfolio companies? At whom are the schemes directed? What conditions must be met?


The ESVCLP was introduced in 2006 to increase investment into Australian VC. An ESVCLP is a specially registered limited partnership. Where an ESVCLP is used as the fund vehicle, subject to certain exceptions, both Australian investors and foreign investors may be entitled to tax-free returns from the ESVCLP. Key tax features of the ESVCLP regime for investors include:

A non-refundable offset of up to 10% of a limited partner’s contributions made on or after 1 July 2016 to an ESVCLP that was unconditionally registered on or after 7 December 2015.

A limited partner’s share of any gain or profit from the disposal or realisation of an “eligible venture capital investment” (EVCI) by the ESVCLP is exempt from Australian income tax, if the partnership owned the investment for at least 12 months (subject to certain exceptions).

A limited partner’s share of income derived from an EVCI (for example, dividends paid by an investee) held by the partnership is exempt from Australian income tax.

Unfranked dividends or interest derived by the ESVCLP and paid to a non-resident investor are subject to withholding tax. The rate is generally 30% in the case of an unfranked dividend or 10% in the case of interest (subject to the operation of any applicable double tax treaty). Unlike income, which flows through the ESVCLP, losses do not, so investors cannot generally deduct losses made by an ESVCLP.

There are a number of criteria that an ESVCLP must meet to be registered (see Question 4).

Early stage innovation company (ESIC)

An investor that purchases new shares in a company that qualifies as an ESIC immediately after the shares are issued may be eligible for the following tax incentives:

A non-refundable carry forward tax offset equal to 20% of the amount paid for their eligible investments (ESIC Tax Offset). This is capped at a maximum tax offset amount of AUD200,000 for the investors and its affiliates combined in each income year (which includes any ESIC Tax Offsets that were carried forward from previous income years).

Deemed capital account treatment for shares that give rise to an entitlement to an ESIC Tax Offset.

A modified capital gains tax (CGT) treatment, under which capital gains on qualifying shares that are continuously held for at least 12 months and disposed of before the tenth anniversary of the issue of the shares may be disregarded. Capital losses on qualifying shares held for less than ten years must be disregarded.

These tax incentives are not available if the:

Investor did not purchase the shares in the ESIC directly from the ESIC as newly issued shares.

Shares are not equity interests in the ESIC.

Investor is an ESVCLP.

Investor is a widely held company or a wholly-owned subsidiary of a widely held company.

Investor’s total investment in one or more ESICs for the income year is more than AUD50,000 and the investor was not a “sophisticated investor” in relation to at least one of those offerings (that is, a disclosure document was required for at least one of the offerings).

Investor or the ESIC are affiliates of each other at the time the shares are issued. An individual or company is an affiliate of another entity where, in relation to their business affairs, the individual or company acts, or could reasonably be expected to act, in accordance with that entity’s directions or wishes, or in concert with the entity.

Investor holds equity interests in the ESIC, including any entities “connected with” (see below) the ESIC, immediately after the investor is issued with the new shares that carry the right to:

receive more than 30% of any distribution of income or capital by the company or the entities; or

exercise, or control the exercise of, more than 30% of the total voting power in the company or the entities.

An entity is connected with the ESIC if the entity controls, is controlled by, or is under common control with the ESIC.

Investor acquired the shares under an employee share scheme.

Special rules apply to trusts or partnerships.

Funding sources

3. How do venture capital funds typically obtain their funding?

In the years after the global financial crisis in 2007 to 2008, the bulk of VC funding came from domestic high net worth investors and family offices. However, there has been a shift to a broader mix of domestic high net worth investors and family offices, Australian superannuation funds and some overseas institutional investors.

As these kinds of investors are all considered to be “wholesale clients” for purposes of the Corporations Act 2001 (Cth), there are no formal disclosure requirements for fundraising other than a requirement that the fund sponsor not engage in misleading or deceptive conduct. (Wholesale clients are, generally, institutional investors, professional investors or persons who can provide an accountant’s certificate showing that they have AUD2.5 million in net assets or a gross annual salary for the previous two years of AUD250,000, or persons investing AUD500,000 or more.)

