Closing your next funding round has gotten a lot harder, here's why
Signing documents (and waiting for documents to be signed) can be a frustrating and often error-laden process. Australia's outdated requirement of wet-ink signatures on paper makes it even more difficult. Earlier in 2021, the Treasury Laws Amendment (2021 Measures No. 1) Bill was drafted to reinstate what we had during COVID-19. This Bill would be a saviour for young companies, as it allows for electronic signing and split execution. Unfortunately, the Bill did not pass parliament - so where to from here?
In 2020, the government made the decision to allow electronic signing and split execution. Electronic signing is where different parties sign a digital copy of a document, and split execution is where different parties sign duplicates of the same document. These measures were in response to COVID-19, which made it far harder for directors and members to gather in one meeting room to sign off on the closing of a round. Whilst it seems entirely logical to keep these measures in place, they expired in March 2021, so we are back to what we had before, which is a judgement handed down in 2019.
The South Australian case of Bendigo and Adelaide Bank Limited & Ors v Kenneth Ross Pickard & Anor  SASC 123 (Pickard) is behind much of the document-signing confusion. In a nutshell it decided three main things:
- Electronic Signatures can invalidate a document.
- With electronic signatures or split execution, there must be proof of personal authentication.
- Wet-ink signatures on a single document are preferred.
This is troubling for startups, who are now faced with needing pen on paper fast without the assurance that electronic signatures or split execution will suffice.
For any young company, getting investors on board can be a challenge, but retaining them at the critical stage is even harder, when interest fades and new prospects emerge to lure away investors. Therefore once you have a base of keen investors, it is essential to close the round fast. The more time that passes, the greater the risk that something falls through which could leave your startup in a precarious position.
Given there is so much on the line and a failed round could spell the end for an emerging company, the quick signing of documents has never been more important - but it has also never been more difficult. With investors and directors operating remotely, there are two big risks with document execution:
- Opting for digital or split execution could invalidate the documents - meaning what you sign is not legally binding.
- Opting for wet-ink signatures could take forever - which is very dangerous as investors might drop out and more time is wasted before your next round.
For businesses who began fundraising in 2020, the execution of documents was as simple as attaching a digital signature to a document that was circulated amongst the directors. This shift brought us out of the dark ages and gave us a taste of how much easier it is to use electronic execution which is a convenient solution to COVID-19 induced business models. More importantly, it meant getting money in the bank for startups without the end-of-round panic that comes with needing signatures.
Despite the push from businesses to concretely acknowledge electronic and split execution, Pickard and Section 127 of the Corporations Act are all we have to go off, and there is otherwise a lack of judicial guidance about what forms of execution are acceptable.
For now, we are still waiting for more guidance and we will have to continue to wait until 3 August 2021 when the discussion of the Treasury Laws Amendment (2021 Measures No. 1) Bill is set to resume. Startups can hope that this Bill will signal the turning of a corner in document execution, where we can put technology to good use and cut down on wasted time during the dangerous ‘unclosed round’ period for a company. In this current time of confusion one thing remains clear: startups still need to close their rounds and they must do it quickly, even if that feat is harder to pull off.