On 29 September 2017 new legislation came into effect for equity crowd-sourced funding (CSF) allowing small unlisted public companies to obtain funding in an innovative way by raising small amounts of capital from a large number of investors. This is a key alternative to the current fundraising options permitted under the Corporations Act 2001 (Cth) (Act), following similar moves in other jurisdictions such as New Zealand, the UK and the US.
The Federal Government has also released the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (Cth) (Bill) that proposes to extend the changes made by the recent CSF amendments to proprietary companies.
1. Background
Raising venture capital in Australia can be a significant challenge as funding can be harder to secure than in larger markets such as the US, especially for entrepreneurs who cannot access bank loans or private equity. The CSF legislation assists start-ups and other small business that may have difficulty accessing traditional equity funding because of the costs and time involved in meeting the disclosure and other requirements. Although exemptions currently exist under the Act, such as small scale offerings (where up to $2 million dollars can be raised from up to 20 investors in 12 months) or fundraising from sophisticated investors, many start-ups and other small businesses either do not have access to such investors or require more funding than that allowed without disclosure. Further information regarding the CSF amendments are set out in paragraph 3.
2. Can proprietary companies access CSF?
Proprietary companies are not currently permitted to use CSF as a means to raise capital.
The Bill proposes to extend the application of the new CSF legislation to proprietary companies, subject to some variations to the recent CSF amendments. Under the Bill, proprietary companies seeking to access CSF:
- Must have a minimum of two directors;
- Must not be included in an official list of a financial market operated outside Australia;
- Must have no more than 50 non-employee shareholders – shareholders issued with securities through a CSF offer are not counted in this number;
- Will be exempt from the takeover rules under Chapter 6 of the Act;
- Will not need to have their financial reports audited until they have raised at least $3 million from CSF offers;
- Will have to comply with the related party transaction rules under Chapter 2E of the Act since they will be relying on public money; and
- Will have to comply with additional reporting and audit obligations.
The Bill also proposes to impose additional obligations on proprietary companies to protect investors.
The introduction of the Bill is welcome news for proprietary companies, especially for new businesses and start-ups, as it will enable them to access a new source of capital. However these companies now face a tricky decision – to convert to a public company and access the CSF regime immediately, or wait for the Bill to become law and benefit from the concessions it grants to proprietary companies.
3. CSF legislation
3.1 Summary
In summary, eligible companies may now raise up to $5 million in 12 months through a licensed CSF platform, with a cap of $10,000 per annum per retail investor. Offers are made via a CSF offer document, rather than a more onerous disclosure document such as a prospectus. CSF therefore gives retail investors access to a wider range of investment opportunities, which in turn benefits the companies that receive their investment.
3.2 Which companies are eligible to utilise CSF?
Companies are eligible to utilise CSF under the Act if they are unlisted public companies limited by shares whose principal place of business is in Australia, and have:
- A majority of their directors ordinarily residing in Australia;
- Less than $25 million in both consolidated gross assets and revenue; and
- No substantial purpose of investing securities or interests in other entities or schemes.
3.3 Making CSF offers under the Act
Under the Act, eligible companies will be able to make offers of fully-paid ordinary shares to raise up to $5 million in any 12-month period through licensed CSF intermediaries (CSF offer). Eligible companies must only have one CSF offer open at a time.
A CSF offer must be made by publishing a CSF offer document on a platform of a single CSF intermediary. That CSF offer document does not need to be lodged with ASIC.
The CSF offer can only be open for a limited time. The CSF offer must be closed by the CSF intermediary as soon as practicable after the first of the following occurs:
- A three month period starting from when the offer was made ends; or
- If the CSF offer document specifies a period during which the offer is to be open, or a date after which the offer is no longer to be open – that period ends or that date occurs; or
- The responsible CSF intermediary considers that the offer is fully subscribed to the maximum subscription amount for the offer; or
- The company making the offer notifies the responsible CSF intermediary that the company wants the offer withdrawn (withdrawal is only permitted in certain circumstances); or
- The continued publication of the CSF offer document is prohibited for a reason specified in the Act.
3.4 Prohibited CSF offers
A CSF offer cannot be made if the CSF intermediary:
- Is not satisfied as to the identity of the company making the offer, or of any of the directors or other officers of the company; or
- Has reason to believe that any of the directors or other officers of the company are not of good fame or character; or
- Has reason to believe that the company, or a director or other officer of the company, has, in relation to the offer, knowingly engaged in conduct that is misleading or deceptive or likely to mislead or deceive; or
- Has reason to believe that the offer to which the document relates is not eligible to be made.
3.5 Certain conduct is prohibited
Eligible companies and CSF intermediaries cannot financially assist investors nor arrange financial assistance for such persons to acquire securities pursuant to the CSF offer.
Eligible companies cannot intend to use funds they seek to raise to invest in securities or interests in other entities or schemes, nor to make loans.
3.6 Disclosure requirements and corporate governance obligations for eligible companies
Eligible companies making CSF offers do not have to comply with the usual disclosure requirements under the Act, for example, issuing a prospectus.
The Act also provides corporate governance concessions to particular companies. Newly created or converted public companies making CSF offers, within five years after registration or conversion to a public company, do not have to comply with certain annual general meeting, reporting and audit obligations that would normally apply to public companies.
3.7 CSF intermediaries
Under the Act, CSF intermediaries are required to hold an Australian Financial Services (AFS) licence which authorises them to provide a crowd-sourced funding service. An application needs to be made to ASIC (after the new CSF legislation takes effect) in order to attain the relevant AFS licence.
CSF intermediaries must (among other things), at all times while the CSF offer is open, ensure that the prescribed risk warning in the terms specified by the Corporations Regulations 2001 (Regulations) appears prominently on the offer platform.
3.8 Investor protections
Investor protections apply to CSF offers, including:
- A requirement that investors make an acknowledgement regarding the risk of making an application in the terms specified by the Regulations;
- A five day cooling off period; and
- An investment cap of $10,000 per company in any 12 month period.
4. Conclusion
CSF is an exciting development in capital raising in Australia. For start-ups and other small businesses, raising the funds needed may make the difference between successful expansion taking its business to the next level, and stagnation or even regression of its business due to limited funding.
We look forward to assisting you with exploring the fundraising options for your business, so you can choose the ideal solution for your circumstances. If you have any questions or wish to seek specific advice, please do not hesitate to contact our Equity Capital Markets team.
This article was written by David Woodford, Partner and Thomas Kim, Partner.