Fund structuring

4. What legal structure(s) are most commonly used as vehicles for venture capital funds?

Historically, Australian VC funds were established in the form of a unitised trust. This vehicle is not commonly used in overseas jurisdictions and contains concepts unfamiliar to many investors. Over the past 20 years, other vehicles have been introduced with different associated tax incentives, including the “venture capital limited partnership” (VCLP), the ESVCLP, the “managed investment trust” (MIT) and the “attribution managed investment trust” (AMIT) (MITs and AMITs are forms of unit trusts).


While the VCLP (introduced in 2002) has many characteristics in common with ESVCLPs, its tax benefits mainly flow to foreign investors. Until recently, foreign capital was not particularly attracted to Australian VC, so it has not been common to establish VC funds as VCLPs (in contrast, it is very common for Australian PE funds to include a VCLP in their structure).


The ESVCLP regime was introduced in 2006 with the aim of increasing investment into early stage companies in Australia (see Question 2), and this has become the preferred vehicle for many Australian VC funds. There are a number of criteria that must be met for a limited partnership to be registered as an ESVCLP, including:

The partnership and its general partner are established in Australia or in certain other qualifying countries.

The partnership must remain in existence for at least five years and no more than 15 years.

The partnership’s committed capital must be at least AUD10 million and must not exceed AUD200 million.

No person and its associates can account for more than 30% of the partnership’s committed capital (subject to exceptions).

Each investment that the partnership holds must be an EVCI (subject to limited exceptions for “permitted loans”) and must be in accordance with the partnership’s approved investment plan (see Question 1, Types of company).


Where fund sponsors wish to make investments that would not constitute EVCIs (for example, overseas investments or later stage investments), it is most typical to use a MIT. The MIT regime addresses issues surrounding uncertainty about the tax treatment of gains made by unit trusts, in particular by making an election to deem certain gains made by the MIT to be on capital account.

To qualify as a MIT, a number of tests must be met, including:

The trustee must be an Australian resident for tax purposes.

The trust must not carry on, or control an entity carrying on, an active business.

For certain purposes, a substantial proportion of the investment management activities carried out in relation to the trust throughout the income year must be carried out in Australia in relation to certain assets.

The trust must be a “managed investment scheme” for the purposes of the Corporations Act 2001 (Cth) at the time the payment is made (subject to certain exceptions) (broadly, a managed investment scheme is one where multiple investors contribute money or money’s worth, which is pooled together for use in a common enterprise, and the investors do not have day-to-day control over the operation of the scheme).

The unitholding must be widely held and satisfy concentration of ownership requirements.

In certain cases, the trust must be operated or managed by a licensee holding an Australian financial services licence (AFSL) whose licence covers it providing financial services to wholesale clients (see Question 3).


The AMIT regime is an elect-in regime which, among other things, make the following available to eligible AMITs:

A new attribution method (rather than the existing trust tax rules) to attribute specific classes of income, offsets and credits to unitholders, based on their entitlements.

The ability to attribute any under- or over-distributions to unitholders during the income year the discrepancy is discovered.

Tax treatment as a fixed trust, assisting the flow through of franking credits and carried-forward tax losses.

The ability of unitholders in the AMIT to adjust their tax cost basis in their units so as to avoid double taxation.

To be eligible as an AMIT, all of the following requirements must be met:

A trust must be a MIT (see above, MIT).

The trust deed must clearly define the entitlements of all unitholders to the trust’s income and capital.

The trustee must treat all members of the same class equally and members of the different classes fairly.

5. Do venture capital funds typically invest with other funds?

Investment with other funds is done on a case-by-case basis, particularly in later rounds of investment where the total check size exceeds any one fund’s capacity from a prudential/portfolio construction standpoint.

