Crowd-sourced funding extended to private companies
From 19 October 2018, private companies can seek finance through the equity crowd-sourced funding (CSF) regime 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 regime 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.
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 regime 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 regime they should consider the additional obligations with which they will need to comply.