A new form of crowd-sourced capital raising for small, unlisted public companies is now a possibility with legislation to amend the Corporations Act passing through Australian Federal Parliament.
In late 2016, the Australian Federal Government introduced into parliament, the Corporations Amendment (Crowd-sourced Funding) Bill 2016 (Cth) (the CSF Bill). The CSF Bill will amend the Corporations Act, and will establish a regime for equity crowd-sourced funding for certain ‘eligible’ Australian companies (the CSF Regime). The CSF Bill recently passed through both the Australian Federal House of Representatives and the Australian Senate, and will now be presented to the Governor-General for assent.
The CSF Bill is intended to remove the regulatory barriers to equity crowd-sourced funding and to therefore make available a new funding source for business in Australia. It also introduces to all Australians a form of investment that has previously only been available to sophisticated investors.
The CSF Regime
The key features of the CSF Regime are as follows:
An offer of securities under the CSF Regime will need to satisfy the following key criteria:
- the company making the offer will only be able to offer to issue its own securities;
- the company will need to be an eligible CSF company at the time when the offer is made (see below);
- the securities will need to be of a class specified in the regulations (which are yet to be finalised);
- the maximum amount to be raised by the new offer can be no more than $5 million (after deducting all amounts raised by the company during the previous 12 months through other offers under the CSF Regime, small scale “personal offers” under section 708(1) of the Corporations Act and exempt offers made through financial services licensees under section 708(10) of the Corporations Act); and
- the funds sought to be raised by the offer will not be able to be used, to any extent, by the company or a related party of the company, to invest in securities or interests in other entities or schemes.
Eligible CSF Company
A company will be an eligible CSF company if all of the following conditions are satisfied in relation to the company at the relevant time:
- the company is a public company limited by shares;
- the company’s principal place of business is in Australia;
- a majority of the company’s directors (not counting alternate directors) ordinarily reside in Australia;
- the company complies with the assets and turnover test, that is: (a) the value of the consolidated gross assets of the company, and of all its related parties is less than $25 million; and (b) the consolidated annual revenue of the company, and of all its related parties, is less than $25 million;
- neither the company, nor any related party of the company, is a listed corporation; and
- neither the company, nor any related party of the company, has a substantial purpose of investing in securities or interests in other entities or schemes.
A key feature of the CSF Regime is the establishment of separate and less onerous disclosure requirements for capital being raised under the CSF Regime. Therefore, the existing Pt 6D.2 (Disclosure to investors about securities) and Pt 6D.3 (Prohibitions, liabilities and remedies) of the Corporations Act will not apply to this form of capital raising.
An offer under the CSF Regime will need to be made via an offer document that will need to comply with the requirements set out in the CSF Bill and the new regulations.
An offer of a company’s securities under the CSF Regime will only be able to be made on a platform operated by a single crowd-sourced funding intermediary (CSF intermediary) and all applications made in response to the offer, and all application money in respect of such applications, will need to be sent or paid (as applicable) to the CSF intermediary and be dealt with by the CSF intermediary as specified by the CSF Regime.
CSF intermediaries will need to hold an Australian Financial Services Licence that specifically authorises crowd-sourced funding activities and the CSF Regime will impose additional obligations on CSF intermediaries (including obligations to have carried-out appropriate checks on the company seeking to raise capital).
As noted above, only unlisted public companies will be eligible to be CSF companies. Proprietary companies seeking to access the CSF Regime will need to convert to an unlisted public company.
Given the additional compliance costs that small companies need to incur after converting from a proprietary company to a public company, this aspect of the CSF Regime has attracted the greatest criticism.
In order to alleviate some of the concerns, the CSF Bill provides that a company that is registered as, or that converts to, a public company limited by shares after the commencement of the CSF Regime may be eligible for corporate governance and reporting concessions for a period of 5 years. The concessions include:
- an exemption from needing to hold an Annual General Meeting (AGM) under the usual rules;
- the option to only provide financial reports to shareholders online; and
- the company not being required to appoint an auditor or have audited financial reports until more than $1 million has been raised from CSF offers.
Retail Investor Protection
The CSF Regime also includes certain protections for retail investors including:
- retail investors will only be able to invest up to $10,000 per company; and
- retail investors may withdraw an application for securities under the CSF Regime within 5 business days after the application is made, giving retail investors a chance to reconsider their investment decision.
Despite the regulatory compliance concessions in the CSF Bill, the Senate Economics Legislation Committee Report that was concluded in February 2017 notes that the CSF Bill still fails to address the needs of start-ups and small businesses, most of which are proprietary companies. Their view is that the Government should go back to the drawing board, consult with industry and come back with a framework that is suitable for both private and public companies.
Despite these views, the CSF Bill has now passed through Federal Parliament and the key operative provisions of the CSF Bill will commence on the earlier of a day to be fixed by Proclamation, or 6 months after the day of assent.
We will keep you updated in relation to the commencement of the CSF Regime and the introduction of any regulations that may impact the operation of the CSF Regime.
In the meantime, if you have any questions on this article or crowd-sourced equity funding, please do not hesitate to contact Troy Mossley (Senior Associate - firstname.lastname@example.org), Michael Jeffery (Director – email@example.com) or Craig Sanford (Director – firstname.lastname@example.org).