Investment objectives

6. What are the most common investment objectives of venture capital funds?

VC funds seek to provide returns that are commensurate with the risk of investing in early stage companies. They seek to provide downside protection through typical protective mechanisms such as veto rights, redemption rights, liquidation preferences and anti-dilution protection, with a couple of important exceptions:

For VC funds established as ESVCLPs, it is not common to include redemption features, as these may cause the investments to be treated as debt for tax purposes, which is not permitted (except in very limited circumstances).

For VC funds established as MITs, a MIT is unable to control a trading business. This includes positive control and, arguably, negative control. This can affect the veto rights that a VC fund would ordinarily receive to mitigate its risk.

Funds that are structured as ESVCLPs cannot remain in existence for more than 15 years. Unit trusts have no such limits and can effectively hold investments indefinitely. However, it is most common for VC funds to have a five to six year investment period (during which the fund can make new investments) and a total life of ten years with the opportunity to extend for up to three years, as this is what investors typically require.

VC funds that are focused on the biomedical space may have longer time horizons, commensurate with the longer time frames required to commercialise the relevant products.

7. Can the structure of the venture capital fund affect how investments are made?

The structure of a VC fund does not generally affect how investments are made, but it can affect what investments are made and what features those investments have.

Fund regulation and licensing

8. Do a private equity fund’s promoter, principals and manager require authorisation or other licences?

A VC fund sponsor that carries on a financial services business in Australia generally must hold an Australian Financial Services Licence (AFSL), which sets out the authorised activities that the manager can undertake (such as providing advice, issuing interests in the scheme, dealing in the underlying investments and custody).

This requirement can be satisfied either by the fund sponsor holding an AFSL, or by the fund sponsor becoming an authorised representative under another person’s AFSL. The specific entities within the fund sponsor’s group that must be licenced differ depending on the fund structure.

Foreign fund sponsors may be exempt from the need to hold an AFSL in certain circumstances, failing which they must be authorised under another person’s AFSL or apply for a new category of licence called a Foreign AFS Licence.

The Australian Securities and Investments Commission (ASIC) is the licensing authority.

9. Are venture capital funds regulated as investment companies or otherwise and, if so, what are the consequences? Are there any exemptions?

There are no special restrictions on marketing a VC fund, provided the fund sponsor has the appropriate licence (see Question 8) and markets exclusively to wholesale clients (see Question 3).

If any offers of interests in VC funds are made to Australian investors who are retail persons (that is, not wholesale), the fund sponsor must be comfortable that an exemption to the disclosure requirements applies (for example, among other exemptions, offers to no more than 20 people in any 12-month period for a raising of no more than AUD2 million are exempt). Otherwise, a prospectus or product disclosure statement must be issued and registered with ASIC.

If offers of interests in the VC fund are made to retail persons, the fund must also be registered and additional licensing (and financial) requirements apply to the fund sponsor.

10. How is the relationship between investor and fund governed? What protections do investors in the fund typically seek?

The primary sources of governance between the investor and the fund are the contractual agreements governing the fund. These usually consist of either a limited partnership deed or a trust deed, a subscription deed and, for institutional investors, potentially a side letter.

Typical investor protections include the ability of specific percentages of limited partners (typically 75% by capital commitments) to approve the following matters:

Removal of a fund manager for cause, and sometimes for no cause (subject to payment of a termination fee).

Approval of key changes like key personnel changes or changes of control.

Changes to the auditor, accounting standards or reporting guidelines.

Approval for the fund sponsor to raise a new fund before the end of the investment period or before a certain amount of capital has been deployed.

Extensions to the investment period.

Extensions to the term.

For unit trusts (including MITs and AMITs), there is an additional layer of statutory and non-statutory laws relating to trusts, which impose fiduciary duties on trustees (although, in practice, fiduciary-like duties are imposed on general partners under partnership agreements).

Interests in portfolio companies and securities regulation

11. What form of interest do venture capital funds take in an investee company? Are there any restrictions on direct investment in a company’s equity securities by foreign venture capital funds? What regulations govern the offer and sale of securities in venture capital transactions?

