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Gearing up for equity crowd-funding

Since our last update, proposed crowd-funding legislation has been passed, creating a new regulatory regime for public companies to obtain equity-based crowd-sourced funding. The Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) (2017 Act), will commence on 29 September this year.

Background

Readers will know that crowd-sourced funding or ‘crowdfunding’ (CSF) typically involves the practice of raising funds through the pooling of small contributions from a large number of investors to finance an enterprise, investment or specific objective, often using a website or other electronic facility.

The 2017 Act will allow eligible CSF companies to do this through engaging a single online intermediary to make its CSF offers.

About Eligible CSF Companies

Question Answer
Who can crowd-fund? An eligible CSF company can crowd-fund, being a company that:

  • is a public company limited by shares
  • satisfies the gross assets and turnover caps
  • is not listed
  • has its principal place of business and a majority of directors ordinarily residing in Australia
  • does not have a substantial purpose of investing in security interests in other entities or managed investment schemes.
 What is the ‘gross assets test’? The value of the consolidated gross assets of the CSF company and any related parties must be less than $25 million at the time the company is determining its eligibility to crowd-fund.
 What is the ‘turnover test’? The company and any related parties must have consolidated annual revenue of less than $25 million during the 12 month period immediately prior to determining eligibility to crowd-fund.
What type of securities can be the subject of a CSF offer? At this time, only fully paid ordinary shares may be issued.
How much money can I raise? The ‘issuer cap’ is the maximum amount of funds that a CSF company can raise under the CSF regime. It is currently set at $5 million in any rolling 12 month period.

 

This is calculated by having regard to:

  • the maximum subscription amount sought under the current CSF offer
  • all amounts raised from other CSF offers within the past 12 months by the CSF company and its related parties
  • all amounts raised within the past 12 months under the small scale personal offering exception and certain other offers made via an Australian Financial Services (AFS) Licence holder.

Funds raised from offers to wholesale investors do not count towards the issuer cap.

If a company registers as or converts to a public company, will it receive any concessions? Yes. A company is eligible to receive temporary reporting and corporate governance concessions for five years if it:

  • registers as, or converts to, a public company after 29 September 2017
  • has completed a CSF offer within 12 months.

These concessions will grant temporary relief from holding an Annual General Meeting, appointing and auditing its financial reports, and distributing copies of its annual reports to shareholders.

How much can I invest? Retail (individual) investors will be limited to investing up to $10,000 annually in a single company, and have a five day cooling-off period after making an application.
What are the offer document requirements? The offer document must address all of the following topics specifically:

  • a pro forma risk warning
  • specific information about the offering company (their identity, its’ officers, the business and its’ history)
  • specific information about the offer
  • specific information about investor rights (including the cooling-off period).[1]

Each retail investor must also sign a pro forma risk statement when they make an application to buy shares.

About CSF Intermediaries

Question Answer
Who is a CSF intermediary? An AFS licensee whose licence expressly authorises the licensee to provide a crowd-funding service on its own platform (website or other electronic facility used to host a CSF offer).
What is their role? A CSF intermediary plays a significant role under the CSF regime, operating the platform through which investors invest and companies offer their shares.

 

They manage some of the risk that may arise by:

  • performing certain ‘gatekeeper’ obligations, including performing checks on a prospective offering company, the CSF offer and the CSF offer document
  • displaying certain information prominently on its platform, including a risk warning and information about cooling off rights
  • ensuring advertising is not misleading or deceptive
  • ensuring retail clients understand their cooling-off rights.

Extending the CSF Regime to Proprietary Companies

The Federal Government is also contemplating extending this CSF regime to proprietary companies (who have two or more directors). While this creates opportunities, it also means eligible proprietary companies would face certain corporate governance obligations that currently apply only to public companies.

The Federal Government’s published exposure draft[2] proposes the following:

Proposed new law Current position
Shareholder caps The shareholder cap of 50 non-employee shareholders would not include CSF shareholders (unless subsequent transfers were made). Proprietary companies are limited to 50 non-employee shareholders.
Reporting The company must prepare annual financial and directors’ reports in accordance with accounting standards. Small proprietary companies are usually exempt unless directed.
Auditing If $1 million or more is raised from CSF offers, the company must have its financial statements audited until the company stops having CSF shareholders. Small proprietary companies are usually exempt unless directed.
Related-party rules The company will be subject to the related party transaction rules and penalties in Chapter 2E, by being required to obtain member approval for giving financial benefits that could endanger members’ interests. Proprietary companies are not subject to the related party transaction rules.
Takeover rules The company will not be in breach of the takeovers rules if its constitution contains appropriate CSF exit arrangements – that is, if someone acquires more than 40 percent of the voting shares in the company, they must offer to purchase all other shares in the company on the same terms within 31 days. Companies with more than 50 shareholders are subject to the takeovers rules.

Should the draft legislation be successful, the temporary concessions granted under the CSF regime previously would also be removed.

Authors
Mick Garner | Special Counsel
T +61 3 9258 3609
E mick.garner@maddocks.com.au
  Jessica Leppert | Lawyer
T +61 3 9258 3607
E jessica.leppert@maddocks.com.au

[1] See Corporations Amendment (Crowd-sourced Funding) Regulations 2017.

