Earlier this year, the first report on Australia’s crowd-sourced funding (CSF) sector was released by the Australian Securities and Investment Commission (ASIC). The release of the report follows the expansion of Australia’s CSF regime to include eligible proprietary companies in late 2018.
CSF involves companies raising small amounts of capital from the public using an authorised platform. Anyone considering engaging in CSF should seek advice early, be aware of how the regime can assist with simpler equity financing and understand its limits.
The current CSF market in Australia has a large number of authorised CSF intermediaries compared to the number and value of CSF offers that have been made to date. As capital-driven businesses and funders become more familiar with CSF as a viable funding source, this may change.
Further, whether or not an increase in CSF activity occurs in the coming years may also depend on any action that ASIC proactively takes to facilitate a more engaging environment for CSF proponents and investors.
Who is the CSF regime available to?
The current CSF regime was introduced in Australia in 2017 through changes to the Corporations Act 2001 (Cth) (Corporations Act). The purpose of the regime is to provide an alternative, lower cost fundraising option for start-ups and small-to-medium-sized companies.
The CSF regime in Australia was originally only available to unlisted public companies who met certain eligibility requirements (e.g. companies with less than A$25 million in gross assets and annual revenue). However, the CSF regime was expanded in late 2018 by the amendments to the Corporations Act to include proprietary companies.
Proprietary companies are the most common form of company in Australia and have lower levels of regulation than public companies (e.g. number of directors, financial reporting) but also limitations on public fundraising and the number of shareholders.
Given the extension of the regime to proprietary companies, the amendments removed the temporary corporate governance concessions in the Corporations Act for proprietary companies that convert to or register as public companies to access the CSF regime.
When is a proprietary company eligible to access the CSF regime?
In order for a proprietary company to be eligible to access the CSF regime, it must have:
- its principal place of business in Australia;
- at least two directors, with a majority of directors ordinarily residing in Australia (the normal statutory minimum is one director);
- less than A$25 million in both consolidated gross assets and revenue; and
- no substantial purpose of investing in securities or interests in other entities or schemes.
If a proprietary company satisfies the above, it may use the CSF regime to raise up to A$10,000 from each private investor, and A$5 million in total, over any 12-month period.
The corporate governance and reporting obligations under the CSF regime
In order to protect small investors, the CSF regime imposes additional rules applicable only to proprietary companies that have one or more CSF shareholders:
- Record keeping: the company must record additional information in its share register in order to specifically track those shares issued under a CSF offer from other shares in the company. Such information includes:
- the date of every issue of shares under a CSF offer;
- the number of shares issued under each CSF offer;
- the shares issued to each shareholder under a CSF offer; and
- the date on which each shareholder ceases to be a CSF shareholder of the company.
Further, the company will have additional obligations to notify ASIC of certain changes to its share register and structure. For example, this includes a change to the share structure of the company where the cancellation of shares has resulted in the company ceasing to have any CSF shareholders.
- Financial reporting: a ‘small’ proprietary company with CSF shareholders must prepare and lodge with ASIC financial statements and directors’ reports in accordance with the applicable accounting standards prescribed under the Corporations Act, similar to existing requirements for ‘large’ proprietary companies.
- A ‘small’ proprietary company is a company (from 1 July 2019), that by the end of the financial year, has:
- consolidated revenue of less than A$50 million;
- consolidated gross assets of less than A$25 million; and
- fewer than 100 employees.
- Audit requirements: if the company raised at least A$3 million from all CSF offers it has made in the financial year,it must have its financial reports audited.
- Related party rules: the company must comply with the ‘related party transaction’ rules under Chapter 2E of the Corporations Act. In particular, a proprietary company with CSF shareholders must obtain shareholder approval to give a financial benefit to a related party, unless an exception applies.
- Shareholder limit: shareholders who hold shares issued as part of a CSF offer do not count towards the 50 non-employee shareholders limit applicable to proprietary companies.
- Takeover rules: so long as the proprietary company has CSF shareholders and continues to be eligible to make CSF offers, it is exempt from the takeover rules in Chapter 6 of the Corporations Act.
Mandatory use of authorised intermediary for CSF offers
Because CSF is recognised as a financial service under the Corporations Act, an eligible CSF company must use an authorised CSF intermediary in order to raise funds under the CSF regime.
During the 2017–2018 financial year, ASIC authorised eight CSF intermediaries via either new or amended Australian financial services (AFS) licenses. A further eight CSF intermediaries were authorised in the 2018–2019 financial year.
A CSF intermediary operates an online platform through which a company offers CSF shares to investors. CSF platforms have additional features such as a communication facility for investors to ask questions about the CSF offer.
In addition to the general obligations the intermediary has as an AFS licensee, there are specific ‘gatekeeper obligations’, which include performing checks on a prospective offering company, the CSF offer and the CSF offer document.
In a survey conducted by ASIC which focused on the period between 11 January to 30 June 2018 (noting that this period does not include CSF used by proprietary companies), the key findings included:
- 14 CSF offers were hosted on intermediary platforms, of which half were successful;
- of those complete (successful) CSF offers, approximately A$7.04 million was raised;
- a total of 17,457 investors subscribed to complete offers;
- almost all investors were retail investors, who raised the majority of funds;
- the consumer discretionary spending sector had six offers, of which four were successful; and
- other industries to complete CSF offers included financial, energy and industrials.
ASIC has noted its concerns about the large number of CSF intermediaries in comparison to the number of CSF offers and the amount of capital actually raised, in particular that New Zealand experienced greater participation in the first year of their CSF regime (1 August 2014 to 31 July 2015) than the first year of Australia’s CSF regime.
However, the New Zealand regime has a significantly wider scope and does not impose a cap on the size of company that can access the regime. Despite these concerns, it is expected that the expansion of the CSF regime to proprietary companies will support existing intermediaries and new entrants.
ASIC has also said it will continue to monitor activity and assess any risk indicators that emerge in the CSF industry and, where appropriate, will provide advice to the Government about any necessary changes.
This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.
Jeremy Horwood is a leading equity capital markets and mergers and acquisitions lawyer with deep expertise in these areas, as well as Australia’s complex foreign investment law. He is a member of the Law Council’s Foreign Investment Committee, which regularly consults with Treasury regarding Australia’s foreign investment law and approval processes.
For more information, please visit www.corrs.com.au.