Forms of interest

VC funds typically invest into shares (either ordinary shares or preference shares) or convertible notes (including SAFE notes). ESVCLPs are prohibited from acquiring debt interests, other than a narrow category of “permitted loans”. This means that they can generally only invest in ordinary shares, preference shares that do not have a redemption feature, or convertible notes that are equity for tax and accounting purposes.

Restrictions on direct investment

Under Australia’s foreign investment laws, the Commonwealth Treasurer (Treasurer) has powers over certain transactions (including to block them or order divestments) where the Treasurer considers them to be contrary to the national interest. Transactions over which the Treasurer has this power are called “significant actions”. A subset of these, “notifiable actions”, must be notified and approval sought (failure to do so is an offence). Other transactions do not strictly have to be notified, but doing so and obtaining a notice of no objection cuts off the Treasurer’s powers.

One kind of notifiable action is the acquisition by a foreign person of an interest of 20% or more in an Australian entity (or, if the foreign person is deemed to be a foreign government investor, an interest of 10% or more, and sometimes less than 10%), valued above the current monetary thresholds. As a result of the 2019 novel coronavirus disease (COVID-19), all thresholds have temporarily been reduced to AUD0, so any foreign VC fund wishing to acquire the requisite percentage of an Australian entity requires foreign investment approval. (Many overseas PE and VC funds are deemed to be foreign government investors, by virtue of the passive investments by sovereign wealth funds, public pension funds, public universities and so on.)

A number of changes are expected, likely coming into effect on 1 January 2021, including:

The reintroduction of the normal monetary thresholds (AUD275 million in certain cases, with higher thresholds applicable for treaty countries) for private foreign investors.

The introduction of a new AUD0 threshold for “national security businesses”, a term which is still in the process of being defined but will potentially include a broad range of “critical infrastructure” across numerous industry sectors.

New call-in and last resort review powers, which would enable the Treasurer to re-examine transactions as new information comes to light.

Reimagining the definition of foreign government investor, to exclude many PE and VC funds that are currently deemed to be foreign government investors, provided they can demonstrate their investors that are classified as foreign government investors are truly passive according to guidance provided by the government.

Securities regulation

The Corporations Act 2001 (Cth) regulates the issue of securities by potential investee companies to VC funds. In general, a VC fund is considered to be a wholesale client, so there are no special restrictions on issuing securities to a VC fund and the only legal requirement on the potential investee is to ensure that they do not engage in misleading and deceptive conduct. No public filings are required, but shareholding and director appointments must be notified to the ASIC and are publicly searchable (for a fee).

Valuing and investigating investee companies

12. How do venture capital funds value an investee company?

While valuations of early stage companies can be dressed up with a variety of metrics, fundamentally the valuation is the figure that the potential investee and the fund can agree, or where agreement cannot be reached, the valuation determined by a future investor in a larger fundraising round. It is most typical for investment rounds in Australia to be priced in Australian dollars, but this depends on the nature of the investment and whether there are, or will in the near future be, US investors.

13. What investigations do venture capital funds carry out on potential investee companies?

Investigations that VC funds carry out vary widely among investments, and it is rare to engage legal counsel to conduct an M&A-style due diligence. Most commonly, fund managers focus on:

Ensuring to the extent possible that the capital table accurately reflects the manager’s shareholding and optionholding.

Ensuring that the IP is owned by the potential investee.

Potentially, reviewing some material contracts.

Legal documentation

14. What are the principal legal documents used in a venture capital transaction?

The typical legal documents in a VC transaction relating to an investment in shares include the:

Subscription agreement.

Shareholders’ agreement.

Terms of issue of the preference shares or other securities being issued, which are included in the company’s constitution (that is, a company’s organisational document).

For a convertible note financing, there may instead be a note purchase agreement or a convertible note deed poll, and whether the person becomes a signatory to the shareholders’ deed in that circumstance (before conversion) varies depending on the investment.

Other ancillary documents can include new employment agreements, deeds of assignment of IP to the company, a new employee share option plan, and so on.

