Crowdfunding update: Corporations Amendment (Crowd-sourced Funding) Bill 2015
Key points:
The Turnbull Government has unveiled its Innovation Statement, which focuses on strengthening ties between the business community, universities and scientific institutions.
A key aspect of the Innovation Statement is the Corporations Amendment (Crowd-sourced Funding) Bill 2015 (the Bill), which allows non-listed public companies access to crowd-sourced funding (CSF) from investors.
The Bill imposes a gross turnover and assets cap on companies, and an investment cap on investors.
Introduction The Turnbull Government has unveiled its Innovation Statement, which introduces policies aimed at encouraging productivity through innovation, a core driver of economic growth. In the same way that the resources boom led Australia through the global financial crisis, Malcolm Turnbull now hopes that an “ideas boom” will see Australia into the 21st century. To that end the Government has released the Bill. The Bill will allow unlisted public companies with less than $5 million in assets and less than $5 million in annual turnover to raise up to $5 million in CSF in any 12 month period. There will be a cap of $10,000 per retail investor in relation to CSF offers by a particular company per 12-month period to protect investors from excessive risks. It has been deemed a “…key priority of the Turnbull Government’s National Innovation and Science Agenda.”[1] For an innovative start-up company, the Bill introduces a new avenue of potential funding for their business, which could mean the difference between its success and failure. If you are a start-up and are looking to tap into alternative means of finance, this guide is for you. So what is CSF? CSF is an emerging form of funding that allows entrepreneurs to raise funds from a large number of investors (the crowd) through online intermediaries. This provides small businesses and start-ups an alternative funding option beyond the traditional sources of finance that are not always available to them. The current legislative framework contained in the Corporations Act 2001 (Corporations Act) places restrictions on the ability of companies to obtain crowd-sourced investment. The Government has been engaging with the public on ways to introduce a regulatory framework for CSF since 2014, with the Industry Innovation and Competitiveness Agenda released in October 2014. The Murray Inquiry into Australia’s financial system (Murray Report), released in December 2014, specifically recommended the introduction of graduate fundraising regulations to facilitate crowdfunding. The Government responses to the Murray Report demonstrated their strong commitment to CSF. Are you eligible to seek CSF? In order to be eligible to make an offer for CSF you must satisfy the following: 1. Are you an unlisted public company? Your business must be registered as an unlisted public company limited by shares.[2] The Corporations Act in its current form imposes burdensome regulatory requirements on public companies:
Must have three directors, two of which must ordinarily reside in Australia[3];
must have at least one company secretary ordinarily residing in Australia[4];
must keep its registered office open to the public during certain hours of the day[5];
must appoint and have an auditor[6];
must hold an annual general meeting;[7]
must prepare audited financial reports that are audited, lodged with ASIC within 4 months of financial year end and sent to members by the earlier of 4 months after year end or 21 days before the next annual general meeting.[8]
We noted, and stakeholder feedback throughout the Government consultations persistently suggested that the majority of companies which are likely to consider and require CSF are proprietary companies. These private companies, which must have less than 50 shareholders, are currently prohibited from raising funds from investors under the Corporations Act. They also have much fewer compliance costs and regulatory requirements, making them a natural and attractive company type for start-ups. To counter this, the Bill allows temporary concessions (for up to five years) from certain public company corporate governance and reporting requirements. If you register as, or convert to, a public company after the commencement of the CSF regime, and for the purpose of making an CSF offer you will be eligible for these concessions. The purpose of these concessions is to reduce the barriers to adopting a public company structure. These concessions include:
no requirement to hold an AGM[9];
only required to provide financial reports to shareholders online[10];
no requirement to appoint an auditor or have audited financial reports until more than $1 million has been raised from CSF offer or other offers requiring disclosure[11].
2. Is Australia your principal place of business? Given that the objective underpinning the Bill is to encourage risk-taking and innovation and support the growth of the Australian economy by improving Australian businesses’ access to capital, your company must have its principal place of business and majority of directors located in Australia. 3. Does your company meet the gross assets and turnover cap? Your company must also comply with the gross assets and turnover cap. This cap means that the value of the consolidated gross assets for your company and any related party must be less than $5 million.[12] As well as satisfying the assets test, the company and any related parties must have consolidated annual revenue of your company and any related party must be less than $5 million.[13] How do you make a CSF offer? If your company is eligible, you are able to make a CSF offer to the public through publishing a CSF offer document[14] on the platform of a single CSF intermediary.[15] A different CSF offer document must be prepared for each CSF offer.[16] The regulations accompanying the Bill, which have not yet been released, will include details of the information to be included in the CSF offer document.[17] The information that will likely be required will include details about your company and business, the CSF offer and how the proceeds from the CSF offer will be used. You must only have one CSF offer open at any one time. Is there a limit to the amount of funds you can raise through CSF? There is a cap on the maximum amount of funds that you can raise through CSF over any 12-month period. This cap is currently set at $5 million, with a regulation-making power to adjust the cap in future.[18] This is calculated by taking into account:
the maximum subscription amount sought under the current CSF offer;
all amounts raised within the past 12 months from any other CSF offers; or
other small scale personal offers; and
certain offers made via an Australian Financial Services Licence.
