Crowd sourced equity funding in Australia
Key takeaways
The submission period for the Government’s consultation paper “Facilitating crowd-sourced equity funding and reducing compliance costs for small business” ended on 31 August 2015.
The Government has committed to introduce a CSEF framework for public companies, but it is unclear whether the Government will extend this framework to proprietary companies.
We predict the change of leadership to Malcolm Turnbull will result in further changes to the CSEF proposed legislative regime
Introduction Crowdfunding is rapidly growing as a viable alternative of obtaining capital from investors. Crowd sourced equity funding (CSEF) essentially sources funds from investors in exchange for equity, allowing the investor to receive an interest in the project or business in return for their financial investment. The investor therefore obtains a long-term interest in the product or company. The current legislative framework contained in the Corporations Act 2001 places restrictions on the ability of companies to obtain CSEF. 31 August 2015 marked the end of the submission period for the Government’s consultation paper “Facilitating crowd-sourced equity funding and reducing compliance costs for small business” (Consultation Paper). The Consultation Paper considered whether the CSEF framework should be extended to include proprietary companies, and also considered ways to reduce compliance costs and make capital raising more flexible for small proprietary companies. It offers an insight into the different ways in which the Government may legislate in this area. What is the framework for CSEF for public companies? The Government has announced its commitment to introducing a CSEF legislative framework for public companies. Which public companies will be eligible? CSEF will be available to issuers incorporated in Australia through the use of an intermediary, however CSEF will be limited to certain small enterprises that have not raised funds under existing public offer arrangements. Eligible companies may raise up to $5 million in any 12 month period. The regime sets investment caps for retail investors of $10,000 per offer per 12 month period and $25,000 in aggregate CSEF investments per 12 month period. The permitted securities are one class of fully paid ordinary shares per CSEF offer, and all shares in the CSEF offer must have the same price, terms and conditions. What are the proposed disclosure requirements? The offer must be disclosed to investors through a tailored CSEF disclosure document which will include information about the company and its financial structure, CSEF raising and mandatory risk warnings. The regime will provide relief from certain public company compliance costs for newly registered or converted public companies, including:
exemptions from disclosing entity rules;
allowing annual reports to be provided online only;
exemptions from holding an annual general meeting; and
exemptions from the need to appoint an auditor and have financial statements audited, subject to a cap of $1 million raised from CSEF or under a disclosure exemption.
These exemptions will be available for up to five years, subject to annual turnover and gross assets thresholds of $5 million. How will intermediaries be licenced? Intermediaries will be required to hold an Australian Financial Services Licence, must undertake prescribed checks on the issuer, and must provide generic risk warnings to investors. What about CSEF for proprietary companies? Stakeholder feedback suggests that the majority of companies which are likely to consider CSEF are proprietary companies. However, the Corporations Act limits the amount of non-employee shareholders to 50, and essentially prohibits proprietary companies from fundraising beyond offering shares to its existing shareholders or employees of the company. The Consultation Paper canvassed a number of proposals from the Government which would make CSEF available to proprietary companies. Shareholder limit One proposal involves increasing the shareholder limit for proprietary companies, which would enable proprietary companies to raise funds from a larger base. The Government is considering increasing the shareholder limit to be available up to 5 years after a proprietary company’s first CSEF raising. Additional transparency obligations One of the benefits of operating as a proprietary company is the reduced governance and reporting requirements compared with public companies. However, this may not be appropriate for proprietary companies accessing CSEF. To address these concerns, additional transparency obligations may be imposed, including the preparation of financial reports and a tailored CSEF disclosure document. Small scale offerings A different proposal involves simply amending the current exception from issuing a disclosure document for small scale offerings. Currently, personal offers do not require disclosure to investors if:
none of the offers results in the number of people to whom securities have been issued exceeding 20 in any 12 month period (the 20/12 rule); and
none of the offers results in the amount raised by issuing securities exceeding $2 million in any 12 month period.
The Government is proposing to amend the small scale offerings exception by increasing the 20 investor limit and/or the $2 million cap. Reducing compliance costs for proprietary companies The Government has also sought public participation on ways to reduce the compliance costs for small proprietary companies, including:
removing the requirement to maintain a share register for small proprietary companies;
removing the requirement to make an annual solvency resolution; and
amending the law surrounding the execution of documents.
When will any CSEF legislation be introduced? The Government has indicated that it intends to develop CSEF legislation for public companies regardless of whether it decides to proceed with legislation facilitating CSEF for proprietary companies. We anticipate that legislation will be introduced to Parliament in the spring parliamentary sitting of 2015. This commitment has not been extended to proprietary companies. The Government has stated that it will consider stakeholder feedback before it makes any decisions regarding extending the CSEF framework to proprietary companies. What do we think is next? The majority of companies seeking to obtain CSEF are proprietary companies. The Government’s failure to legislate in this area would see Australia fall behind countries such as New Zealand[1] and the United States[2], who have already adopted legislation in this area. If Australia wishes to remain competitive and stimulate economic growth in the changing global business landscape, it needs to commit to more progressive means of funding for businesses through allowing CSEF for both public and proprietary companies. On 14 September 2015, Malcolm Turnbull replaced Tony Abbott as Prime Minister of Australia. One of his key reasons for “ousting” Abbott was to provide “… the economic confidence that business needs”.[3] Malcolm Turnbull has long indicated that he is in favour of an innovative and competitive market, he is keen to remove red tape for businesses operating in Australia, and is particularly supportive of start-up companies (which typically incorporate as proprietary companies).[4]. Malcolm Turnbull’s support for CSEF has been well documented.[5] We also took particular interest in the tone of Mr Turnbull’s first speech as incoming prime minister, especially the following comments: The Australia of the future has to be a nation that is agile, that is innovative, that is creative. We can’t be defensive, we can’t future proof ourselves. We have to recognise that the disruption that we see driven by technology, the volatility in change is our friend if we are agile disruption that we see driven by technology, the volatility in change is our friend if we are agile and smart enough to take advantage of it. Our prediction This change in leadership will result in further changes to the CSEF proposed legislative regime, which we predict will result in CSEF being extended to proprietary companies as well as public companies. Watch this space! [1] See the Financial Markets Conduct Act 2013 and the Financial Markets Conduct Regulations 2014. [2] See the Jumpstart our Business Startups (Jobs) Act 2012. [3] See http://www.businessinsider.com.au/malcolm-turnbulls-offer-to-restore-business-confidence-is-a-contradiction-but-just-might-work-2015-9 [4] See http://www.startupdaily.net/2015/03/australian-startups-think-malcolm-turnbull-hero-mps-actually-supporting-ecosystem/ [5] See http://www.afr.com/technology/malcolm-turnbull-says-australia-could-follow-new-zealand-crowdfunding-laws-20150517-gh3rur
