Crowdfunding update: extending CSF to proprietary companies
Key Points
In September 2018 the Government passed the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 (Cth) (Act), as well as the Corporations Amendment (Crowd-sourced Funding) Regulations 2018 (Cth) (Regulations).
The Act and accompanying Regulations will provide small, proprietary companies access to crowd-sourced equity funding, providing opportunities for expansion and development for start-ups and small businesses across Australia.
We have followed the progress of this legislation with interest, and you can find our updates here.
Introduction
The passing of the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 (Act) represents the latest (positive) advancement in the regulation of equity-based crowdfunding in Australia. The Act demonstrates the Government’s efforts to engage with stakeholder feedback and facilitate innovation and alternative finance platforms for small business and start-up financing. To counterbalance this, the Act will also require participants to adhere to stringent regulatory controls to ensure investors receive adequate protection.
What is CSF?
Small businesses and start-ups face challenges accessing finance, particularly at the formative business stages where access to finance is crucial for continued innovation, development and expansion. Crowd-sourced funding (CSF) is an innovative fundraising mechanism, which uses new technologies to connect fundraisers directly with funding sources.[1] It allows individual investors to make financial contributions towards a company, in exchange for equity in that company.
What is the current state of play?
Proprietary companies are (generally speaking) prohibited from raising funds from the public. In 2017, legislation was passed to allow public companies access to CSF, with concessions available to proprietary companies that converted to public companies to access CSF under that legislation.[2] However, these concessions were simply not enough of an inducement, as the compliance costs and regulatory burden associated with operating as a public company acted as a deterrent to the small businesses and start-ups who really needed these alternative sources of finance to succeed.
What are the key changes?
The Act extends the current regime to allow proprietary companies to access CSF without the need to convert to a public company.
Proprietary companies operate within the confines of a shareholder cap, limited to 50 non-employee shareholders. To ensure that start-ups have access to a wide number of investors, the Act amends this shareholder cap to exclude “CSF shareholders”.[3]
A CSF shareholder is one who is directly issued with a share under a CSF offer, as well as shareholders who own shares that were originally issued as part of a CSF offer, and the transfer occurred prior to the company’s shares being traded on a financial market in Australia.[4]
What is a CSF offer?
An eligible company may make a CSF offer to the public by publishing a CSF offer document on the platform of a single CSF intermediary.[5]
Companies must satisfy the following conditions to access the CSF regime:
the company is either a public company limited by shares, or a proprietary company that has at least 2 directors;
the company’s principal place of business is Australia;
a majority of the company’s directors (not counting alternate directors) ordinarily reside in Australia;
the value of consolidated gross assets of the company is less than $25 million, and its consolidated annual revenue is less than $25 million);
neither the company nor any related party is a listed company; and
neither the company not any related party has a substantial purpose of investing in securities or interests in other entities or schemes.[6]
The CSF offer document must include risk warnings, information about the offering company, information about the offer, and information about investor rights.[7] The Regulations set out the specific contents and information to be included.
Is there a limit on how much a company can raise?
There is a cap on the maximum amount of funds that can be raised through CSF over any 12-month period. This cap is currently set at $5 million.[8]
What are the additional investor protections?
Special investor protection measures will apply to any proprietary companies accessing the CSF regime. These include requirements to:
have at least 2 directors, with a majority of directors ordinarily residing in Australia;[9]
have financial reports audited if the company raises $3 million or more (the “CSF audit threshold”);[10]
comply with additional reporting obligations, including the inclusion of CSF information as part of company register;[11]
prepare annual financial and directors’ reports in accordance with accounting standards;[12] and
comply with restrictions on related party transactions.
When can you access the CSF regime?
Proprietary companies can now access the CSF regime, with the legislation coming into force on 19 October 2018.[13]
Conclusion
The Act represents a win for entrepreneurs and start-ups, allowing access to fundraising for innovative new businesses. At the same time, we think it strikes the right balance between facilitating alternative sources of finance to innovative start-ups who need it, and ensuring investors are adequately and robustly protected.
We hope that the Act improves investor confidence in alternative finance platforms such as crowdfunding, and that these alternative platforms continue to grow as a source of funding for businesses across Australia.
The Pacific Legal Network has extensive experience advising start-up companies with the growth and expansion of their business. Please contact us to find out more.
[1] The Availability of Business Finance, Ellis Connolly and Ben Jackman, the Domestic Markets Department, Reserve Bank of Australia.
[2] See: Corporations Amendment (Crowd-sourced Funding) Act 2017.
[3] Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 (Cth) s 6; Corporations Act 2001 (Cth) s 113(2).
[4] Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 (Cth) s 6; Corporations Act 2001 (Cth) s 113(2).
[5] Corporations Act 2001 (Cth) s 738L.
[6] Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 (Cth) s 41; Corporations Act 2001 (Cth) s 738H.
[7] Corporations Regulations 2001 (Cth) cl 6D.3A.02.
[8] Corporations Act 2001 (Cth) s 738G.
[9] Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 (Cth) s 13(1A); Corporations Act 2001 (Cth) s 201A(1).
[10] Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 (Cth) s 16; Corporations Act 2001 (Cth) s 285(1).
[11] Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 (Cth) s 10; Corporations Act 2001 (Cth) s 169(6).
[12] Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 (Cth) s 18; Corporations Act 2001 (Cth) s 292(2)(b).
[13] Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 (Cth) s 2; Corporations Amendment (Crowd-sourced Funding) Regulations 2018 (Cth) s 2.
