Insights / December 15th, 2016

Crowd sourced equity funding back on the agenda

The exciting crowd sourced equity funding (CSEF) regime is back on the Government’s agenda! The Federal Government’s original 2015 Crowd-sourced Funding Bill lapsed but has since been reintroduced with some minor changes as the Crowd-sourced Funding Bill 2016 (the Bill).

CSEF involves offering securities to the public through internet-based intermediary platforms. This allows small public companies to raise relatively substantial funds from a larger pool of investors, with each retail investor only having a small contribution to the company.

The Bill proposes a number of amendments to the Corporations Act designed to make a flexible, quick and easy way for small public companies to raise capital from retail investors with substantially lower costs and compliance requirements.

The increasing popularity of CSEF, especially via the Internet, as an alternative form of fund raising, will potentially impact a number of parties. Start-ups, platform providers and investors need to consider the implications.

The following is an overview of the key changes between the 2016 and 2015 bills and a reminder of some of the key features of the proposed CSEF regime in Australia.

Has anything changed from the 2015 Bill?

The Bill is substantially in-line with the lapsed 2015 bill, however there are a few key changes:

Net assets and revenue test

Increased from $5 million to $25 million

Investor cooling off period

Reduced from 5 days to 48 hours

Technical amendments

Relating to conversion to a public company to access CSEF and the audit exemption

The revised legislation has not extended the CSEF regime to include proprietary companies despite strong public consultation support for such a proposal.

Is my company eligible?

A company must qualify as a CSEF company to raise funds from the crowd under the Bill. To be an eligible CSEF company, a company must satisfy all the following criteria:

  • The company is a public company with its principle place of business in Australia.
  • A majority of directors must ordinarily reside in Australia.
  • The company has less than $25 million in consolidated gross assets and less than $25 million consolidated annual revenue. This threshold amount has been increased from $5 million under the lapsed 2015 bill. Cowell Clarke agrees that $25 million is a more appropriate threshold to facilitate greater access to crowd sourced funds by start-ups and small public companies.
  • The company cannot be listed.
  • The company must not operate as an investment business.

Proprietary companies are unable to utilise the CSEF regime, however they can convert to a public company in order to do so.

How would my company raise funds?

CSEF raisings can only be undertaken via intermediaries on an internet based platform. Intermediaries are required to hold an Australian Financial Services License and have a number of obligations, including to:

  • Conduct a prescribed check of the issuer.
  • Publish a risk warning.
  • Provide an application facility.
  • Obtain a risk acknowledgement from general (retail) investors.
  • Not publish, or continue to publish, an offer document in certain circumstances.
  • Provide a communications facility.
  • Provide cooling off rights.
  • Disclose fees and interests.

Application money for the CSEF offer is to be received and held by the intermediary until the offer closes.

A tailored CSEF offer document for the offer is required to be published on the intermediary’s platform. The offer can only be conducted via one intermediary and an eligible company cannot have more than one CSEF offer open at a time.

How much can my company raise?

An eligible CSEF company can raise up to $5 million in CSEF in any 12-month period (Issuer Cap). The Issuer Cap is calculated by taking into account:

  • The maximum subscription amount sought by the company under the current CSEF offer.
  • Amounts raised under other CSEF offers within the past 12 months by the company or its related parties.
  • All amounts raised within the past 12 months from small scale personal offers and certain offers made via an AFSL holder by the company or its related parties.

Funds raised from a CSEF offer cannot be used by issuers to any extent for investing in securities or interest in other entities or schemes.

As an investor, how am I protected?

There are a number of retail investor protections built into the Bill, including:

Investor cap

$10,000 per company via a particular intermediary in any 12 month period

Risk acknowledgement

Intermediary must obtain a risk acknowledgement from the investors prior to accepting a CSEF application.

Unconditional investor cooling off rights

Cooling off rights within 48 hours after an offer application is made.

No financial assistance

The CSEF company, its related parties, the intermediary and its associates are not permitted to financially assist the investor to acquire the CSEF securities.

Compliance – Corporate governance concessions

The Bill includes a number of corporate governance compliance concessions for certain CSEF companies under the Corporations Act, including:

AGM requirement

Waiving the requirement to hold an AGM each financial year and within 18 months of incorporation.

Audit requirement

Waiving the requirement to appoint an auditor or have audited financial accounts until more than $1 million has been raised from CSEF offers or other fundraising offers requiring disclosure.

Financial reports

Permitting the company to provide financial reports to its members by publishing on its website.

A CSEF company is eligible for these corporate governance concessions for a particular time if:

  • The company is an ‘eligible CSEF company’ at that time.
  • The application for the company’s registration or conversion stated that the company will be eligible for these concessions on registration or the company’s registration is altered to reflect its conversion and the company intends to make a CSEF offer after registration or conversion.
  • The time is within 5 years of the company’s registration or conversion i.e. the company has not been a public company for longer than 5 years.
  • The time is at or after the end of a financial year that ends later than12 months after the company’s registration or conversion, the company has successfully completed a CSEF offer.
  • Either the financial year is the first financial year that ended after the company’s registration, or the company has been eligible for these corporate governance concessions in relation to every earlier financial year.
  • The company has not made any offers for securities that require disclosure to investors under the Corporations Act.

What should I do?

Whether you are an eligible company or wishing to become an eligible company, a start-up, an intermediary or a potential investor, Cowell Clarke can assist you prepare for the implementation of the new CSEF regime in Australia.

We have start-up kits, investor ready documents and intermediary licensing packages to enable you to cost effectively take advantage of the new regime.

For more information please contact us.

Related Expertise