New and improved ASIC relief for employee incentive schemes

More good news on the employee share scheme front! Following the federal government’s announcement that it will fix the tax treatment of benefits received under employee share schemes (see HERE), ASIC has released new Class Orders to give companies relief from the various Corporations Act requirements that would otherwise apply to offers made under employee share schemes. These include the disclosure, licensing, hawking and other incidental requirements.


And, in response to comments on the consultation paper released in November 2013 (ASIC CP 218), ASIC has significantly extended and simplified both the relief it previously provided under its previous class order (CO 03/184) and its original consultation paper proposals.

The relief for ’employee incentive schemes’ (EIS) (as ASIC now calls employee share schemes) is now contained in two separate Class Orders, one for listed bodies (CO 14/1000) and one for unlisted bodies (CO 14/1001).

Key points to note include:

  • For listed bodies, the types of financial products that can now be offered under an EIS has been expanded to include “incentive” rights, indeterminate rights, CDIs (Australia and UK) and ADRs (US), and now also ASX-listed units in managed investment schemes and listed stapled securities without the need to be stapled to a share
  • The definition of a ‘performance right’ (now referred to as an ‘incentive right’) has also been modified to include rights classified by ASIC as ‘derivatives’ that would have been excluded under the consultation paper proposals. This includes rights to cash equivalents, which are a feature of most performance rights plans in the larger companies. This also includes rights to cash payments referable to the dividends paid on the underlying shares pending vesting (or to the delivery of additional shares to an equivalent value), which are becoming an increasing feature in higher yield company plans (and for good reason)
  • Of interest particularly to recently IPO-ed companies, and the many still contemplating an IPO, is that the quotation period for the security, option over, or performance right to, the security being offered has been reduced. The class order previously required the relevant security to have been quoted for a period of 12 months, without suspension during that period for more than two trading days. This has been reduced to a period of three months, without suspension during the 12-month period prior to the date of the offer (or such shorter period as the financial product has been quoted) for more than five trading days.

  • The proposed restrictions on offers to non-executive directors have been removed, so the class orders apply to them in the same way as for employees. This complements the government’s announcement of tax changes to employee share schemes which appear to permit options to be granted in lieu of cash fees with tax deferred until exercise
  • The extension of the class order relief to cover offers to prospective employees, plus contractors and casual employees who work or will reasonably be expected to work 40% of a comparable full time position
  • The use of trusts for holding allocated and unallocated financial products is recognised, now without audit obligations.  Listed bodies can also use contribution plans (under which the employee contributes towards the cost of the equity offered) and loan plans, but unlisted bodies cannot
  • However, for listed companies, interest is not permissible on loans associated with employee incentive schemes. This means that it will not be possible to have loan based plans where dividends are set off against interest. Class order relief also requires that the loans be non-recourse, or limited recourse to the value of securities provided via the loan. Loan plans, which will probably remain the most tax effective employee equity plans even after new share scheme taxation is introduced, will need to heed these requirements to comply. Unlisted companies will not be permitted to provide loan plans under the class order relief
  • For unlisted bodies, the value of all EIS offers to an individual participant cannot exceed $5,000 in any 12 month period (the original proposal was for a $1,000 limit)
  • Unlisted bodies can offer fully paid voting ordinary shares and units, and options and derivatives that relate to the fully paid ordinary voting shares, of the unlisted body
  • A listed body must not issue more than 5% of its issued capital and an unlisted body must not issue more than 20% of its issued capital, calculated on the basis of the body’s reasonable belief of what has and may be issued under the current EIS, when aggregated with offers made under other EISs of the body during the last 3 years. The “5% over 5 years” for listed companies has served as an acceptable equity plan dilution limit to many institutional investors and proxy advisers. The more relaxed ASIC requirement will be better for listed smaller and higher growth listed technology companies that continue to rely on employee equity in lieu of cash salaries
  • EIS offers by both listed and unlisted bodies must be accompanied by offer documents containing information specified in the class orders.  Copies of offer documentation must be provided to ASIC upon request.
  • A ‘notice of reliance’ on the class order relief must be provided no later than 1 month after an offer relying on the class order relief is made
  • The Class Orders provide transitional relief to enable bodies relying on the now replaced CO 03/184 to continue to operate their existing employee share schemes with equivalent relief.

ASIC Class Order [CO 14.978] has also been made, to broaden the ability of a body to make small scale personal offers (20 investors and $2 million limit) of securities without the need for a disclosure document under subsection 708(1) of the Corporations Act, notwithstanding the body has also made offers in reliance on Class Orders [CO 14/1000] and [CO 14/1001].


Copies of the new Class Orders as well as the updated Regulatory Guide 49 Employee Incentive Schemes and an Explanatory Statement and a Regulation Impact Statement are available HERE



Our newsletter article on the consultation paper proposals is available HERE



A summary of our submission on the consultation paper is available HERE.

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