The public has been offered a tantalising glimpse of Australia’s future CSEF regime with the 4 August 2015 release of the Australian Government Treasury consultation paper on crowd-sourced equity funding (CSEF).1
According to the consultation paper, CSEF will be made available to fundraisers incorporated as Australian public companies. However, it is uncertain whether the regime will extend to proprietary companies. Treasury has invited submissions from stakeholders on this question.
Treasury expects draft legislation to implement the regime to be released for public comment shortly and tabled in Parliament later in the year.
Key features of the CSEF regime for public companies
Most features of the public company CSEF regime stem from recommendations made by the Corporations and Markets Advisory Committee (CAMAC) in its May 2014 Report.2The good news for potential fundraisers and investors is that the regime will allow fundraisers to raise and investors to invest more money through CSEF than CAMAC originally proposed.
Under the public company CSEF regime:
- newly registered or converted public companies will be relieved from compliance with certain public company disclosure and financial reporting obligations for up to five years, subject to meeting $5 million annual turnover and gross asset thresholds;
- a fundraiser may raise up to $5 million (in contrast to $2 million as proposed by CAMAC) in any 12-month period through CSEF or small scale offerings under the “20-12 rule” by issuing fully paid ordinary shares pursuant to a template CSEF disclosure document;
- a CSEF platform must hold an Australian Financial Services Licence (AFSL), undertake prescribed due diligence on fundraisers that use the platform, provide generic risk warnings to investors, and disclose any fees received or investments made in fundraisers; and
- a retail investor may invest a maximum in any 12-month period of $10,000 per CSEF offer and $25,000 in aggregate, subject to signing a risk acknowledgement statement and certifying that they have not exceeded the investment caps. These caps are considerably more generous than the $2,500 and $10,000 caps proposed in the CAMAC model.
What about proprietary companies?
Despite acknowledging “substantial stakeholder support for allowing proprietary companies to access CSEF”, the Government is not yet certain whether, and if so how, it will extend the CSEF regime to proprietary companies.
Some of the possibilities canvassed in Treasury’s consultation paper include:
- increasing the 50 non-employee shareholder limit for proprietary companies, either for a limited period (while the company conducts CSEF) or permanently for all proprietary companies;
- imposing additional financial disclosure and transparency obligations on proprietary companies conducting CSEF;
- imposing annual turnover and gross asset caps on proprietary companies conducting CSEF; and
- increasing the 20 investor limit and/or the $2 million limit under the “20-12 rule”.
Additionally, Treasury is consulting on further ways to reduce red tape and compliance costs for fundraisers and small businesses in general, including by reviewing the requirements to pass an annual solvency resolution and maintain a share register.
Some stones left unturned
The release of Treasury’s consultation paper is a welcome milestone in the journey towards an Australian CSEF regime, but it is too soon to know whether its implementation will proceed smoothly. In particular, the consultation paper does not examine the place of the CSEF regime in the context of Australia’s broader financial services law framework.
Perhaps the most troubling omission from the consultation paper is a discussion of how the CSEF regime will interact with the Australian market licence framework (if at all). Treasury has now clarified that CSEF platforms will require an AFSL (although we do not yet know the exact details of what the AFSL will need to authorise). But the consultation paper is silent about whether a CSEF platform may also be deemed to be operating a financial market requiring an Australian market licence.
In our experience, the Australian Securities & Investments Commission is quick to raise concerns that CSEF platforms may be operating financial markets. If this aspect of the law is not clarified, individuals and businesses may be wary of participating in CSEF activities even under a bespoke CSEF regime.
Submissions on Treasury’s consultation paper are due by 31 August 2015.