[2] Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (Exposure Draft)

Since our last update, proposed crowd-funding legislation has been passed, creating a new regulatory regime for public companies to obtain equity-based crowd-sourced funding. The Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) (2017 Act), will commence on 29 September this year.

Background

Readers will know that crowd-sourced funding or ‘crowdfunding’ (CSF) typically involves the practice of raising funds through the pooling of small contributions from a large number of investors to finance an enterprise, investment or specific objective, often using a website or other electronic facility.

The 2017 Act will allow eligible CSF companies to do this through engaging a single online intermediary to make its CSF offers.

About Eligible CSF Companies

Question Answer
Who can crowd-fund? An eligible CSF company can crowd-fund, being a company that:

  • is a public company limited by shares
  • satisfies the gross assets and turnover caps
  • is not listed
  • has its principal place of business and a majority of directors ordinarily residing in Australia
  • does not have a substantial purpose of investing in security interests in other entities or managed investment schemes.
 What is the ‘gross assets test’? The value of the consolidated gross assets of the CSF company and any related parties must be less than $25 million at the time the company is determining its eligibility to crowd-fund.
 What is the ‘turnover test’? The company and any related parties must have consolidated annual revenue of less than $25 million during the 12 month period immediately prior to determining eligibility to crowd-fund.
What type of securities can be the subject of a CSF offer? At this time, only fully paid ordinary shares may be issued.
How much money can I raise? The ‘issuer cap’ is the maximum amount of funds that a CSF company can raise under the CSF regime. It is currently set at $5 million in any rolling 12 month period.

 

This is calculated by having regard to:

  • the maximum subscription amount sought under the current CSF offer
  • all amounts raised from other CSF offers within the past 12 months by the CSF company and its related parties
  • all amounts raised within the past 12 months under the small scale personal offering exception and certain other offers made via an Australian Financial Services (AFS) Licence holder.

Funds raised from offers to wholesale investors do not count towards the issuer cap.

If a company registers as or converts to a public company, will it receive any concessions? Yes. A company is eligible to receive temporary reporting and corporate governance concessions for five years if it:

  • registers as, or converts to, a public company after 29 September 2017
  • has completed a CSF offer within 12 months.

These concessions will grant temporary relief from holding an Annual General Meeting, appointing and auditing its financial reports, and distributing copies of its annual reports to shareholders.

How much can I invest? Retail (individual) investors will be limited to investing up to $10,000 annually in a single company, and have a five day cooling-off period after making an application.
What are the offer document requirements? The offer document must address all of the following topics specifically:

  • a pro forma risk warning
  • specific information about the offering company (their identity, its’ officers, the business and its’ history)
  • specific information about the offer
  • specific information about investor rights (including the cooling-off period).[1]

Each retail investor must also sign a pro forma risk statement when they make an application to buy shares.

About CSF Intermediaries

Question Answer
Who is a CSF intermediary? An AFS licensee whose licence expressly authorises the licensee to provide a crowd-funding service on its own platform (website or other electronic facility used to host a CSF offer).
What is their role? A CSF intermediary plays a significant role under the CSF regime, operating the platform through which investors invest and companies offer their shares.

 

They manage some of the risk that may arise by:

  • performing certain ‘gatekeeper’ obligations, including performing checks on a prospective offering company, the CSF offer and the CSF offer document
  • displaying certain information prominently on its platform, including a risk warning and information about cooling off rights
  • ensuring advertising is not misleading or deceptive
  • ensuring retail clients understand their cooling-off rights.

Extending the CSF Regime to Proprietary Companies

The Federal Government is also contemplating extending this CSF regime to proprietary companies (who have two or more directors). While this creates opportunities, it also means eligible proprietary companies would face certain corporate governance obligations that currently apply only to public companies.

The Federal Government’s published exposure draft[2] proposes the following:

Proposed new law Current position
Shareholder caps The shareholder cap of 50 non-employee shareholders would not include CSF shareholders (unless subsequent transfers were made). Proprietary companies are limited to 50 non-employee shareholders.
Reporting The company must prepare annual financial and directors’ reports in accordance with accounting standards. Small proprietary companies are usually exempt unless directed.
Auditing If $1 million or more is raised from CSF offers, the company must have its financial statements audited until the company stops having CSF shareholders. Small proprietary companies are usually exempt unless directed.
Related-party rules The company will be subject to the related party transaction rules and penalties in Chapter 2E, by being required to obtain member approval for giving financial benefits that could endanger members’ interests. Proprietary companies are not subject to the related party transaction rules.
Takeover rules The company will not be in breach of the takeovers rules if its constitution contains appropriate CSF exit arrangements – that is, if someone acquires more than 40 percent of the voting shares in the company, they must offer to purchase all other shares in the company on the same terms within 31 days. Companies with more than 50 shareholders are subject to the takeovers rules.

Should the draft legislation be successful, the temporary concessions granted under the CSF regime previously would also be removed.

Authors
Mick Garner | Special Counsel
T +61 3 9258 3609
E mick.garner@maddocks.com.au
  Jessica Leppert | Lawyer
T +61 3 9258 3607
E jessica.leppert@maddocks.com.au

[1] See Corporations Amendment (Crowd-sourced Funding) Regulations 2017.

[2] Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (Exposure Draft)