After a protracted journey through Parliament that initially began in 2015, the Corporations Amendment (Crowd Sourced Funding) Act 2017 (Act) is here! The Act establishes the crowd-sourced equity funding (CSF) regime in Australia.
Under the CSF regime, eligible companies can raise a limited amount of equity capital from a large number of investors, including ‘mum and dad’ retail investors, through internet based intermediary platforms, without providing prospectus-level disclosure.
This is big news for the start-up community as the current fundraising laws in Australia generally make it prohibitively expensive, and the compliance requirements too onerous, for start-ups and small companies to raise funds from retail investors.
Australia now joins a host of other countries that have CSF, such as Canada, USA, the UK and New Zealand.
Although the Act only received royal assent in March this year and is set to come into effect on 29 September 2017, just two months later, as part of the 2017-18 budget, the Government has released the Corporations Amendment (Crowd-Sourced Equity Funding for Proprietary Companies) Bill 2017 (Bill) to extend the CSF regime to include proprietary companies.
This article outlines what you need to know about the CSF regime under the Act if you are a company wanting to access CSF, a potential investor or an intermediary, as well as the changes to the CSF regime proposed under the Bill.
Is my Company Eligible?
A company wanting to access CSF will need to be an ‘eligible company’ under the Act. An eligible company is a public (unlisted) company limited by shares with an annual turnover or gross assets of less than $25 million that is not a subsidiary or related entity of a listed company. Companies that operate an investment business are excluded.
The Act presently excludes the ability for proprietary companies to access CSF. However, they may convert to a public company in order to do so.
The exclusion of proprietary companies from the CSF regime has been hotly debated and the subject of significant public consultation. If the Bill is passed, the CSF regime will be extended to include the ability for proprietary companies to raise funds from the crowd. Please see below for more details of the proposed changes to the CSF regime under the Bill.
How Does my Company Raise Funds?
To raise funds from the crowd, eligible companies will need to prepare a specific CSF offer document containing the information prescribed by the regulations and publish that offer document on an intermediary platform. There are certain restrictions on advertising and publishing CSF offer materials that fundraisers and intermediaries must comply with.
Fundraisers will be limited to making one CSF offer at a time and that offer must only be published on one intermediary platform and can only be open for a maximum of 3 months.
Eligible companies can raise up to $5 million through CSF in a 12-month period. This $5 million cap includes amounts raised from small scale personal offers and offers made via an Australian Financial Services License (AFSL) holder.
The CSF regime currently only allows eligible companies to issue new fully paid ordinary shares. It will not facilitate the sale of existing securities that have already been issued.
Are There any Corporate Governance Concessions Available?
Fundraisers who complete a CSF offer within either 12 months of registration or conversion to a public company will be entitled to certain corporate governance concessions for a maximum period of 5 years, including:
- an exemption from the requirement to hold an Annual General Meeting;
- an exemption from the requirement to have audited financial reports. This concessions ceases once more than $1 million has been raised from CSF offers; and
- the ability to provide financial reports to members by publishing on its website.
These concessions will only apply to companies that register or convert to a public company after the CSF regime commences.
How do I Invest?
A potential CSF investor will be able to access CSF offers by browsing online platforms operated by CSF intermediaries.
After reviewing the CSF offer document, if the investor decides to invest, they pay the application money to the intermediary via the platform. The intermediary holds the application money until the minimum subscription amount for the offer is reached and the other conditions prescribed by the CSF regime are met.
The intermediary then forwards the investor’s application money to the fundraiser. The fundraiser will then issue the relevant shares to the investor.
‘Mum and dad’ (i.e. retail investors) will have a 5 business day cooling off period to withdraw their acceptance of a CSF offer if they change their mind for any reason.
Retail investors will be limited to investing up to $10,000 per fundraiser via a particular intermediary platform within a 12 month period. However, there is no cap on the total amount that a retail investor can invest in all CSF offers each year.
Retail investors are investors who are not sophisticated investors or professional investors under the Act.
What is the Role of the Intermediary?
The role of the intermediary is to operate and manage an internet based platform that publishes fundraisers’ CSF offers, collect and deal with CSF investor application funds, and facilitate investor communication about CSF offers.
Intermediaries will need to hold an AFSL expressly authorising them to provide CSF services. Depending on the nature of their activities, intermediaries may also need to hold an Australian Market Licence.
Under the CSF regime, intermediaries have a number of obligations, including to:
- conduct a prescribed check on the fundraiser before publishing offer documents;
- publish a prescribed investor risk warning and information about a retail investor’s cooling off rights;
- obtain a risk acknowledgement from retail investors;
- ensure that their platform has an application facility to allow investors to apply for shares under CSF offers;
- provide a communication facility to allow investors to communicate about CSF offers;
- disclose any fees paid to them by fundraisers, and any interest that the intermediary has or intends to take in the fundraiser.
Intermediaries will, therefore, play a key role in regulating CSF raisings and will have significant responsibilities and potential liability in relation to them.
What Changes are Proposed Under the Bill?
One of the major criticisms of the CSF regime under the Act is that proprietary companies are excluded from fundraising from the crowd unless they first convert to a public company.
Under the Bill it is proposed that the regime will be extended so that proprietary companies can make CSF offers without first converting to a public company. However, this extension is not quite that simple. There are a number of proposed additional obligations imposed on CSF proprietary companies; a number of which usually only apply to public companies.
The key changes to the CSF regime proposed under the Bill to extend access by proprietary companies are outlined below:
50 Shareholders’ cap
CSF shareholders will not be counted as part of the 50 non-employee shareholder cap imposed on proprietary companies under the Corporations Act.
Takeover Concession
Proprietary companies with CSF shareholders will be exempt from the takeover rules in Chapter 6 of the Corporations Act where a CSF company includes a provision in its constitution that requires a person who acquires more than 40% of the voting shares in the company to offer to purchase all other voting shares in the company on the same terms within 30 days.
A company wanting to take advantage of the takeovers concession will be required to lodge its constitution with ASIC.
Additional Obligations
Currently, the key additional obligations proposed under the Bill are:
- Maintenance of a more comprehensive company register and notification to ASIC.
- The related party transaction restrictions in Chapter 2E of the Corporations Act will apply to a company with CSF shareholders.
- Financial and directors’ reports must be produced.
- Companies that raise greater than $1 million in CSF will be required to have audited financial reports.
Corporate Governance Concessions
With the proposed extension of the CSF regime to include proprietary companies, the various corporate governance concessions available to public companies accessing CSF during their first 5 years will no longer be necessary. Therefore, under the Bill these concessions will not be available to public companies that are incorporated or converted from a proprietary company after the Bill becomes law.
What Should I do?
Whether you are a potential fundraiser, investor or intermediary, now is the time to start thinking about how you might take advantage of this exciting new fundraising and investment opportunity.
