Equity Crowd Source Funding Part 2: Regulatory Update
Australia’s equity crowd source funding régime (CSF Régime) came into effect in Australia on 29 September 2017. The relevant provisions now sit within Part 6D.3A of the Corporations Act 2001 (the Act) and of the Corporations Regulations (2001) (the Regulations).
The CSF Régime offers an opportunity for start-ups and small businesses to raise funds from retail investors without a detailed and extensive disclosure document or by relying on the so-called “20/12 rule” or “small scale offering” exemption. Similar regimes operate in the UK, New Zealand, Canada and USA.
Our previous article covered the topics including the eligibility criteria to be satisfied by a company seeking to raise equity capital via the CSF Régime.
This article digs a little deeper now that the Regulations have been promulgated and the government intends to change one of the eligibility criteria. ASIC has also published two Regulatory Guides (261 and 262). These will need to be updated once the change outlined below comes into force.
Following extensive public consultation, the government altered its position on the requirement that a company seeking to raise funds under the CSF Régime must be a public company.
As noted in our previous article, a public company is subject to a raft of stringent corporate governance and reporting requirements that do not apply to proprietary companies. At present, it is necessary for a company wishing to access the CSF Régime to convert to a public company. Although the government grants a few temporary concessions, it is considered that the time and costs associated with complying with these public company requirements are an anathema to the stated objective of reducing regulatory barriers and compliance costs for start-ups and SME businesses looking to raise capital.
Proposed amendments to the legislation are currently before the Senate, with the aim to extend the CSF Régime to proprietary companies but with a few additional requirements. The additional requirements that will need to be complied with by proprietary companies to access the CSF Régime, as compared with the requirements of proprietary companies in general, are set out below:
Proprietary Company accessing the CSF Régime
Minimum of 1 director
Minimum of 2 directors
Generally no requirement to prepare and lodge annual financial reports with ASIC (there are certain exceptions)
Must prepare and lodge financial statements with ASIC
Generally no requirement to have financial statements audited
Must have financial statements audited, but only when CSF company has raised $3 million or more under the CSF Régime
Related party transaction rules under Chapter 2E of the Corporations Act do not apply
Chapter 2E applies
Company must not have more than 50 shareholders (excluding employee shareholders)
The 50 shareholder limit still applies. However, for the purpose of calculating the number of shareholders, you can exclude employee shareholders and shareholders to whom shares are issued under the CSF Régime
Proprietary companies with more than 50 shareholders are subject to the takeover rules
Proprietary companies that have CSF shareholders are exempt from the takeover rules
A proprietary company that makes a CSF offer is required to include additional information as part of its company register. This includes dates of issue, number of shares issued etc.
It is hoped that the amendments will be approved by the Senate and receive Royal Assent before the end of 2018.
Whilst the forthcoming concessions to be made by the government to the public company requirement are welcome, the duties and obligations of the CSF intermediary remain unaltered and are extensive and numerous.
In effect, the CSF intermediary is akin to a gate keeper. Its obligations include:
- undertaking fairly rigorous diligence inquiries on the company, its business and officers;
- ensuring that the infrastructure of the online platform under which CSF offers are made support a host of features prescribed by the legislation. This entails an intermediary having in place policies, systems and procedures to ensure that it complies with its gatekeeper obligations;
- complying with detailed procedures for making the CSF offer, such as when the offer may open, when it may be closed and when the offer may be regarded as complete. In addition, the intermediary must have a communication facility in place to allow potential investors, the issuer and intermediary to communicate with each other about a particular CSF offer; ;
- dealing with subscription funds and when to refund those monies;
- ensuring that it does not publish or continue to publish on its online platform an offer document that is defective (misleading, deceptive, containing omissions).
Given that a breach of many of the obligations to which a CSF intermediary is subject may result in criminal liability, a CSF intermediary will need to undertake a thorough verification exercise prior to publishing a CSF offer document on its CSF platform and then closely monitor the platform while the offer remains open. With the ability of the company to communicate directly with prospective investors, via the online platform, CSF intermediaries will need to ensure that these communications are vetted in order to avoid the company carelessly (or worse) disseminating false or misleading information.
To date, as far as we are aware, seven companies have been issued with Australian Financial Services (AFS) licence authorisations to act as intermediaries to provide a crowd-sourced funding service. These are Big Start, Billfolda, Birchal Financial Services, Equitise, Global Funding Partners, IQX Investment Services and On-Market Bookbuilds.
The jury is still out on the effectiveness of the current CSF Régime and the impact which the proposed amendment will have on the régime. The compliance requirements remain extensive for CSF intermediaries and the extent to which investors will embrace the CSF Régime is yet to be seen.
 See section 708 of the Corporations Act 2001. This compliance-light form of capital raising is known as the ‘20/12’ rule because the ambit of a ‘small scale offering’ is limited to capital raisings of no more than $2,000,000, from a maximum of 20 investors, during a 12 month period. This kind of private offering is usually made via an informal Information Memorandum. Offers cannot be made available to the public – they must be personal offers. Sophisticated investors or officers of the company are excluded from the 20 investor cap, as are those people investing $500,000 or more.