On 20 March 2017, the Australian Senate passed amendments to the Corporations Act that introduced a crowd sourced equity funding regime. The regime should come into effect by no later than September 2017.
Key features of the crowd sourced funding regime include:
- A company raising crowd sourced equity funding (“CSF company”) must be a public company limited by shares. It can’t be related to a listed company and it must have annual turnover or gross assets of less than AUD$25 million. In the long lead up to the passing of the legislation, there was much discussion about the requirement that the company be a public company. Since the CSF regime is particularly aimed at the early stage or start-up company sector, many people (including us) advocated for the inclusion of proprietary companies. Public companies have increased corporate governance and reporting obligations and most start-up companies are proprietary.
- The legislation seeks to lessen the impact of the requirement for public company status. If the CSF company raises crowd sourced equity within 12 months of its registration or conversion to a public company, it can for 5 years be exempt from holding annual general meetings and from appointing an auditor until it has raised more than AUD$1 million from CSF offers or has made other offers requiring formal disclosure. It can send annual reports to shareholders by email.
- A CSF company will be able to raise up to AUD5 million in any 12 month period.
- A CSF company must use a CSF intermediary (e.g. a platform) that holds an Australian Financial Services Licence authorising the intermediary to provide a crowd-funding service (i.e. operate the CSF platform). The CSF intermediary will deal with applications and receive investment funds from investors and will have some gatekeeper obligations.
- CSF offers cannot be open for more than 3 months.
- The CSF company will have to publish via the CSF intermediary an offer document. The details to be included in the offer document are still to be confirmed in regulations to the legislation, but it is likely that the disclosure obligations will be less onerous than would otherwise apply in a more formal offer document such as a prospectus or offer information statement.
- If an offer document contains a misleading or deceptive statement that renders it materially defective, that will expose the CSF company and other people responsible for the offer document including CSF intermediaries to civil and criminal penalties.
- Retail (mum and dad) investors will be able to apply for a maximum of AUD$10,000 per offer within a 12 month period. They have a 5 day cooling off right. Time will tell whether this long cooling off period will create uncertainty or management issues for CSF companies. Unlike CSF provisions in the USA, UK and NZ, the Australian regime does not cap the total amount an investor may invest in different CSF offers in a year.
- Investors will have to accept a risk acknowledgement when submitting a funding application. CSF intermediaries must prominently display the risk warnings provided by CSF companies.
We think that the new CSF regime is good news for the Australian innovation and start-up space. While the regime is in some respects more complicated or restrictive than some in the industry wanted, it will hopefully provide a much needed avenue for companies to raise crowd sourced equity funding via a less formal and less regimented process than previously applied. Time will tell.