The Corporations Amendment (Crowd-sourced funding for proprietary companies) Bill 2017 (Cth) was passed by the Senate on 12 September 2018 extending equity crowdfunding to proprietary companies. Read on...
Equity-sourced crowdfunding is a new type of fundraising, typically online, that allows a large number of individuals (or the ‘crowd’ at large) to make small financial contributions towards a company in exchange for an equity stake in the company.
In Australia, the CSF legislation took effect on 29 September 2017, but only for unlisted public companies that wished to raise up to $5 million in 12 months through an AFS licensed intermediary who is authorised to provide CSF services. In January 2018 seven Australian equity crowdfunding platforms, including Equitise, OnMarket, Billfolda, and Birchal, received Australian Financial Services licences for crowd-sourced funding services.
One of the biggest concerns for early stage companies looking to crowdfund was that they were required to convert from a proprietary company structure to a public unlisted structure. Some concessions were given to those companies that needed to convert to a public unlisted company including exemptions from audits (when raising under $1m) and AGMs. However, the preparatory legal work, along with the ongoing compliance obligations, put off many entrepreneurs.
Responding to concerns regarding the inefficiencies in the new CSF regime from both early stage companies and equity crowdfunding platforms, the Corporations Amendment (Crowd-sourced funding for proprietary companies) Bill 2017 (Cth) was passed by the Senate on 12 September 2018 and will come into effect 28 days after receiving royal assent, extending equity crowdfunding to proprietary companies.
As of August this year, the total number of companies registered in Australia is 2,634,282. Most of these are proprietary companies. CSF is an alternative way to raise funds, especially for innovative and early-stage or growth-stage companies that may not have the access to debt funding (via banks and other financial intermediaries) or equity funding.
This is great news for early stage companies as this form of capital is now more readily accessible with less regulatory red-tape slowing down the process. Many of the rules that applied to public unlisted companies under the old CSF legislation will continue to apply to proprietary companies, including the $25m asset and turnover caps, the requirement for the business to not be listed on any stock exchange and the company’s principal place of business being in Australia.
So what does the new legislation mean for private companies?
While the new legislation does require companies to include details of CSF shareholders on the company register, these will not count towards the 50 shareholder cap that applies to proprietary companies. This exemption continues to apply even if shares are transferred to another shareholder later, so long as the shares were originally issued through a CSF offer and that the company’s shares have not been traded on financial markets (in Australia or otherwise).
Additionally, proprietary companies utilising equity crowdfunding will be exempt from Chapter 6 of the Corporations Act 2001 (Cth) which deals with takeover rules that usually apply to companies with over 50 shareholders. This exemption means that proprietary companies raising capital through CSF will not have to navigate the complex and onerous rules in Chapter 6, despite having a diverse share register after raising funds through equity crowdfunding. This is a positive given that many early-stage companies will be aiming to position themselves for a sale in the future.
However, recognising that proprietary companies undertaking equity crowdfunding will bring on board CSF shareholders that most probably won’t have a personal connection with the business, the new legislation imposes additional requirements on proprietary companies to protect shareholders, including:
- A minimum of two directors, with at least one ordinarily residing in Australia if there are two, or a majority of directors residing in Australia if there are more.
- Annual financial reports (prepared to accounting standards) and directors’ reports to be distributed by proprietary companies with at least one CSF shareholder during the financial year. These may be distributed online, and no written communication is required.
- Audits required where companies raise $3m or more through CSF offers, with an auditor’s declaration to be included in the directors’ report. Where applicable, an auditor should be appointed within one month of the CSF offer closing.
- Notifying ASIC in certain circumstances, such as when issuing shares that causes a company to have CSF shareholders, or cancelling shares so that a company no longer has any CSF shareholders.
- Compliance with Chapter 2E of the Corporations Act 2001 (Cth) dealing with related party transactions.
Overall, these changes reflect a relaxing of the regulations surrounding the types of companies eligible for CSF in Australia. This is a positive and welcome change for the industry, with more entrepreneurs being able to access this type of capital and more investment opportunities available for investors.
Would you like to learn more?
For businesses that are serious about raising finance, launching a campaign on a crowd-sourced funding platform may prove to be a great adjunct to other forms of capital raising, as it provides businesses with a unique investor base that historically would not have been available.
Crowdfunding can be a great way to amplify the support and customer loyalty from existing customers, and therefore a CSF platform that can deliver the right mix of brand awareness, community involvement, marketing tools, and complimentary sophisticated investor network, could prove an attractive proposition.
If any of our existing clients or associates are interested in hearing more about the crowd-sourced funding legislation, the market opportunities, and the business structure requirements, we would enjoy the opportunity to discuss your requirements - please get in touch.
ABN Australia - led by Chairman David Garry and Managing Director Aaron Garry - has spent the last 18 months positioning itself as experts in understanding the crowd-sourced funding legislation and compliance frameworks, understanding the markets and opportunities both in Australia and overseas, as well as building a relationship and network within the crowdfunding industry.
As such particularly where speed to market is a requirement, we are the only firm in Adelaide positioned to provide compliance and strategic advice to businesses looking to crowdfund equity on a licensed platform.
We are currently consulting with a number of Adelaide based early stage business with a strong interest in accessing the crowdfunding market opportunity and continue to evolve our understanding and insights in the challenges and requirements involved.
More information at:
Phone 1300 226 226 to discuss how we can help.
Please note this article is for information purposes only and does not constitute legal advice. Should you have any queries or require more information, please contact the team at ABNAustralia.com.au.