Small businesses and start-ups have a new source of capital funding in Australia as a result of changes to the Corporations Act 2001(Cth).
The Corporations Amendment (Crowd-sourced Funding) Bill 2016 was passed by the Senate on 20 March 2017. After a protracted passage through Parliament, the Bill establishes a framework to enable small, unlisted public companies to raise funds from a large number of investors in return for the issue of shares in the company. The Bill removes certain barriers that small businesses and start-ups face when seeking to raise capital, including onerous disclosure, reporting and corporate governance requirements under the Corporations Act.
The Government hopes this legislation will open up new and innovative sources of capital funding for Australian small businesses.
Crowd-sourced equity funding enables companies to raise funds from a large number of investors in return for equity in their company. Presently in Australia, it is difficult for start-ups and small businesses to make equity offers to 'mum and dad' investors. This is because these types of offers may require compliance with onerous fundraising laws under Chapter 6D of the Corporations Act, together with other reporting obligations. These requirements have been prohibitively expensive and too onerous for small businesses to comply with, leading to a "funding gap" for Australian start-ups and small businesses. The Corporations Amendment (Crowd-sourced Funding) Bill 2016 seeks to address this funding gap.
A legislative framework for crowd-sourced equity funding already exists in over 10 countries, including New Zealand, the UK and the USA. Whilst the Australian framework is more restrictive in terms of the type of businesses which can access crowd-sourced equity funding, the Federal Government anticipates that it will reduce the competitive disadvantage faced by Australian businesses compared to their international counterparts when it comes to funding options. The Federal Government also hopes that it will assist in unlocking growth and innovation for small businesses in Australia.
What type of companies will be eligible?
The Bill applies to unlisted public companies limited by shares, with an annual turnover or gross assets of less than $25 million, and which are not a subsidiary of or related to a listed company. In the remainder of this article, we will refer to these companies as "Eligible Companies".
Raising equity and disclosure
Eligible Companies can raise up to $5 million through crowd-sourced equity funding in a 12-month period.
The Bill establishes a new disclosure regime that can be used by an Eligible Company to make certain offers of securities for issue. This is less onerous than the existing disclosure requirements under the Corporations Act, including the requirements to issue prospectus' and other disclosure documents.
Any crowd-sourced equity funding offer must be contained in, or accompanied by an offer document and must be made through a crowd-sourced equity funding intermediary platform, which holds an Australian Financial Services Licence.
The Offer Document must contain all information specified in the regulations, however such requirements are significantly less onerous than those currently required under the Corporations Act.
The Bill provides for a number of investor protections, including:
- any 'mum and dad' investors who accept a crowd-sourced equity funding offer will be limited to investing up to $10,000 per offer in a 12-month period;
- investors must accept a risk acknowledgement prior to submitting a crowd-sourced equity funding application; and
- a five day cooling off period will apply to each investment by an investor.
Whilst the Bill restricts the amount a retail investor can invest per crowd-sourced equity funding offer, it does not contain a cap on the total amount an investor can invest in crowd-sourced equity funding offers each year, as is the case in the UK and the USA. In the absence of such a cap, small businesses and start-ups will have greater access to funding.
Proprietary companies excluded
Controversially, crowd-sourced equity funding will not be available to proprietary companies under this framework. Any company wishing to raise funds through crowd-sourced equity funding needs to be an unlisted public company, and will therefore face additional compliance obligations that apply to public companies under the Corporations Act.
The decision to restrict the regime to unlisted public companies has been criticised as being unnecessarily restrictive and imposing additional administrative burdens on small businesses. The exclusion of private companies from the Bill’s framework places Australia at odds with the crowd-sourced equity funding regulations in New Zealand, the UK and the USA.
Grace from reporting obligations
The Bill attempts to address these concerns by providing temporary relief to new public companies that are Eligible Companies from the reporting and corporate governance requirements under the Corporations Act 2001.
For example, Eligible Companies will be exempt from holding an annual general meeting, appointing an auditor and publishing annual reports for a period of five years.
What this means for eligible businesses
In order to be eligible for these concessions, the company must complete a crowd-sourced equity funding offer within either 12 months of registration or conversion from being a proprietary company to a public company.
In order to take advantage of this source of capital, an Eligible Company will need to publish an Offer Document that satisfies all of the requirements set out in the regulations.
An Offer Document will be considered defective where, for example, the document contains a misleading or deceptive statement. Under the Bill, criminal sanctions apply to a company which offers securities through a defective Offer Document if the defect is materially adverse from the point of view of an investor.
Accordingly, it is important that Eligible Companies are aware of what information must be addressed in Offer Documents.