Crowdfunding laws that finally work for the crowd
Introduction
The Government has introduced the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (the “Bill”), which seeks to extend crowd-sourced funding (“CSF”) to proprietary companies in Australia.
The Bill will provide small businesses and start-ups with access to alternative means of finance, at significantly reduced compliance costs than the current regime.
Refresher on CSF: what is it?
CSF is a form of funding which allows entrepreneurs to raise funds from a large number of investors (i.e. the crowd) through online intermediaries, in exchange for an equity stake in the company. CSF provides small businesses and start-ups with an alternative source of funding, beyond traditional sources of finance that may not be available to them.
What is the current state of play in Australia?
Currently, proprietary companies are prohibited from raising funds from the public.
The Corporations Amendment (Crowd-sourced Funding) Act 2017 is due to commence in Australia on 29 September 2017. This legislation allows public companies access to CSF, however, it does not extend to proprietary companies. This decision was largely criticised, given that the majority of companies that are likely to consider and require CSF are proprietary companies. While the Act does provide some concessions for companies who convert to public companies to access CSF, the decision to bar proprietary companies from accessing CSF contradicted much of the stakeholder feedback received by the Government.
How will this Bill help?
The Bill will extend CSF to proprietary companies that meet certain eligibility requirements, which will enable small businesses and start-ups with the access to capital that they need in order to thrive.
While the Bill will definitely be seen as a welcome relief to small business, proprietary companies that do seek access to CSF will be subject to greater obligations, including:
a minimum of 2 directors;
financial reporting in accordance with accounting standards;
audit requirements;
restrictions on related party transactions; and
minimum shareholder rights to participate in exit events.
Additionally, companies that have CSF shareholders will be required to maintain this information as part of their registers, and will have additional obligations to report to ASIC once they make a CSF offer.
These measures will encourage greater accountability on the part of the company, and will ensure investors receive adequate protection. However, the Explanatory Memorandum does caution that in the event that the CSF regime for proprietary companies develops in a way that creates great risk for investors then further eligibility requirements will be imposed.[1]
What do we think?
We were very pleased with the release of the Bill. It demonstrates that the Government is finally legislating alongside current industry expectations, and we believe that the Bill represents a win for start-ups and small businesses in Australia.
The Bill is currently before Parliament, and we will continue to provide any updates as they arise.
Food for thought
The Pacific Legal Network is proud of its participation in several impact investment projects across the Pacific. There is a natural link between crowdfunding and impact investment – or, ‘crowdfunding for impact’ – the former can be used as a tool to achieve the latter.
We will continue to watch this space with interest.
[1] Corporations Amendment (Crowd-Sourced Funding for Proprietary Companies) Bill 2017 Explanatory Memorandum, p8.
