Crowd-sourced equity funding (CSF) is now available for proprietary companies. Up until recently, CSF was only available to qualifying unlisted public companies. As the vast number of companies registered in Australia are proprietary companies, the CSF regime was largely ineffectual.
Just to refresh your memory, in this article we will first give you a brief summary of what CSF is, and then summarise how CSF works differently for a proprietary company.
What is CSF?
Crowd-sourced equity funding is a type of fundraising facilitated on-line that allows a large number of individuals – the crowd – to make small financial contributions towards a company in exchange for an equity stake in the company.
CSF is an alternative way to raise funds, especially for innovative and early-stage or growth-stage companies that may not have access to debt funding or traditional equity funding.
The level of disclosure required for companies to make CSF offers to the crowd is significantly less onerous than typically required in a prospectus and generally not prohibitively expensive.
The CSF regime kicked off in Australia in September 2017 but only applied to unlisted public companies. That meant that a proprietary company that wished to access CSF had to first convert from a private company to a public company. That all changed with the passing of the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018, and now private companies can access CSF capital.
CSF for proprietary companies
CSF works a bit differently for proprietary companies. Here is a summary of some key features:
- Shareholder limits: the standard 50 non-employee shareholders limitation still applies, but shareholders that hold shares issued under a CSF offer do not count towards this shareholder cap.
- Two directors: the company must have at least 2 directors, a majority of whom ordinarily reside in Australia.
- Takeover provisions: the exemption from the Corporations Act 2001 (Cth) takeover provisions continues to apply for so long as the company is eligible to make a CSF offer.
- Related party transactions: shareholder approvals are required for any related party transactions under Chapter 2E of the Corporations Act 2001 (Cth).
- Audit: once more than $3 million from CSF offers is raised, the company must have its financial statements audited.
- Financial statements: financial and directors’ reports must be prepared in accordance with accounting standards.
- Company registers: more comprehensive company registers must be maintained, including details about the CSF offer to shareholders as part of the company registers.