On 24 November 2016, the Australian Government reintroduced an amended (and expanded) Corporations Amendments (Crowd-Sourced Funding) Bill 2016 (Cth) (the Bill) after the former CSEF Bill lapsed in May 2016. The proposed Bill will amend the Corporations Act 2001 (Cth) (the Act) to facilitate crowd-sourced funding in Australia by small, unlisted public companies.
What is Crowd-sourced Funding?
Crowd-sourced funding is raising funds from a large number of investors via public advertisement usually on a website or platform (e.g. Equitise). Each investor contributes a small amount of capital for an equity stake in the business. The Bill’s introduction forms part of the Government’s National Innovation and Science Agenda.
|Aims of the Bill|
|1||Provide additional fundraising opportunities for innovative business’ and startups|
|2||Balance investor protections|
|3||Ensure that investors can make informed investment decisions|
Currently, public equity fundraising is only available to public companies who comply with arduous regulatory requirements including comprehensive disclosure obligations. However, the proposed Bill provides a means to reduce the regulatory barriers for businesses that satisfy the eligibility criteria.
What are the Key Features of the Bill?
The new regime will allow eligible companies to fundraise up to $5 million per year via crowd-sourced funding. An eligible company must first satisfy all the requirements set out below.
|Type of Company||Unlisted public company limited by shares|
|Location||Principal place of business and a majority of directors must be in Australia|
|Assets and Turnover||Company must have less than $25 million in consolidated gross assets and under $25 million in annual revenue|
|Shares Offered||Company can only offer fully-paid, ordinary shares under the regime|
|Use of Funds||Company cannot use the funds raised for investing in another entity or scheme|
The Bill would also provide eligible new companies with temporary relief from reporting and corporate governance requirements. This would reduce the potential barriers for startups and small businesses to adopt the required public company structure.
There is also talk of the amendments extending to proprietary companies sometime in the future. In practice, this means that for up to 5 years, a proprietary company which converted to a public company limited by shares to crowdfund will be exempt from the standard requirements, such as:
- hold annual general meetings,
- have annual reports audited,
- provide annual reports to investors, and
- publish annual reports on their website.
Fundraising From Retail Investors
Under the regime, companies fundraising from retail investors (not sophisticated or professional investors) can do so with lower disclosure obligations (for example, there would be no need for a formal prospectus). Retail investors can only make an investment of up to $10,000 per issuer, per 12 month period and they must provide a risk acknowledgement statement with their investment. There is also a 48 hour cooling off period available to that investor after making the investment.
Financial Services Licence
Finally, the intermediaries who facilitate the crowd-sourced funding must hold an Australian Financial Services Licence. The strict obligations on these licence holders aim to quality assure the platforms and their use. For example, intermediaries must:
- conduct checks on issuers before listing their offer, and
- display risk warnings, cooling-off rights and any fees charged to the listing company.
The Bill streamlines the regulation of these platforms and tailors them to crowd-funding services (rather than having these services falling under a number of different regulatory schemes).
The Senate is yet to the pass the Bill, so for now, we must wait to see whether these amendments will take hold. If they are to get through, however, this is certainly a step in the right direction when it comes to diversifying the options available to startups to raise capital. However, given the large majority of startups are proprietary companies, and therefore not eligible to participate, more could be done in this space.