Pub­li­ca­tions

Equi­ty Crowd Source Fund­ing Part 2: Reg­u­la­to­ry Update

Australia’s equi­ty crowd source fund­ing regime (CSF Regime) 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 Regime 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.[1] 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 Regime.

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.

Pro­posed Change

Fol­low­ing exten­sive pub­lic con­sul­ta­tion, the gov­ern­ment altered its posi­tion on the require­ment that a com­pa­ny seek­ing to raise funds under the CSF Regime 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 Regime 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 Regime 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 Regime, as com­pared with the require­ments of pro­pri­etary com­pa­nies in gen­er­al, are set out below:

Pro­pri­etary Company

Pro­pri­etary Com­pa­ny access­ing the CSF Regime

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 Regime

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 Regime

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

Not applicable

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.

CSF inter­me­di­ary

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.

Con­clu­sion

The jury is still out on the effec­tive­ness of the cur­rent CSF Regime and the impact which the pro­posed amend­ment will have on the regime. The com­pli­ance require­ments remain exten­sive for CSF inter­me­di­aries and the extent to which investors will embrace the CSF Regime is yet to be seen.


[1] 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.