Looking back on the year ended 30 June 2023
Since its introduction in 2017, Australian businesses have raised nearly $250 million via crowd-sourced funding (CSF).1 By offering shares to many investors, each of whom invests relatively small amounts of money, CSF allows companies to rapidly fundraise significant sums without the need to engage with sophisticated investors or investment banks.
During the 12 months ended 30 June 2023, there were 85 CSF offers in Australia, raising a total of $64 million.2 In a period where the Australian Securities Exchange (ASX) experienced an 80% drop in capital raises, and there was a 96% decrease in IPO funding,3 the comparatively modest decrease in CSF funding of just 26% demonstrates its relative strength in markets generally impacted by a lack of investor confidence.4
Highlights from the CSF offers in the last financial year include:
- the fastest CSF campaign in Australian history – $2.5million raised in under two hours; and
- a company hitting the $5 million cap for CSF funding per year.
Given its accessibility and relative simplicity when compared to traditional capital raises, we anticipate that CSF will continue to grow in Australia.
Eligibility to make CSF offers
CSF allows companies to fundraise from many small investors in a rapid fashion. Sophisticated investors may invest any amount, while everyday (retail) investors are limited to investing $10,000 via CSF offers per year.
Companies may raise up to $5 million via CSF per year. However, this cap may be reduced if the company has received amounts under a small-scale personal offer or an offer made via an Australian financial services licensee during that same period.
To make a CSF offer, a company must prepare a CSF offer document. The minimum contents of this document are mandated by ASIC and must include appropriate risk warnings, company information, information about the offer and a summary of investors’ rights. These rights include a compulsory cooling-off period for retail investors, during which they can withdraw their investment in full. The offer document is made available to the public via a CSF intermediary’s online platform. Engagement with a CSF intermediary is mandatory and the intermediary is subject to strict regulation by ASIC.
To be eligible to make a CSF offer, unlisted public companies and proprietary companies must meet the assets test and the revenue test. Companies (and their related parties) must:
- have less than $25 million in consolidated gross assets; and
- have less than $25 million in consolidated annual revenue.
Companies must also have their principal place of business be in Australia, and have the majority of their directors ordinarily residing in Australia, to be eligible to make a CSF offer. Foreign companies may make CSF offers in certain circumstances.
Reporting and corporate governance
Typically, a proprietary company can have no more than 50 non-employee shareholders. Once a company reaches this threshold it usually must convert to an unlisted public company. However, shareholders who acquired their shares via a CSF offer do not count towards this 50-shareholder limit. As such, a company that fundraises via a CSF offer may have a significantly larger number of shareholders and remain a proprietary company.
Despite being proprietary companies, such companies will have to comply with increased reporting and corporate governance measures intended to safeguard the interests of their shareholders. These measures include:
|1.||Recording details of its CSF shareholders and the shares issued under its CSF offer on its share register.||The company must record the date of when shares are issued under a CSF offer, the number of shares issued, the shares issues to each CSF shareholder and the date on which each shareholder ceases to be a CSF shareholder of the company.|
|2.||Notifying ASIC about changes to its share register, including when it starts or ceases to have CSF shareholders.||The company must notify ASIC if it starts or ceases to have any CSF shareholders, whether it has new CSF shareholders as a result of any share issues and whether it ceases to have any CSF shareholders as a result of any share cancellations.|
|3.||Having a minimum of two directors, with the majority ordinarily residing in Australia.||Companies must have a minimum of two directors at the time of making the CSF offer in order to be eligible to make the offer. Where there are only two directors, only one is required to ordinarily reside in Australia.|
|4.||Lodging annual financial reports and directors' reports with ASIC.||Small proprietary companies are usually only required to lodge these reports if directed to do so by ASIC or their shareholders. The reports must be in accordance with the accounting standards and must be lodged with ASIC within four months of the end of the financial year.|
|5.||Having its annual financial reports audited.||This obligation only applies to large proprietary companies or to small proprietary companies that have raised more than $3 million from CSF offers. Usually, small proprietary companies are only required to have audited reports if directed to do so by ASIC or its shareholders.|
|6.||Making its annual financial report, directors' report and auditor's report (if any) available on its website.||This obligation only applies to small proprietary companies.|
From 1 July 2019, large proprietary companies are those with at least two of the following: (1) consolidated revenue of $50 million or more; (2) consolidated gross assets of $25 million or more; and (3) 100 or more employees at the end of the financial year. If a company does not meet at least two of the above criteria, it is a small proprietary company.
Unlike typical proprietary companies, companies with CSF shareholders must comply with the rules on related party transactions in Chapter 2E of the Corporations Act 2001 (Cth) (Act). Where a company wants to give a financial benefit to a related party (such as a company’s director or their spouse or relative), the company must first get shareholder approval. What constitutes financial benefit is to be construed broadly and includes benefits not involving the payment of money. However, there are certain exceptions to this rule, for example where the transaction is on arm’s-length terms.
Application of the takeover rules
The takeover rules in the Act may apply to companies with CSF shareholders in a limited manner. Generally, persons may not acquire shares in a company with more than 50 members if, because of that acquisition, they would hold an interest in more than 20% of the company’s shares. However, section 611 of the Act grants an exception from this prohibition to proprietary companies that have CSF shareholders. This exception is designed to help facilitate exit opportunities for CSF shareholders, as potential buyers may more easily acquire shares in the company.
Despite this exception, the general takeover principles still apply to companies with CSF shareholders. The purpose of these principles is to ensure that:
- the acquisition of control over a company takes place in an efficient, competitive and informed market;
- shareholders and directors know the identity of a person proposing to acquire a substantial interest in the entity, have a reasonable time to consider the proposal and have enough information to enable them to assess the proposal; and
- shareholders all have a reasonable and equal opportunity to participate in any benefits of the proposal.
The Takeovers Panel may prevent a company from undertaking certain transactions if it determines there are ‘unacceptable circumstances’. This includes where the above purposes are not met.
CSF shareholders may add complexity to future fundraising. For a proprietary company to fundraise by issuing new shares, it must fall within the exceptions listed in section 708 of the Act. A few of the common exceptions, and the challenges to fundraising posed by CSF shareholders, are outlined below:
- Small scale issue – this is limited to 20 shareholders and $2 million dollars. The limit may prevent all CSF shareholders from being able to participate and the funds cap may not be sufficient for all companies’ purposes.
- Sophisticated/professional investors – CSF shareholders are typically retail investors and are not eligible to invest pursuant to these exceptions.
- Associated persons – Associated persons include a senior manager’s spouse or family members. CSF shareholders are generally not known to the company.
Given the challenges for proprietary companies, involving CSF shareholders in subsequent fundraising rounds often requires significant legal analysis. Alternatively, a proprietary company may convert to a public company, allowing it to issue a prospectus and complete fundraising without the need to rely on any of the disclosure exceptions. Please get in contact with our firm to discuss options for your business.
Given the asset and revenue cap, and the relative speed with which a CSF offer can be conducted, CSF funding is well suited for Australian start-ups and small businesses looking to rapidly expand.
HWL Ebsworth Lawyers’ national corporate team have experienced professionals who can assist you in obtaining crowd-sourced funding for your business.
This article was written by Thomas Kim, Partner and Josh Hanegbi, Solicitor.
1 Birchal Pty Ltd’s report on the financial year ended 30 June 2023 (Birchal Report).
2 Birchal Report.
3 ‘Floats and capital raisings droughts hits ASX’, The Australian (6 July 2023).
4 Birchal Report.