In December 2014, Treasury released a discussion paper calling for submissions in respect of three potential models for regulating crowd-sourced equity funding (CSEF).
One option is to require CSEF to fit within the existing regulatory model that applies to fundraising.
However, in general, proprietary companies are significantly limited in their ability to raise funds from the public. The Corporations Act prohibits proprietary companies from engaging in activity that would require formal disclosure to investors.
While public companies are not so restricted, there are significant compliance costs involved in producing a disclosure document (typically a prospectus) required under the Corporations Act. Most start-ups are usually not in a position to bear these costs.
Currently, intermediaries that offer an entity's securities must hold an AFSL and comply with the AFSL licensing obligations under the Corporations Act.
THE CAMAC MODEL
In May 2014, the Corporations and Markets Advisory Committee (CAMAC) released an extensive report suggesting a new model for regulating CSEF. CAMAC's key recommendations included:
- creating a new category of public company (available to eligible entities) with reduced disclosure obligations and exemptions from certain reporting and corporate governance requirements of the Corporations Act.
- a template disclosure document which could be used by such public companies upon the issue of securities.
- permitting CSEF issuers to raise up to $2 million in a given year through issuing one class of fully-paid ordinary shares.
- prohibiting CSEF intermediaries from charging fees based on the amount raised by the issuer or from acquiring an interest in issuers that make use of their platform.
- requiring CSEF intermediaries to undertake due diligence of issuers, provide risk warnings to investors and be members of an external dispute resolution body.
- restricting individual investors from investing in an individual company more than $2,500 per annum or $10,000 per annum in total in CSEF investments.
THE NEW ZEALAND MODEL
Treasury also considered the idea of adopting a model similar to the New Zealand regulatory framework for CSEF. While this model bears a resemblance to the CAMAC model, there are a few notable differences, which include:
- no obligation for CSEF issuers to incorporate a special form of entity.
- more limited disclosure requirements, with arrangements between issuers and intermediaries for greater disclosure if the amount to be raised exceeds specified thresholds.
- no specified limit/prohibition on intermediaries as to how they structure their fees, investment in issuers or provision of investment advice to investors.
- voluntary investor caps along with no prohibition on lending by intermediaries to CSEF investors.
As of yet, Treasury has not indicated a preference for one of these models over another. It is expected that Treasury will publish a report later in the year. McCabes will continue to monitor any developments in this area.
This article was co-written by Kamran Khalid, Lawyer and Jacqueline Winters, Lawyer.