At the end of last month, the Corporations and Markets Advisory Committee (CAMAC) released its long-awaited report on crowd sourced equity funding (CSEF). With CAMAC being a casualty of the recent Federal Budget, this report is likely to be one of its last. Well-researched and pragmatic, CAMAC’s swan song may yet prove to be the catalyst for which those watching CSEF in Australia have been waiting.
If the report’s proposals are adopted, Australian start-ups and entrepreneurs (as well as those eager to invest in new and innovative projects) will benefit from a bespoke legislative regime that, within limits, facilitates CSEF in a way Australian law does not currently allow.
CSEF involves start-ups and entrepreneurs (issuers) offering their shares to the public (investors) via online platforms (intermediaries).
Currently, as CAMAC acknowledges, Australian law significantly hinders fundraising in this manner. For example, proprietary company issuers can have a maximum of 50 shareholders, and must rely on a narrow range of legislative exceptions (which are not particularly suited to online fundraising) to avoid having to prepare a prospectus.
CAMAC’s proposal to overcome these and other limitations involves more than just tinkering with some Corporations Act definitions. CAMAC’s recommendation is to create a regulatory regime specifically tailored to facilitate CSEF in Australia. The regime would consist of three core elements:
- A new category of public company, the
“exempt public company”
Issuers could adopt the form of an “exempt public company” for a limited period while they conduct their fundraising campaigns, but the company would automatically become a regular public company if and when the company’s capital or turnover reached a certain threshold (e.g. $5m), or if the company had enjoyed exempt status for a certain period of time (e.g. 3 years).
Like a public company, but different
Exempt public companies would be exempt from some of the requirements which apply to regular public
companies. An exempt public company would not be required to:
- send annual reports directly to shareholders. Instead, they could publish such reports online only, with the initial disclosure document (discussed below) pointing shareholders to the online address where the reports would be published;
- hold an AGM while they continue to qualify as exempt public companies; or
- comply with the continuous disclosure requirements in Chapter 6CA of the Corporations Act (although issuers would be required to notify investors of material adverse changes).
On the other hand, various requirements which apply to regular public companies would continue to apply to an exempt public company. For example:
- the requirement that executive directors’ remuneration be reasonable or approved by shareholders would still apply;
- just as with public companies, termination benefits for certain directors and other key management personnel would be subject to shareholder approval; and
- an exempt public company would be subject to the same rules as public companies regarding related party transactions.
Exempt public company disclosure
CAMAC proposes that issuers would provide information to investors about the share offer by using a standard issuer disclosure template tailored to CSEF fundraising.
In general, CAMAC’s proposal is that issuers should be given the flexibility to structure their fundraising campaigns as they wish (subject to the issuer cap mentioned below), provided investors are fully informed.
For example, CAMAC’s view is that issuers should be free to issue classes of shares carrying different rights provided that the disclosure document adequately summarises the issuer’s existing equity structure, including the rights attaching to the various classes of shares on issue and the procedure by which any of these rights can be varied or cancelled.
CAMAC proposes that the amount which an issuer can raise in any 12 month period should be capped at $2m.
Amounts raised from investors who qualify as sophisticated investors under the Corporations Act would not be counted towards the $2m cap.
However, amounts raised under the Corporations Act’s small-scale personal offers exemption (the so called ’20- 12’ rule) would count towards the $2m cap. This would mean, for example, that an issuer relying on the 20-12 exemption which has raised more than $2m or issued shares to more than 20 friends and relatives in a 12 month period would not be able to conduct CSEF during that period.
- A new type of fundraising participant, the
Under CAMAC’s proposal, crowdfunding platforms / websites would apply to ASIC to be authorised CSEF intermediaries, subject to ASIC’s regulatory oversight and to a number of obligations such as:
- conducting limited due diligence on issuers in accordance with template due diligence requirements;
- providing generic risk warnings to online investors to alert them to the possibility of the project failing, share dilution occurring, and other matters; and
- providing ways for online investors to communicate with fundraisers and with each other.
CSEF intermediaries would also be subject to a number of prohibitions, including prohibitions on:
- placing themselves in situations which are likely to result in conflicts of interest between themselves and issuers;
- offering investment advice to investors; or
- lending funds to investors.
- Regulation and protection of online investors by means of investor caps and risk warnings
In the interests of protecting the investing public, CAMAC proposes that investors should:
- not be able to invest more than $2,500 in any particular issuer in any 12 month period, and not more than $10,000 in total in that period;
- be required to sign a risk acknowledgement and self- certify that they have complied with the investor caps; and
- have certain cooling off and withdrawal rights, such as:
- the unconditional right to withdraw for a limit period after accepting the offer (e.g. 5 days); and
- a further withdrawal right where the issuer undergoes a material adverse change after the investor has accepted the offer.
CAMAC’s proposal is multifaceted, drawing on the approaches taken to the regulation of CSEF in other jurisdictions such as Canada, USA and New Zealand to arrive at a balanced and sensible regulatory regime.
There is also much more to the report than can be outlined in any detail here, and CAMAC has at least canvassed, if not expressly proposed a solution for, a number of the issues that prospective CSEF participants face in seeking to progress in this area.
CAMAC’s recommendations are welcome news for those keen to see CSEF facilitated in Australia, but it remains to be seen whether, and to what extent, the Government will be receptive to implementing those recommendations. We will be sure to keep you updated.