The Corporations and Markets Advisory Committee recently released a report on crowd sourced equity funding, which proposes a detailed regulatory structure to facilitate this emerging form of capital raising in Australia.
The proposals set out in the Corporations and Markets Advisory Committee (CAMAC)’s report seek to overcome the current legal impediments for Australian companies to raise capital through crowd sourced equity funding (CSEF).
What is CSEF?
CSEF is a form of crowd funding. Crowd funding is where a business seeks to raise money for a particular project, such as the development of a product, from a number of contributors (investors) from a wide range of people (the crowd) online through a crowd funding platform website (intermediary).
CSEF is crowd funding which involves raising capital by offering shares or other equity in the business to investors through the intermediary. CSEF is generally intended for early-stage capital raising by innovative or other start-up businesses.
The focus of CAMAC report
The CAMAC report focuses on CSEF by issuers that are companies subject to regulation under the Corporations Act 2001.
CAMAC recognises that CSEF has the potential to encourage economic growth in Australia, and that it may mainly be used by proprietary companies rather than public companies.
The current legal impediments for a proprietary company in Australia to raising capital through CSEF include:
- the shareholder cap of 50 non- employee shareholders for proprietary companies
- the general prohibition on proprietary companies making public offers of its securities that require disclosure (unless otherwise under an exception, such as the small scale offering or sophisticated investor exceptions).
Further, even if the company is a public company, it will be required to comply with the disclosure requirements associated with public offers of securities (i.e. providing a prospectus) unless an exception applies. This can involve significant costs and regulatory burden to the public company.
The CAMAC report therefore sets out a series of proposals which are intended to overcome the current legal impediments to capital raising through CSEF in Australia and balance the interests of the companies and the investors.
CAMAC’s proposals to facilitate CSEF
New classification of ‘exempt public company’
CAMAC considers that offers of shares to the public via CSEF should be made by a public company. However, to overcome the reluctance of businesses to incorporate public companies, which are often more expensive as they are subject to more onerous regulation under the Corporations Act, CAMAC proposes that a new classification of ‘exempt public company’ be established.
Under this proposal, a company seeking to raise capital through CSEF may:
- be incorporated as an exempt public company
- change from an existing proprietary or public company into an exempt public company in certain circumstances
- be incorporated as a public company without this exempt status.
An issuer with exempt public company status will be exempt from certain compliance requirements for public companies. Key examples of these compliance exemptions include the requirements:
- to hold an annual general meeting
- to have financial reports audited
- to prepare half yearly financial reports (unless certain capital or turnover thresholds are reached).
CAMAC suggests that these exemptions apply until the expiry of the limited time period (three years proposed) or until the occurrence of a specific event, such as the capital of the company reaching a certain amount ($5 million proposed).
Regulation of crowd funding process
CAMAC proposes a number of requirements that must be met for CSEF. Key examples of these requirements include:
- The offer must be made by an eligible company through a single (licenced) online intermediary.
- The offer must not result in the company exceeding a proposed raising cap of $2 million in any 12 month period.
- The company would be required to disclose certain prescribed information about the company and the offer using template documentation (see “development of a standard disclosure form” below).
- The controls on advertising must be complied with.
- The company must not lend to crowd investors to acquire its shares.
- Any material adverse change concerning the company must be notified.
Development of a standard disclosure form
In order to provide clear guidance as to the information required to be disclosed by companies to the crowd, CAMAC proposes that a standard disclosure template be created. It is expected that such a standard template would also assist crowd investors to compare the offers from other companies.
Licencing of online intermediaries
In recognition of the important role that intermediaries play in the CSEF process, CAMAC proposes that an intermediary must hold a CSEF licence to permit them to host CSEF offers and conduct any secondary market where CSEF shares may be traded. CAMAC also proposes that these intermediaries be responsible for, amongst other things, conducting due diligence checks on companies and providing communication facilities between companies and investors. The report states that these proposals are aimed at stimulating company and investor confidence in the CSEF process.
Restrictions on investor contributions
CAMAC proposes that a crowd investor should be limited to investing $2,500 per company, and $10,000 for all companies, in any 12 month period, to prevent excessive investment by crowd investors.
The report also sets out a number of proposals by CAMAC which are aimed at providing protection for investors, such as:
- the implementation of a risk disclosure document, which must be acknowledged by investors before investing
- the availability of cooling-off and withdrawal rights for investors.
Shortly after CAMAC’s report was issued, the Federal Budget for 2014- 2015 announced that CAMAC would be abolished and its functions transferred to the Treasury. Given the significant legislative amendments that would be required to give effect to CAMAC’s proposals, it remains to be seen if, to what extent and in what timeframe the proposals will be implemented.