Long awaited legisative change may be a boon for early-stage growth companies and retail investors. Jill Storey explains.
On 28 March 2017 the Corporations Amendment (Crowd-sourced Funding) Act 2017 (the Act) finally received royal assent.
The Act provides a regulatory framework for crowd-sourced equity funding in Australia. This legislation was enacted following a period of consultation, development and debate, which began with an initial review by the Corporations and Markets Advisory Committee in 2013 and included a previous bill lapsing in parliament.
Australia now joins other jurisdictions that have enacted crowd-sourced equity funding legislation including the UK, the US, New Zealand and Canada, among others.
Crowd-sourced equity funding enables a large number of individuals to make small financial investments in exchange for an equity stake in a company.
The objective is to improve access to finance for early-stage growth companies and open up access to investment opportunities previously unavailable to many retail investors.
Achieving these objectives while protecting retail investors from risky, non-realisable securities has been a dilemma for the federal government, which was concerned retail investors may put their financial wellbeing at risk by investing too much money in ventures with a high probablilty of failure.
Prior to the new legislation, Australian equity crowdfunding platforms were only open to individuals with assets worth more than $2.5 million (excluding their family home) or an income above $250,000 a year.
The legislation allows eligible, unlisted public companies to raise up to $5 million from investors each year through the use of crowd-sourced equity funding.
At the time the Act was passed there was relief Australia had finally joined the crowd-sourced equity finding party. But this enthusiasm was dampened on the realisation the Act was restricted to unlisted public companies. This restriction excludes most small businesses from accessing this source of funding.
Subsequently the 2017 Federal Budget released an exposure draft, the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (the Bill), for consultation.
The Bill expands the application of the first Act, so that proprietary companies can raise crowd-sourced equity funds. At the same time it imposes greater governance and reporting requirements for those who access the new regime.
About the new laws
The Act sets out retail investor investment limits, requirements for eligible companies and eligible offers, requirements for how an offer must be made, and obligations on intermediaries such as crowdfunding platform operators.
Retail investors interested in opportunities available through the crowd-sourced equity funding regime may only make applications for shares via a crowd-sourced equity funding intermediary platform.
They are limited to investing $10,000 in any one eligible crowd-sourced equity funding company per 12-month period and they are provided with a mandatory five-day cooling-off period.
There is no overall cap on the amount a retail investor can invest in crowd-sourced equity funding opportunities.
The offer must be made via a crowd-sourced equity funding offer document and must be published on the platform of a single crowd-sourced equity funding intermediary.
The offer must be for the issue of a prescribed class of securities of an eligible crowd-sourced equity funding company and must not result in more than $5 million being raised in any 12-month period. Raisings from sophisticated or professional investors may be made in addition to the $5 million cap.
The funds raised cannot be used for investing in other entities or schemes.
Crowd-sourced equity funding intermediaries are required to hold an Australian Financial Services Licence and in some situations maybe required to obtain an Australian Market Licence.
Intermediaries have a number of roles under the crowd-sourced equity funding regime, including the publication of offer documentation, the provision of communication and application facilities, the provision of gatekeeper services and ensuring systems are in place for investor protection.
Platforms are required to prominently display generic risk warnings to investors, the cooling off period of five business days and fee arrangements. They must operate a Q&A facility at all times while an offer is open or suspended.
In addition, they are obliged to monitor and reject applications from retail investors where they would be in breach of the $10,000 cap per 12-month period for crowd-sourced equity funding offers for which they are responsible.
There are restrictions on the advertising of crowd-sourced equity funding offers and platforms can be potentially liable for a crowd-sourced equity funding document that is known to be defective.
To qualify as an eligible crowd-sourced equity funding company, a company must meet various conditions, including having the principal place of business in Australia and having the majority of the company’s directors ordinarily residing in Australia. It must not have a substantial purpose of investing in securities or schemes and must have consolidated gross assets and consolidated annual revenue of less than $25 million.
Directors must ensure they get these provisions right, as they are important considerations under these new laws.
If directors are uncertain about any of the detail of this new legislation they should seek advice to ensure they remain within the rules, especially given how new the regulations are.
The regime for public unlisted and proprietary companies
The legislation for public unlisted companies will come into force on 29 September 2017.
Eligible public unlisted companies are provided with temporary relief from reporting and corporate governance requirements for a period of up to five years.
These reduced reporting requirements include the ability to publish accounts online, the removal of the obligation to hold an audit where less than $1 million is raised, and no requirement to hold an annual general meeting.
The introduction of the new Bill removes the need for proprietary companies to transition to a public company structure with the associated costs and compliance burdens to access the crowd-sourced equity funding regime.
The Bill has a number of key features. There is a requirement for a crowd-sourced equity funding eligible proprietary company to have at least two directors.
It also gives permission for proprietary companies to make crowd-sourced equity funding offers, which would otherwise be prohibited as a fundraising activity.
Additionally, crowd-sourced equity funding shareholders are not to be counted toward the 50-member statutory limit for proprietary companies.
However, once the crowd-sourced equity funding shares are sold or transferred, the new holder will not be a crowd-sourced equity funding shareholder and the crowd-sourced equity funding reforms will not apply to such a shareholding.
There is also the requirement to complete annual financial and directors’ reports, to have the financial report audited if funds raised from a crowd-sourced equity funding offer exceed $1 million and to notify the Australian Securities and Investments Commission of the commencement and cessation of the membership of crowd-sourced equity funding shareholders. Crowd-sourced equity funding shareholders are subject to the related party transaction rules.
The Bill provides that the takeover provisions in Chapter 6 of the Corporations Act, will not apply to a company that has made an allowance in its constitution for crowd-sourced equity funding exit arrangements.
Unlisted public companies will be able to access the new regulatory framework from the end of September 2017.
It is understood these new pieces of legislation mark an important milestone for Australia in opening up an alternative source of funding for early stage companies.
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