In March this year, after a number of false starts, the Corporations Amendment (Crowd-sourced Funding) Act 2017 proceeded to Royal Assent and is set to become law in late September this year. The Act, while a major breakthrough for crowd- sourced funding (CSF) in Australia, has been criticised for its limitations. You can find our update on this topic here.
Just two months later, as part of the 2017-18 Budget, the Federal Government has released for circulation draft legislation aimed at overcoming some of those criticisms.
The Corporations Amendment (Crowd-Sourced Funding For Proprietary Companies) Bill 2017 (Bill) will, as its name suggests, extend the CSF regime to private companies. However, it is not just a simple extension – the Bill intends to impose additional obligations on companies who opt into the CSF regime in an attempt to balance the structural benefit of the proprietary company structure while increasing shareholder protections.
While allowing CSF companies to remain private is clearly a concession, many are likely to question whether they are truly being allowed to remain proprietary companies or whether they essentially becoming public companies in disguise. Some of the key provisions are set out below.
Extension to proprietary companies
Currently, the key blockers to proprietary companies engaging in CSF activities are the restriction on having more than 50 non-employee shareholders and the prohibition on engaging in any activity that requires disclosure to investors under Chapter 6D of the Corporations Act. These are overcome by removing these restrictions in relation to CSF offers under which a person will become a CSF shareholder.
Interestingly, however, the CSF concession will only apply to the purchase of shares under a CSF offer and not to subsequent transfers of the same securities. This means that where a CSF shareholder sells their shares, the purchaser will not be a CSF shareholder and will be counted within the 50 person non-employee shareholder cap.
At this stage, the only key eligibility criterion is that the CSF regime will not apply to sole director companies.
One of the key concessions to CSF companies under this Bill is in relation to takeovers. Currently, a company with more than 50 shareholders is subject to the takeover rules in Chapter 6 of the Corporations Act. The proposal recognises that these complex rules may be contrary to the objectives of start-ups who are often positioning for a takeover or to become listed in the future.
Accordingly, the Bill provides an exemption from Chapter 6 where the CSF company includes a provision in its constitution that requires a person who acquires more than 40% of the voting shares in the company to offer to purchase all other securities in the company on the same terms within 31 days.
As noted above, the Bill intends to increase protection for CSF shareholders by imposing a number of obligations which usually only apply to public companies.
At this stage the key additional obligations proposed are:
- maintenance of a more comprehensive company register
- production of financial and directors’ reports (which generally only have to be produced where directed by shareholders or ASIC, or in some cases where the company is controlled by a foreign entity)
- companies which raise more than $1 million from CSF offers will be required to have their annual financial reports audited
- the related party transaction restrictions in Chapter 2E of the Corporations Act will apply to a company with CSF shareholders and
- if a company intends to take advantage of the exemption from Chapter 6 set out above, it will be required to lodge a copy of its constitution with ASIC.
Removal of corporate governance concessions
With the extension of the CSF regime to proprietary companies, the proposal suggests that the corporate governance concessions, available to public companies accessing the CSF regime during their first five years, will no longer be necessary. As such, the Bill proposes that these concessions will not be available to public companies that are incorporated or converted from a proprietary company after the Bill becomes law.
This draft Bill represents another massive leap forward for crowd-funding in Australia. However, it raises an important conundrum for those who want to access the CSF regime as soon as possible. Companies will have to decide whether to convert to a public company structure to access the regime in September or face an uncertain wait in the hopes of accessing a CSF regime which may be better suited to their needs.