Crowd-sourced fund­ing extend­ed to pri­vate companies

From 19 Octo­ber 2018, pri­vate com­pa­nies can seek finance through the equi­ty crowd-sourced fund­ing (CSF) régime that was pre­vi­ous­ly open only to pub­lic companies.

CSF is a mech­a­nism (an online plat­form) that allows eli­gi­ble com­pa­nies to raise cap­i­tal by offer­ing secu­ri­ties (only new ordi­nary shares) in the com­pa­ny to a large num­ber of investors, includ­ing retail investors. The CSF régime was first intro­duced in Sep­tem­ber 2017, how­ev­er, at that time it was open only to pub­lic com­pa­nies. For a refresh­er, please see our pre­vi­ous arti­cles on CSF, Equi­ty Crowd Source Fund­ing — Part 1 and Equi­ty Crowd Source Fund­ing Part 2: Reg­u­la­to­ry Update.

Although it is now pos­si­ble for pri­vate com­pa­nies to avail them­selves of the CSF, there are cer­tain oblig­a­tions they need to com­ply with, which are designed to increase share­hold­er engage­ment and mit­i­gate the occur­rence of fraud. They include:

1. Min­i­mum Directors

The com­pa­ny must have a min­i­mum of two direc­tors. If there are two direc­tors, one of the direc­tors must be ordi­nar­i­ly res­i­dent in Aus­tralia. If there are more than two direc­tors, a major­i­ty of the direc­tors must be ordi­nar­i­ly res­i­dent in Aus­tralia. An increased num­ber of direc­tors (com­pared to the default posi­tion of one direc­tor) is, as we under­stand, to ensure that there is greater trans­paren­cy, more robust deci­sion mak­ing and greater cer­tain­ty around suc­ces­sion planning.

2. Report­ing

Even if the com­pa­ny sat­is­fies the def­i­n­i­tion of small pro­pri­etary com­pa­ny’, once it has any CSF share­hold­ers, it must pre­pare annu­al finan­cial and direc­tors’ reports in accor­dance with account­ing stan­dards, pro­vide them to the share­hold­ers and also lodge them with ASIC. There is, how­ev­er, no oblig­a­tion to make the reports pub­lic. The finan­cial state­ments must be audit­ed once the com­pa­ny has raised at least $3 mil­lion from CSF activ­i­ties. This amount may be adjust­ed in future.

3. Com­pa­ny Register

The com­pa­ny must main­tain addi­tion­al infor­ma­tion in its reg­is­ter, including:

  • the date of each issue of shares as part of a CSF offer; 
  • the num­ber of shares issued as part of each CSF offer; 
  • the shares issued to each mem­ber of the com­pa­ny as part of each CSF offer; and 
  • the date on which a per­son ceas­es to be a CSF share­hold­er of the com­pa­ny in respect of a par­tic­u­lar share in the company.

The com­pa­ny is also required to report to ASIC once it makes a CSF offer. This will include noti­fy­ing ASIC when the com­pa­ny starts and ceas­es hav­ing CSF share­hold­ers and when there are changes to its share register.

4 Relat­ed Par­ty Trans­ac­tion Rules

Although a pri­vate com­pa­ny, it will be required to com­ply with the exist­ing relat­ed par­ty trans­ac­tion rules that apply to pub­lic com­pa­nies. These are set out in Chap­ter 2E of the Cor­po­ra­tions Act 2001 (Cth).

5 Takeover rules

Fur­ther, the gen­er­al rule that a pri­vate com­pa­ny can­not have more than 50 non-employ­ee share­hold­ers has been relaxed in that the num­ber of CSF share­hold­ers will not be count­ed towards this thresh­old. So, pro­vid­ed that the num­ber of non-CSF share­hold­ers does not exceed 50, the takeover rules and many oth­er oblig­a­tions to which a pub­lic com­pa­ny is required to adhere, will not apply to a com­pa­ny with CSF shareholders.

The CSF régime will no doubt open doors for start-up com­pa­nies look­ing to raise funds through non-tra­di­tion­al avenues. Before a pri­vate com­pa­ny seeks finance through the CSF régime they should con­sid­er the addi­tion­al oblig­a­tions with which they will need to comply.

If you would like to know more about the CSF régime, please feel free to con­tact Michael Phillips at mpp@​swaab.​com.​au or Bill Lo at bbl@​swaab.​com.​au.