In March 2017, the Corporations Amendments (Crowd-sourced Funding) Bill 2016 passed the Senate with the resulting Act to take effect in late September this year.
Without a doubt, this is a significant piece of legislation as it will provide certain Australian corporations with an avenue to raise equity finance outside the current onerous and expensive regime. The previous legislation, Chapter 6 D of the Corporation Act 2001 (Cth), was clearly designed for more substantial capital raising activities by larger well-resourced listed public companies.
The Bill should assist smaller companies and start-up ventures (which usually have small asset bases and speculate futures which are unattractive to traditional debt financiers) to raise equity finance.
Perhaps one of the better descriptions of the operation of Bill is on the Australian Parliament website which states:
“Crowd-sourced equity funding (CSF) is a relatively new concept and is enabled by the rise of internet technologies. As the name suggest, it allows businesses to obtain capital from a large number investors (that is, a crowd) through an online platform, where each investor typically contributes a small amount of money in return for an equity stake in the business.
At its most basic level, CSF allows people to invest in unlisted shares issued by businesses.
CSF has gained attention because access to finance is considered a major impediment to improved productivity and innovation, particularly for smaller and/or newer businesses that are not able to access the more traditional sources of financing. CSF can notionally help to alleviate some of these constraints by introducing an additional source of finance for these firms. However, the current regulatory framework imposes burdens and costs that are considered significant impediments to more widespread utilisation of CSF in Australia.
The proposed changes in this Bill are intended to alleviate these constraints. In its broadest form, the Bill will allow small companies, which would otherwise find it difficult to raise money through traditional sources of finance, to raise money from the general public through an online platform. The proposed changes are also intended to improve investment opportunities for retail investors. However, since small businesses and start-ups also pose a greater relative risk for such retail investors, the proposed amendments also aim to provide protection to these investors by imposing caps on the investments in any single offer and by imposing information and gatekeeping requirements on licensed CSF intermediaries.”
Clearly, the new fundraising changes focus on raising money from the public in an online regime through licensed CSF intermediaries.
Amongst other changes to the Corporations Act, the Bill introduces a new Part 6D.3A of the Corporations Act, titled “Crowd- sourced funding”.
In a nutshell, amongst other things, new part 6D.3A:
- Defines the types of companies that may make offers (“eligible CSF companies), which are unlisted Australian registered public companies limited by shares which do not have a substantial purpose of investing in securities or interests in other entities and which meet an assets and turnover test (must be less than $25 million in both cases);
- Sets an issuer cap of $5 million which an eligible CSF company may raise in a 12 month period;
- Establishes the requirements of CSF offer documents including the mandatory use of CSF intermediaries and “offer platform” on which CSF offer documents are to be published;
- Defines when offers are open and closed and the period during which offers may be open;
- Sets out numerous obligations on the gatekeepers- i.e. the CSF intermediaries and how they operate their platforms and deal with application monies amongst other things;
- Defines when CSF offer documents are defective and the consequences of defective documents and the liability of directors and other parties;
- Describes when a retail investor applicant may withdraw their application (by providing a 48 hour cooling off period);
- Provides a cap on investment by retail investors ($10,000);
- Prohibits a company or a CSF intermediary financially assisting retail investors in acquiring securities
- Provides restrictions on advertising CSF offers; and
- Provides that certain companies may be eligible for exemption from certain governance requirements in the Corporations Act.
Given that the majority of companies in Australia are proprietary limited companies, which by definition in the Corporations Act are not public companies, the Bill will not afford proprietary limited companies the ability to participate in the crowd-source funding regime.
However, the Federal Government has indicated an intention to introduce further legislation to enable proprietary limited companies to access the crowd-sourced funding regime in the near future.
If you would like further information on crowd-sourced equity funding including the conversion of your existing company into an entity which would qualify as an eligible CSF company, please contact Nevett Ford