While the cap does seem like an unnecessary limitation, it is higher than those set by the US and the New Zealand CSF models.[19] How are your investors protected? The Bill allows so called mum and dad investors to invest an “…unlimited sum in crowdfunding.”[20] However, it imposes a $10,000 cap on the amount that retail investors can invest in a particular company in relation to CSF offers via the same intermediary within a 12-month period,[21] limiting the investors’ exposure to a single company. It is expected that the licensed intermediary will have the necessary systems in place to track this.[22] In its Consultation Paper released in August 2015, “Facilitating crowd-sourced equity funding and reducing compliance costs for small businesses”, the Government intended to include a cap for retail investors of $25,000 in aggregate CSF investments in a 12 month period. This additional cap on investment has not been included in the Bill in its current form. The Bill provides cooling off rights, allowing investors to unconditionally withdraw their application within 5 business days of it being made.[23] The Bill also imposes rules regarding the advertising of CSF offers and intended CSF offers.[24] What do we think? It is clear that Malcolm Turnbull is intent on defining and shaping his Government’s legacy as a driver and pursuer of innovation, leader of the “ideas boom”. We believe that this Bill is a positive step in ensuring that legacy. However, the Bill is by no means perfect, and has been heavily criticised for requiring companies to be public to be eligible to make an offer for CSF, rather than proprietary companies, which contradicts much of the stakeholder feedback received by the Government. The whole purpose behind the Bill is to encourage the Australian entrepreneurial spirit and create an environment which enables innovative start-up companies and small businesses to grow and flourish. The Bill does recognise the administrative burden that comes with registering as a public company, which can be seen through the various corporate governance concessions it allows. This will provide some relief to those companies seeking CSF. We hope that these concessions will be enough to encourage start-ups and small business to access CSF under this model. As Malcolm Turnbull has stated: "If some of these policies are not as successful as we like, we will change them. We will learn from them. Because that is what a 21st century government has got to be. It has got to be as agile as the start-up businesses it seeks to inspire."[25] The regulations, once released, will provide further clarity on how the Bill will operate in practice. [1] http://kmo.ministers.treasury.gov.au/media-release/030-2015/ [2] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 1, pt 1, item 14, para 738 738H(1)(a). [3] Corporations Act 2001 (Cth) s 201A (2). [4] Corporations Act 2001 (Cth) s 204A(2). [5] Corporations Act 2001 (Cth) s 145. [6] Corporations Act 2001 (Cth) s 327A(1). [7] Corporations Act 2001 (Cth) s 250N. [8] Corporations Act 2001 (Cth) s 295 – 297. [9] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 2 item 2, ss 250N(5). [10] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 2, items 6 & 7, ss 314(1), 314(1AF). [11] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 2, item 2, ss 301(5). [12] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 1, pt 1, item 14, para 738H(2)(a). [13] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 1, pt 1, item 14, para 738H(2)(b). [14] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 1, pt 1, item 14, para 738J(1). [15] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 1, pt 1, item 14, para 738L(1). [16] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 1, pt 1, item 14, para 738J(1). [17] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 1, pt 1, item 14, para 738J(2). [18] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 1, pt 1, item 14, para 738G(2). [19] http://kmo.ministers.treasury.gov.au/media-release/030-2015/ [20] http://kmo.ministers.treasury.gov.au/media-release/030-2015/ [21] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 1, pt 1, item 14, para 738ZC(1). [22] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 1, pt 1, item 14, para 738ZB(4)(b). [23] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 1, pt 1, item 14, para 738ZD(1) [24] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 1, pt 1, item 14, para 738ZG(1)(a). [25] http://www.smh.com.au/federal-politics/political-news/malcolm-turnbulls-rare-prime-ministerial-admission-theres-nothing-wrong-with-failure-20151207-glhcmh.html
