On 20 March 2017, the Commonwealth Parliament passed the Corporations Amendment (Crowd-sourced Funding) Bill 2016 to provide a regulatory framework for crowd-sourced equity funding (CSF) in Australia. This Bill was passed following a long period of consultation, development and debate, which began with an initial review by the Corporations and Markets Advisory Committee in 2013 and included the Bill lapsing in the previous Parliament following the most recent election being called. Australia now joins 15 other jurisdictions which have enacted CSF legislation.
The key features of the Bill largely mirror those set out in our November 2016 client update. The only significant change being that the period for which cooling-off rights for retail clients are available was extended to 5 business days (instead of 48 hours) in the Bill passed by Parliament.
The Bill also enacts amendments to the Australian market licence (AML) framework. These amendments will provide a series of exemptions which any financial market operator can apply for, not just CSF intermediaries. Current market operators may wish to access these exemptions, for example, to create a consistent approach across markets or facilitate mutual recognition of Australian operators with cross-border activities. New and emerging market operators may seek exemptions to avoid the need to obtain a full AML.
While this is beneficial legislation which will provide an entirely new source of funding to entrepreneurs, it is worth remembering that this legislation does not exempt CSF intermediaries from other statutory obligations (such as Anti-Money Laundering/Counter-Terrorism Financing requirements). Those intending to participate in CSF platforms are reminded that the CSF Bill will not cover the entire regulatory field.
The CSF Bill, among other things, sets out requirements for eligible companies and eligible offers, requirements for how the offer must be made and obligations on CSF intermediaries (ie, the platform operators) and in respect of the platforms. It has the following key features:
- the offers must be made by “eligible CSF companies” – only unlisted public companies with less than A$25 million in consolidated gross assets and less than A$25 million in annual revenue are able to access the CSF regime;
- the offer must meet certain requirements, including a fundraising cap of A$5 million in any 12 month period;
- the offer must be made via a “CSF offer document” which will involve reduced disclosure requirements, and must be published on the platform of a single CSF intermediary;
- CSF intermediaries must be licensed to provide crowd funding services, and must comply with further requirements on intermediaries to undertake gatekeeper obligations such as due diligence on the CSF offer companies;
- the platform must:
- prominently display generic risk warnings to investors, cooling off periods (5 business days) and fee arrangements;
- include an application facility; and
- at all times, while the offer is open or suspended, operate a Q&A facility;
- the CSF Bill includes investment caps for retail investors of A$10,000 per issuer per 12 month period (with CSF intermediaries being obliged to reject applications if, having regard to CSF offers for which they are the responsible intermediary, the cap is breached), and requires investors to provide a risk acknowledgement statement;
- restrictions on advertising of CSF offers, with advertising permitted provided certain mandatory statements are included – however, there are exceptions for publications on the CSF intermediary’s platform;
- eligible new public companies (including a proprietary company that converts to a public company limited by shares) are provided with temporary relief from reporting and corporate governance requirements (including AGMs, audited financial reports and half-yearly reporting) for a maximum period of five years;
- amendments to the Australian Securities and Investments Commission Act 2001 (Cth) to place the provisions introduced by the CSF Bill within the purview of ASIC; and
- the introduction of civil penalties and criminal offences for CSF intermediaries who fail to comply with obligations imposed under the CSF Bill.
In relation to AML regime amendments, the Minister will now have the power to exempt a financial market or class of financial markets, or their operators, from some or all of the AML regulatory requirements, obligations relating to ASIC supervision, and compensation arrangement requirements. The Minister may also exempt a clearing and settlement facility, a class of facilities, or their operators, from some or all of the clearing and settlement facility licensing requirements.
These exemptions will be available, upon application, to any financial market operator or class of financial markets and are designed to provide additional flexibility and facilitate efficient and appropriate licensing for those markets. In passing the CSF Bill, Parliament made clear that these exemptions could be accessed by both current operators of markets and operators of new and emerging market types.
The regulations to be made pursuant to the CSF Bill will set key requirements for both those raising funds through CSF and those operating as CSF intermediaries. These regulations will specify:
- the class of securities that can be offered;
- certain information to be included in the CSF offer document, including the form of risk warnings, and information in relation to the offering company, the offer and investor rights;
- the form of the risk acknowledgment to be signed by any potential investor; and
- the requirements of the gatekeeper obligations on CSF intermediaries.
The Treasury has previously released exposure drafts of proposed regulations. The final form of the regulations will govern much of the CSF offer documentation and the gatekeeper obligations which CSF intermediaries will have to discharge.
Australian financial services licence
The CSF Bill will create a new type of financial service, the provision of a crowd-funding service, which requires the provider hold an Australian financial services licence (AFSL). The policy intent behind the licensing provisions of the Bill is that CSF intermediaries should hold an AFSL as it imposes particular obligations and protections for retail clients. The requirement of AFSL holders to be members of an external dispute resolution scheme was considered a particularly important obligation.
CSF intermediaries that hold an AML will not be able to rely on the “incidental” exemption from the requirement to hold an AFSL to provide a crowd-funding service. A person who holds an AML does not meet the definition of a CSF intermediary unless they hold an AFSL that expressly authorises provision of CSF. This will affect intermediaries who currently operate crowd-funding services under an AML.
Australian market licence
Some CSF intermediaries will also be required to obtain an Australian Market Licence depending on the nature of activities they carry out. The explanatory memorandum to the Bill indicates that CSF intermediaries may be exempt from AML obligations when facilitating primary issuances and access a reduced AML regime for facilitating secondary trading.
The role of ASIC
ASIC will assess and consider applications for AFSL and AML licences. Parliament has indicated that to obtain CSF authorisation in an AFSL may require certain data reporting obligations on licensees be fulfilled to assist in ongoing evaluation of the CSF market. ASIC will issue regulatory guidance in the transition period before commencement of the CSF Bill which will clarify the transition to the new laws.
Schedule 1, relating to the establishment of a regulatory framework to facilitate CSF, and Schedule 2 relating to the temporary relief from reporting and corporate governance requirements, will commence on a day to be fixed by proclamation or 6 months after the Act receives assent. Schedule 3, allowing the Minister to exempt certain financial market and clearing and settlement facility operators, will commence on the day after assent is received.
It appears the legislation enacted by the CSF Bill will soon be subject to further amendment. A key issue in the passage of the Bill was that it was limited in its application to public unlisted companies and did not extend to proprietary companies. Some submissions made regarding the Bill suggested the creation of a new company type specifically to facilitate crowd funding, with disclosure obligations that would sit somewhere between those of a proprietary company and a public company.
The Minister has indicated that he has instructed Treasury to continue developing a framework for proprietary companies and that he “would expect that an extension of the framework will be introduced through subsequent legislation in the near future”.