The Federal Parliament has amended the Corporations Act 2001 (Cth) (“Corporations Act”) to open up crowd-sourced equity funding to proprietary companies that meet new eligibility requirements.
In March 2017, the Federal Government amended the Corporations Act to create a legislative framework that allowed public companies to engage in crowd-sourced funding (“CSF”). Start-up and small companies, commonly registered as proprietary companies, were initially unable to access funding through the CFS regime. In September 2017, the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 was introduced to extend the CSF regime to proprietary companies.
The amendments provide an exciting opportunity for a broader array of companies to access equity to grow their business. The Bill was passed on 12 September 2018 and received Royal Assent on 21 September 2018. The majority of amendments came into force on 19 October 2018.
What is CSF?
CSF is an innovative type of fundraising, typically online, that allows a large number of individuals to make small financial contributions towards a company, in exchange for an equity stake in the company. See our previous article for more information about the CSF regime here.
A revised CSF regime applies for proprietary companies. Proprietary companies must meet new eligibility requirements and comply with a range of other rules to protect both the companies offering CFS and those who invest in the companies. To engage in the CFS regime, a proprietary company must:
- maintain two directors at all times
- prepare annual financial reports and directors’ reports that meet the minimum accounting standards
- ensure finances are audited if more than $3 million is raised through CSF
- comply with disclosure obligations
- comply with rules for related party transactions that currently apply to public companies
A number of exemptions apply in order to avoid unduly restricting the ability for companies to use CSF. Proprietary company with CSF shareholders will be exempt from the takeover rules in Chapter 6 of the Act as long as it meets the conditions (if any) prescribed in the regulations. Furthermore, CSF shareholders will not count towards the 50 non-employee shareholder limit for proprietary companies.