The Corporations and Markets Advisory Committee (CAMAC) has recently presented its report, Crowd sourced equity funding, to the Federal Treasury, proposing options for regulating crowd sourced equity funding (CSEF) in Australia.
Drawing on the experiences of New Zealand, the USA, the United Kingdom, and Canada, the proposed options are to:
- adjust the regulatory regime for proprietary and public companies under the Corporations Act;
- restrict CSEF offers to limited classes of investors; and
- introduce a new regulatory regime for CSEF specific corporate vehicles and fundraising, which is CAMAC’s preferred option.
Similar provisions to CAMAC’s preferred proposal were introduced in New Zealand in April 2014. In New Zealand, CSEF issuers are subject to reduced offer disclosure requirements and are not required to issue a prospectus. This means that New Zealand CSEF offers are not able to raise capital in Australia under the mutual recognition rules because these rules require the issuer to comply with the New Zealand prospectus regime.
Two key differences between the New Zealand regime and CAMAC’s proposal are that:
- New Zealand intermediaries are permitted to invest in a CSEF offer conducted by it (with disclosure to the market), whereas CAMAC opposes intermediaries engaging in activities that may result in a conflict of interest; and
- there is no cap on the amount a New Zealand crowd investor may invest in one or more CSEF offers, whereas CAMAC suggests an investor cap of $2,500 per offer and $10,000 for all offers per year.
The projected timeframe for the establishment of an Australian CSEF regulatory framework is late 2014 / early 2015.
The exempt corporate vehicle
CAMAC suggests establishing an ‘exempt public company’, with reduced compliance and reporting obligations. An exempt public company would convert into an ordinary public company if:
- it holds A$5 million for a continuous 6 month period;
- its turnover reaches A$5 million per annum; or
- 3 years has expired since the entity became an exempt public company.
CSEF issuers would be able to determine voting and dividend rights in relation to equity offered to crowd investors and would be permitted to issue a class of ‘founder’ shares.
CSEF issuers would not be required to:
- hold Annual General Meetings;
- issue half-yearly financial reports;
- appoint an auditor (except when certain financial thresholds are met); or
- continuously disclose.
However, the following obligations would still apply:
- lodging annual financial reports;
- disclosing executive remuneration and termination benefits;
- requiring member approval for related party transactions; and
- compliance with the takeover provisions of the Corporations Act.
In keeping with the objective of the proposed CSEF exempt public company regime, the following types of entities would be prevented from seeking exempt public company status:
- investment or financial institutions;
- listed companies;
- companies that have already made an offer for equity under Ch. 6D of the Corporations Act;
- blind pools (enterprises without a business plan that stream funds into another enterprise); and
- companies with capital greater than A$10 million.
CAMAC also proposes that intermediaries that operate CSEF platforms enabling crowds to invest and participate in secondary markets be regulated (licenced) intermediaries. Licensed intermediaries would be prohibited from:
- providing advice to crowd investors;
- soliciting crowd investors to accept an issuer’s offer;
- lending to crowd investors.
Intermediaries would also be required to avoid conflicts of interest, including holding interests in the shares of an issuer on the platform, being paid fees determined by reference to the capital raised or being remunerated in issuer equity.lending to crowd investors.
Other obligations include:
- conducting limited due diligence on issuers;
- establishing internal/external dispute resolution protocols;
- providing risk disclosure to crowd investors; and
- limited application of the investor cap ($2,500 per equity offer and no more than $10,000 in total per year).
The question as to the type of licence (Australian financial services licence or Australian market licence) an intermediary should hold has been left with Federal Treasury.