The Australian Treasury has recently published its discussion paper Crowdsourced Equity Funding, drawing on submissions relating to CAMAC’s proposals (see our previous update) and the existing New Zealand regulatory framework for crowd funding.
In taking the next step towards a viable equity crowd funding regulatory framework for Australia, Treasury has recognised that equity financing is more suitable for startups, given the difficulties applying for and repaying debt when the business is not established or has low cash flow, and that without appropriate regulatory changes, startups will remain limited to pool equity finance through angel investors, wholesale investors and smallscale offerings.
The CAMAC proposal and the New Zealand model have similarities (eg a cap on raising more than $2,000,000 in any 12 month period, intermediary licencing, due diligence and external dispute resolution requirements for intermediaries and risk acknowledgement by crowd funders). Treasury’s discussion on these aspects suggests that they would also be fundamental to an Australian model. Treasury is, however, focussing discussion on some key features of the CAMAC and New Zealand models, being:
compliance relief and crowd funding eligibility requirements for startups;
fee structures and startup investment restrictions for crowd funding intermediaries; and
investment participation restrictions for crowd funders.
- CAMAC proposes an ‘exempt’ public company, that has the benefit of certain compliance and reporting exemptions (eg relief from holding AGMs, issuing halfyearly reports, auditing yearly financial reports, and continuous disclosure). Threshold tests around turnover, prior fundraising, and market cap, along with restrictions on the type of business operated by the startup (eg listed companies and investment/financial institutions) are applied to achieve this exempt status. Also, after a prescribed period, the startup must convert into a public company with standard compliance and disclosure obligations.
- The New Zealand model does not create a separate class of public company, and there are fewer thresholds and eligibility hurdles for startups.
- Treasury has suggested that without limiting the types of companies which can use crowd funding, there may be attempts to circumvent standard fundraising disclosure obligations. Treasury is also mindful that establishing a new class of public company may result in additional complexity.
- CAMAC proposes that intermediaries be restricted from investing in startups (which they are the intermediary for) and must only charge fixed fees.
- Under the New Zealand model, intermediaries have flexibility around fee structure (proportional fees, incentives and hybrid cash/equity fees) and can invest in startups.
- Treasury has flagged concerns that intermediaries investing in startups may give rise to conflicts, mislead crowd funders and result in undue promotion of the startup. Treasury has also recognised that restricting intermediaries from investing in startups may deter people from operating intermediaries and has suggested that limiting the fee structures available to intermediary services may be detrimental, given startups typically generate low revenues and use equity incentives to drive growth and development.
- From an international perspective, CAMAC has taken a similar approach to the SEC’s proposal in the United States, where intermediaries are prohibited from investing in startups. The OSF in Canada and the FCA in the UK propose similar flexibility to intermediary investment as the New Zealand model, where intermediaries may invest in startups if their interest is disclosed. Under the Canadian proposal, the OSF will limit an intermediary's holding/controlling in a startup to 10%.
Crowd funder participation restrictions
- CAMAC proposes to restrict crowd funders to investments of no more than $2,500 per offer and
- $10,000 per year in an attempt to reduce crowd funder risk exposure.
- In New Zealand, caps on crowd funder investment are not compulsory and disclosure obligations vary relative to the funds sought by startups.
Treasury is conscious of the limitations the CAMAC approach places on the funds that will be available to startups and has also recognised the microinvestor issues – where crowd funders have limited power to discipline or exert control over the startup.
Submissions and comments on Treasury’s discussion paper closed on 6 February 2015. Further consultation is anticipated to seek an appropriate balance for crowd funder protection and the barriers to market entry.