Protection of the fund as investor

Contractual protections

15. What form of contractual protection does an investor receive on its investment in a company?

The company (and, in some cases, the founders) usually provide the investor with representations and warranties in the subscription agreement in relation to matters such as the current capitalisation table and the business. There may also be an indemnity for breach of warranty. These are usually subject to typical limits such as de minimis thresholds, baskets and caps.

Forms of equity interest

16. What form of equity interest does a fund commonly take (for example, preferred or ordinary shares)?

VC funds can take ordinary shares or preferred shares, although preferred shares are most common. SAFE notes (which are generally considered to be equity) are also common at particularly early stages where valuations are difficult.

Preferred shares

17. What rights does a fund have in its capacity as a holder of preferred or preference shares?

Preference shares usually have:

Voluntary and mandatory conversion features.

(Potentially) a coupon (which usually capitalises on conversion).

Liquidation preference.

Voting rights.

Anti-dilution rights.

Management control

18. What rights are commonly used to give a fund a level of management control over the activities of an investee company?

VC funds commonly have:

A board director appointment right.

Voting rights that are calculated based on its then current conversion rate.

Consent rights (either directly through the board, or indirectly by being included in a particular threshold of preference shareholders that is required to approve various items). These include a range of operational matters such as:

the business plan and budget;

hiring and dismissal of the CEO;

altering key persons’ employment agreements;

material transactions;

issues of equity.

Share transfer restrictions

19. What restrictions on the transfer of shares by shareholders are commonly contained in the investment documentation or the company’s organisational documents?

A shareholders’ deed typically includes rights of first refusal, tag-along rights and drag-along rights, although it is not uncommon for VC funds to have the benefit of these requirements, but to not themselves be subject to such restrictions. Further, founders may be subject to lock-ups for a period of time.

20. What protections do the investors, as minority shareholders, have in relation to an exit by way of sale of the company?

Investment documents commonly include:

Tag-along rights. These are typically triggered on a sale that would result in a change of control.

Drag-along rights. The percentage threshold at which these are triggered varies widely among deals.

Some deals include provisions that require the company to at least explore an exit once the VC fund has been invested for a period of time, typically three or five years.

ESVCLPs are restricted from investing in debt instruments, which limits their ability to use redemption features to force an exit.

There may be automatic conversion events on preference shares where certain valuation thresholds are met (particularly in the case of an initial public offering (IPO)).

Pre-emption rights

21. Do investors typically require pre-emption rights in relation to any further issues of shares by an investee company?

It is very common for all shareholders to have the right to acquire their pro rata share of new issues (and potentially their share of any shortfall securities).


22. What consents are required to approve the investment documentation?

The following consents are commonly required to approve the investment documentation:

In general, the approval of 75% of the holders is required:

where a potential investee is raising new capital and as a result is issuing a new class of securities;

for the creation of a new class of shares;

for any other amendments to the company’s constitution.

Existing shareholders commonly need to waive their pre-emptive rights for the new VC fund to come in.

Third parties, such as major customers/suppliers or landlords, may have consent rights under their contractual arrangements with the potential investee.

There may be regulatory approvals, including foreign investment approval.


23. Who covers the costs of the venture capital funds?

Costs relating to the establishment of a VC fund are recoverable expenses which the fund manager can call from investors. Typically, these are subject to a cap, although the size of the cap varies widely among funds.

Other recoverable expenses generally include all expenses reasonably incurred by a manager in operating a fund, including deal expenses, but excluding overheads.

Typically, investees pay the VC fund’s legal expenses out of the amounts invested by the investors. This may technically amount to financial assistance under the Corporations Act 2001 (Cth), in which case they can only be paid if either the:

Board determines that the action does not materially prejudice creditors.

Expenses are approved by shareholders in accordance with the Corporations Act 2001 (Cth).

Portfolio company management

24. In what ways are founders and employees incentivised? What are the resulting tax considerations?


Founders and employees are typically incentivised through equity, which can be either grants of shares or options. To the extent founders already hold shares, all or a portion of these may become subject to reverse vesting (that is, the founders’ obligation to resell shares to the company, other shareholders or third parties if they leave the company before a certain period of time has elapsed).


