Earlier this month, ASIC issued the first licences to crowd-sourced equity funding (CSF) intermediaries, enabling public unlisted companies to launch CSF campaigns via their platforms. Already, the first crowdfunds have begun to go live, with one raising $500,000 in less than a day. The next step is for CSF to be extended to private companies, which is expected to come into effect from the middle of this year.
CSF legislative pathway
CSF for public unlisted companies commenced on 29 September 2017 (through the Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) (CSF Act)), allowing eligible unlisted public companies with less than $25 million in assets and annual revenue to raise up to $5 million a year through the use of CSF platforms operated by licenced intermediaries.
On 11 January 2018, ASIC issued the first Australian Financial Services licences to a number of intermediaries operating in the market. Intermediaries play an important role in CFS, acting as the conduit between start-ups and investors by operating the crowdfunding platform and performing checks on offering documents, start-ups and investors.
Start-ups have already begun raising capital via CSF campaigns with digital bank Xinja, one of the first start-ups to launch a CSF campaign, raised $500,000 in less than a day.
Extension of CSF to Pty Ltd companies
Given the CSF Act excluded proprietary limited (Pty Ltd) companies from accessing CSF, it was largely criticised given the majority of Australian companies are Pty Ltd companies. In response, on 14 September 2017, the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (CSF Pty Ltd Bill) was introduced, extending CSF to Pty Ltd companies subject to additional reporting requirements and accountability standards (see below). A copy of the CSF Pty Ltd Bill can be accessed here.
On 11 December 2017, the Government released exposure draft regulations (Corporations Amendment (Crowd‑sourced Funding) Regulations 2018 (draft CSF Regulations)) providing further detail on the proposed extension to Pty Ltd companies. A copy of the draft CSF Regulations can be accessed here. The draft CSF Regulations seek to simplify certain requirements for both public and private companies, including in relation to the structure and content of CSF offer documents (for which template documents have helpfully been provided by ASIC), and provide further details on the eligibility requirements and legislative exceptions for Pty Ltd companies.
Additional obligations for Pty Ltd companies
In summary, under the proposed legislation, Pty Ltd companies will be able to access CSF without the need to convert to an unlisted public company subject to additional obligations and exceptions, including:
- two directors:the company must have at least 2 directors, a majority of whom ordinarily reside in Australia, to ensure greater transparency;
- financial statements: in addition to preparing a CSF offer document, the company must prepare financial and directors' reports in accordance with accounting standards;
- audit requirements: if the company raises more than $3 million from CSF offers, its financial reports have to be audited;
- related party rules: the company has to comply with the ‘related party transaction’ rules under Chapter 2E of the Corporations Act 2001 (Cth);
- shareholder limit: the company is limited to 50 non-employee shareholders, but shareholders who hold shares issued as part of a CSF offer do not count towards the shareholder cap; and
- takeovers laws: the company is exempt from the takeovers rules only as long as it is eligible to make a CSF offer.
Where to from here?
Now that CSF has taken off, we are likely to see a growing number of public unlisted companies launch their CSF campaigns. With the CSF Pty Ltd Bill expected to come into operation within 6 months of being passed, it likely that Pty Ltd companies will be able to access CSF from mid-2018.