Equity crowdfunding will finally begin in Australia from 29 September 2017.
When we last reviewed crowdfunding a year ago, Australia’s efforts to introduce crowdfunding laws had been stalled by the 2016 election. After the election, the proposed legislation was brought back and passed through the Parliament in March 2017.
Even before the new law starts, however, the Federal Government is planning amendments to extend the crowdfunding regime.
Here are the main features of the new crowd-sourced equity funding or “CSF” law starting on 29 September:
- Eligible public companies can make offers of ordinary, fully paid shares to raise up to $5 million in any 12 month period.
- To be eligible, the company must have less than $25 million in gross assets and annual revenue, and not be listed. It must have its principal place of business in Australia, a majority of Australian resident directors, and not have the substantial purpose of investing in securities or interests in other entities or schemes.
- “CSF intermediaries” will provide a platform for CSF offers. They must have a financial services licence.
- CSF offers will have to be made using a CSF offer document containing certain information and published on a licensed CSF intermediary platform.
- The CSF intermediary will have due diligence obligations in relation to companies making CSF offers and the offer document.
- Retail investors will be subject to a $10,000 per company investment cap in any 12 month period. They will have a 5 day cooling off right after making an application.
- There will be concessions for CSF offer companies for up to 5 years for some of the reporting, audit and corporate governance obligations under the Corporations Act that normally apply to public companies.
Details in the regulations
Regulations issued in June set out some of the details of the new CSF regime, including rules about the content of the CSF offer document.
The CSF offer document will have a standard 4 part format.
- The first part of the CSF offer document will be a standard risk warning.
- The CSF offer document will have to disclose information about the offering company in part 2, including identifying details of the company, information on key individuals (past offences, banning orders and so forth), information about any convictions or penalties incurred by the company, financial statements, details of debt and equity, the company’s business and organisational structure, and key risks of the business.
- As to the CSF offer itself, part 3 of the CSF offer document must describe the securities being offered and the rights associated with them, specify the maximum duration of the offer and the minimum and maximum amount of funds sought, and describe how the funds raised are intended to be used. The document will also have to specify if any of the funds being raised will be paid directly or indirectly to certain persons including directors and senior managers past and present, the CSF intermediary, promoters of the offer, related parties and anyone with more than 20% of the voting rights. Information on previous CSF offers will also be required.
- Part 4 of the CSF offer document will set out information about investor rights, including the 5 day cooling off period and a prescribed risk acknowledgement that the investor must complete before their application for CSF securities can be accepted.
The regulations also cover the due diligence which the CSF intermediary must do on the offering company before publishing a CSF offer. This includes checking the identity of the company, its eligibility to crowd fund, and details of its directors and managers. The intermediary also has to check that the offer document is clear and concise and meets the CSF offer document content requirements.
ASIC has a new webpage on crowdfunding and has released draft regulatory guides for public companies making CSF offers and for CSF intermediaries. Although only in draft, the regulatory guides give a more user-friendly introduction to the CSF regime.
Extending to proprietary companies
Right from the outset of the new legislation, concerns have been raised that it would not be accessible for many start-ups, because it only applies to public companies.
Under the Corporations Act there are public companies and proprietary (“Pty Ltd”) companies. Proprietary companies are not allowed to have more than 50 non-employee shareholders, and can’t engage in any activity such as share offerings that would require disclosure to investors. Public companies are all other companies that are not proprietary companies. Most companies (and especially start-ups) are incorporated as proprietary, not public.
In response to these concerns, the Government announced in the May 2017 Federal Budget that it would extend the CSF framework to proprietary companies.
Soon afterwards, Treasury released draft legislation, the Corporations Amendment (Crowd-Sourced Funding for Proprietary Companies) Bill 2017 (Cth), which was open for comment until 6 June.
The proposed amendments will allow proprietary companies to access the CSF regime if they meet certain eligibility requirements. The main requirement is that the company has at least two directors. This is to provide more transparency and more robust decision making, and more certainty around succession planning. The legislation will allow for regulations to be made to impose other eligibility requirements.
The existing cap of 50 non-employee shareholders for proprietary companies will be amended so that CSF shareholders are not counted as part of the cap. CSF shareholders will only include people who acquire the shares in a CSF offer. If a person buys the shares from someone who acquired them in a CSF offer, the buyer will not be a “CSF shareholder”.
Proprietary CSF companies will have to maintain information about CSF shareholdings in their company register. They will also need to notify ASIC when they first have CSF shareholders, issue new CSF shares, cancel CSF shares, and cease to have CSF shareholders.
There will be enhanced financial reporting obligations for proprietary companies that make CSF offers.
Normally a small proprietary company only has to prepare annual financial reports and directors reports if it is directed by the shareholders. Because CSF shareholders will not have the same degree of connection to management, proprietary companies will be required to prepare annual financial and directors reports when they have CSF shareholders. These reports will also have to be lodged with ASIC. If the company raises more than $1 million from CSF offers, the annual financial report must be audited. Once the company has raised more than $1 million from CSF offers, the directors will have to ensure that there is an auditor appointed within a month after the $1 million was raised, and an auditor will need to be appointed for the entire period where there are CSF shareholders. The company will be subject to existing rules requiring independence between the company and its auditors.
Proprietary companies that have CSF shareholders will also be subject to the related party transaction rules in Chapter 2E of the Corporations Act. This will give remedies to investors if funds are transferred to a related party for non-commercial purposes without shareholder approval.
If a proprietary company has more than 50 shareholders, it would ordinarily be subject to the takeover rules in Chapters 6 of the Corporations Act. The amendments will exempt proprietary companies with CSF shareholders from these rules, as long as the constitution of the company provides a minimum level of protection for investors to participate in an exit event: a “tag right” provision that requires a person who acquires more than 40% of the voting shares in the company to offer to purchase all other securities in the company on the same terms within 31 days.
The new CSF regime for public companies commencing on 29 September includes a number of corporate governance and reporting concessions for new public companies which were designed to make it easier for proprietary companies to convert to public companies in order to access CSF. Because the proposed amendments will allow proprietary companies to use CSF without having to convert to a public company, the draft Bill proposes to abolish these concessions.
Fintech Australia represents the fintech industry, an important part of the start-up scene whose members may well be interested in using CSF. It has made a submission on the draft Bill to extend CSF to proprietary companies, and has put forward some proposals:
- Consider allowing intermediaries to syndicate multiple investments, such as through unit trusts, and allow units in these trusts to be marketed to retail investors.
- A short form summary or web page for the CSF offer document.
- Audit requirements should apply to companies raising more than $3 million (not $1 million).
- Raise the cap on amounts that can be raised from $5 million to $50 million.
- CSF shares sold to others should retain their CSF status for the purpose of determining the maximum shareholder limit.
- Reconsider the “tag right” provision, because it would restrict the ability of a major shareholder to increase their stake in the company and invest more capital.
- Remove the cooling off period for investors.
It will be interesting to see if the Government adopts any of these recommendations when the Bill is introduced into Parliament.
Patrick Dwyer and Kathleen Harris
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