Australia’s long-awaited reform to equity sourced crowdfunding has recently passed in the Senate with Royal Assent expected from approximately 15th October 2018. Australian private companies will now be able to offer ordinary shares to everyday investors via licensed equity crowdfunding platforms.
The Corporations Amendment (Crowd Sourced Funding for Proprietary Companies) Bill 2017 was passed on 12th September 2018. This legislation withdraws the previous requirement that an Australian private company must convert to an unlisted public company to be able to raise capital from the public. Under the reforms, private companies that raise funds through crowd-sourced funding (CSF) will be subject to a range of compliance obligations.
What is CSF?
CSF is a type of fundraising, typically through online platforms, that allows members of the public to make financial contributions towards a company in exchange for ordinary shares. CSF is an alternative way to raise funds, especially for innovative and early-stage companies that may not have the access to debt funding (via banks and other financial institutions) or equity funding.
In Australia, new CSF legislation took effect on 29 September 2017, which allowed unlisted public companies to raise up to $5 million in 12 months through an AFS licensed intermediary who is authorised to provide CSF services. Recently this legislation was amended to extend the CSF regime to proprietary companies in Australia.
Key Features of the CSF Legislation
- Eligible companies can raise up to $5 million in any 12-month period.
- Private companies, with less than $25 million in annual revenue and $25 million in consolidated gross assets, that have their principal place of business and a majority of directors in Australia, are eligible to participate in the CSF regime.
- Retail investors are limited to investing $10,000 per company in any 12-month period.
- Offers can only be made via licensed CSF intermediary platforms. CSF intermediaries must hold an Australian Financial Services License (AFSL).
- Companies making CSF offers must prepare a CSF Offer Document which includes prescribed minimum information. They must also prepare annual reports and director reports.
- Private companies who raise cumulatively more than $3 million in CSF capital, are required to be audited and must notify ASIC when any CSF shares are issued.
What is the compliance burden?
The amended CSF legislation removes the previous burden on proprietary companies to convert to an unlisted public company. However, there are still compliance requirements to be aware of which are not ordinarily imposed on small proprietary businesses. Some of these compliance obligations include having at least two Directors with the majority residing in Australia, the preparation of an annual report and Directors report in line with Australian Accounting Standards, receiving audited financial statements when more than $3 million CSF capital has been raised, as well as maintaining comprehensive company registers. Shareholder approval is also required for any related party transactions under the amended legislation.
There are concessions available which may eliminate the need to post or email annual reports to shareholders, however, the information will still need to be reported to investors via the company’s website.
It is also worth noting that under the Corporations Act 2001 (Cth)(Act), a proprietary company cannot have more than 50 non-employee shareholders. However, under the amended legislation CSF shareholders will not count towards this cap due to the possible attraction of a large number of small-scale investors.
Although the compliance burden has been seen by many as a high hurdle for companies, it is not necessarily that surprising when considering such companies will be issuing their shares to a large numbers of retail investors. How companies will deal with the demands and expectations of such broad shareholdings will be another area of interest for many onlookers.
Licensed CSF Intermediaries
There are many licensed CSF intermediaries in Australia, one of which is Birchal, a spin-off of the reward-based equity funding site Pozible. Licensed equity crowdfunding platforms like Birchal provide Australian private companies the opportunity to offer an equity stake to everyday investors. Birchal co-founder Matt Vitale says “we’re thrilled this has finally happened, as it will significantly open up the crowdfunding regime for small and medium businesses”. Expanding CSF into equity offerings may also be another way for successful companies to generate greater support from their existing loyal customers.
Next steps for interested companies
Private companies interested in partaking in equity CSF offers will need to partner with a licensed intermediary and work their way through the requirements of the legislation. Given the compliance and regulatory burden, companies may also wish to seek assistance from suitably knowledgeable advisors such as accountants and lawyers in respect of ensuring financial information complies with accounting standards, meeting minimum disclosure requirements for offer documents, etc.
This article was co-authored by Alex Roberts, HLB Mann Judd Melbourne