The general rule is that an employee that receives equity at a discount is taxed on the discount in the year they receive the equity, unless an exception like a reduction or a deferral applies. To qualify as a concessional scheme (and access one of these reductions or deferrals), the plan must meet certain general conditions as well as conditions that are specific to the type of concession being sought.

One set of concessions are the “start-up concessions”, which allow employees of eligible companies:

To acquire employee share scheme (ESS) interests at a discount (subject to certain limits) without including the discount in their taxable income.

If they are issued options which are subsequently exercised, to include the period the options are held in the 12-month holding period for the purposes of accessing the CGT discount on sale of the resulting shares.

The specific conditions applying to this concession differ depending on whether the ESS interest offered is an ordinary share, or an option to acquire an ordinary share.

Other tax deferral schemes may be available if the company cannot comply with the specific conditions applying to start-up concessions.

25. What protections do the investors typically seek to ensure the long-term commitment of the founders to the venture?

It is common for at least a portion of the founders’ shares to be subject to reverse vesting (see Question 24, Incentives). Typically, these are underpinned by good leaver/bad leaver provisions with consequences in relation to the founder’s shares if the founder leaves the company before a specified period or as a bad leaver. These provisions pose practical difficulties, because:

Buybacks (that is, the purchase by a company of its own shares) must be implemented in accordance with procedures set out in the Corporations Act 2001 (Cth), which include notifications to the ASIC and shareholder votes.

Buybacks can have certain negative tax consequences for the affected founder.

Restraints are considered to be contrary to public policy, but will be enforced if they are reasonable in light of all circumstances. As courts in some Australian jurisdictions do not have the power to “read down” restraints to levels that the court would consider to be reasonable, it is often necessary to draft restraints with cascading options for time and geography to help ensure enforceability.

Exit strategies

26. What forms of exit are typically used to realise a venture capital fund’s investment in an unsuccessful company? What are the relative advantages and disadvantages of each?

An exit from an unsuccessful company may involve:

Winding-up the entity.

A sale of some or all of its IP assets.

An outright sale to a trade buyer.

The right strategy depends on what value is left in the company at the point where the company ceases to be able to raise capital. No one strategy is inherently better than another.

27. What forms of exit are typically used to realise a venture capital fund’s investment in a successful company? What are the relative advantages and disadvantages of each?

A VC fund’s investment in a successful company is usually realised through a trade sale or IPO. The secondary market in Australia is relatively small, so this is less likely to be an option.

In addition, because of the finite amount of capital available in Australia and the perceived difficulty of operating a global business from Australia, it is very common for Australian early stage companies to “flip up” to a US entity (that is, establish a US holding company above the early stage company) to focus on the US market and more readily access US capital. While this does not immediately result in an exit, it potentially opens up the company and its investors to new possibilities for exits in a bigger market.

28. How can this exit strategy be built into the investment?

Some investment documents include provisions that facilitate exits, including:

Exit provisions (requiring the company to engage advisers to consider an exit after a period of time).

Drag-along provisions.

Redemption features.

They may also anticipate a “flip up” (see Question 27).


29. What recent reforms or proposals for reform affect venture capital in your jurisdiction?

It is unlikely that any significant reform proposals (other than the foreign investment reforms (see Question 11, Restrictions on direct investment)) will be considered in the near future during the COVID-19 pandemic. However, candidates for reform in the future include:

ESVCLPs must have predominant activities that are not ineligible. Ineligible activities include banking, providing capital to others and insurance, which have a close relationship to activities being undertaken by many businesses in the FinTech sector, which often facilitate businesses that include the ineligible activities. A set of reforms came into effect in July 2018 to attempt to address the resulting ambiguity, but these reforms require further clarification to achieve their intended effect (to facilitate investment into FinTech).

There are a number of other ambiguities in the legislation relating to ESVCLPs that need to be clarified, to maximise the ability of fund managers using ESVCLPs to attract capital into early stage technology companies in Australia.