On Monday, 20 March 2017, the Corporations Amendment (Crowd-sourced Funding) Bill 2016 (the “Bill”) was passed in the Senate in an important step forward in the development of equity crowd-sourced funding (“CSF”) in Australia.
Taking another run at the legislative process
The Bill was re-introduced in the House of Representatives on 24 November 2016 (after an earlier version lapsed in the Senate in May 2016).
The Bill had proposed a 48-hour cooling off period for retail investors. However, the Senate opted for an amendment to extend this to 5 days. As a result, the Bill will shortly return to the House of Representatives for formal passage before it is enacted.
The start of a CSF framework
As we reported previously, the Bill creates a framework for Australian CSF. It will permit small public companies to raise funds by issuing ordinary shares to a large pool of retail investors without being listed on a stock exchange.
The Bill is designed to reduce regulatory barriers to CSF, and to make available a new funding source for early-stage companies while maintaining certain protections for retail investors.
Key features and limitations of the Bill
- At present, only applies to Australian-based public companies that are not listed on a stock exchange.
- They must have less than $25 million in consolidated annual revenue and gross assets, respectively, to participate (the “Assets and Turnover Test”). While that limits CSF to smaller to medium sized companies, it is a substantial increase from earlier proposals, and reflects feedback from industry.
- The regime does not prevent a company raising capital from professional investors, until it reaches the limit of the Assets and Turnover Test.
- Only $5 million can be raised by an issuer through CSF (or raised through broker-channels of “experienced” investors), with a limited investment of $10,000 per investor, in any 12 month period.
- Initially the regime is expected only to apply to offers of fully-paid ordinary shares. That means the CSF regime may not be suitable for Series A funding, often used for early-stage ventures. However, there is flexibility to adapt the regime over time by regulation.
- CSF offers must be made through a licensed CSF intermediary – with a special licence authorisation to provide a crowd funding service. These intermediaries have important gatekeeper responsibilities, relating to the CSF offer document, and its knowledge of the company and its directors or officers.
- There is a streamlined disclosure regime for CSF offers, with contents to be prescribed in the regulations. The CSF offer document is published on the CSF intermediary website, rather than lodged with ASIC.
- The liability regime is also tailored to CSF. It is closely based on the prospectus liability regime, but has defences for lack of knowledge and reasonable reliance on third party information. This softens the drivers of due diligence requirements – but that is largely offset by the obligations of the CSF intermediary.
- Public companies which access CSF may benefit from certain corporate governance and reporting concessions.
Take up may be cautious
The Bill offers significant improvements over earlier versions of the proposed legislation, which are perceived by many in the start-up community and crowd funding platforms as increases in the utility of the initial framework.
However, it is still likely that the burden of public company compliance obligations will continue to be a deterrent to many small to medium businesses that presently prefer the proprietary company format. It remains to be seen how much of a temptation this new framework will prove to be, and whether new businesses will choose to incorporate under the public company format, or whether existing proprietary companies will convert to public companies.
Treasurer, Scott Morrison, has already flagged further amendments to be tabled later this year to include proprietary companies in the scheme.
A positive first step
Overall, the passage of the Bill is seen as a positive step for early-stage companies – with the market eagerly awaiting news of further reforms.