Shannon Finch
1. Crowd-sourced
equity funding (or "CSF") is...
A variety of crowdfunding models have emerged as early-stage companies
search for innovative fundraising methods. In contrast to reward or donation
based models, CSF involves a company raising capital by issuing equity
(ordinary shares) to a large pool of investors, typically for small amounts of
money. CSF is usually facilitated through an online platform hosted by a third
party.
2. CSF is not
here for retail investors. Yet.
As part of the Federal Government’s efforts to kick-start the ‘ideas
boom’, it introduced the Corporations Amendment (Crowd-sourced Funding) Bill
2015 in December 2015. The Bill sought to enable eligible companies to raise
funding from retail investors through CSF. It is expected the Government will
now reintroduce the Bill — but in what form?
3. CSF already
exists in Australia … for some.
Companies can already fundraise through CSF from sophisticated or
professional investors, and in very limited circumstances from retail investors
(eg, small scale offers of 20 investors or less in a 12 month period raising
less than A$2 million). For example, ingogo raised A$4.2 million from
sophisticated investors through Australian-based VentureCrowd in May 2015 (one
of the largest CSF raises globally). Legislative reform is needed to allow
broader participation by retail investors.
4. CSF is alive
and kicking in other jurisdictions.
Australia is not the first country to propose extending CSF to retail
investors, in fact, we’re a bit behind the game. New Zealand introduced a CSF
regime in April 2014, USA’s final rules on CSF took effect in May 2016 and
other jurisdictions such as the United Kingdom, Italy and Canada also have
regulatory regimes that permit retail CSF. However, most regimes set some
careful limits on retail participation.
5. Eligibility is
a public affair.
Under the Bill, an eligible issuer must be an unlisted public company
limited by shares with less than A$5 million in annual consolidated revenue and
A$5 million in gross assets. The issuer’s primary purpose cannot be to reinvest
raised amounts in securities of other companies, its principal place of
business must be in Australia and a majority of its directors must ordinarily
reside in Australia.
6. The Bill
raises the roof…
Under the Bill, an eligible company can raise a maximum of A$5 million
over a rolling 12-month period by issuing ordinary shares (and no other debt,
equity or hybrid instrument). These restrictions are generous compared to other
jurisdictions. New Zealand’s fundraising cap is NZ$2 million and USA’s is US$1
million. However, many have criticised the inflexibility regarding the types of
instruments issuers can use to raise capital.
7. …striking a
balance…
The Bill seeks to strike a balance between protecting retail investors,
and opening up new fundraising avenues for start-ups and investment opportunities
for ‘Mum & Dad’ investors. Protections include an unconditional 5-day
cooling-off period, retail investors may only invest $10,000 per issuer over a
12-month period and all offers are accompanied with an offer document setting
out certain prescribed information on the offer. Some have suggested this may
be overkill, by comparison to the more flexible New Zealand regime, but without
question this is a high-risk part of the investment market.
8. …reducing the
burden on some…
To reduce the burden of the requirement to convert or register as a
public company, the Bill grants eligible companies certain concessions from
obligations imposed on public companies. For example, for a 5-year period after
converting or registering as a public company, an eligible company is not
required to hold an AGM and they do not need to appoint an auditor where that
company raises less than A$1 million.
9. …but
increasing it on others.
The Bill imposes extensive ‘gatekeeper’ obligations on intermediaries.
In effect, CSF intermediaries are required to conduct due diligence on issuers,
enforce investor protections such as the investor cap and cooling-off rights
and provide communication facilities on their platforms. Intermediaries must
hold an AFSL expressly permitting them to provide crowdfunding services and
possibly an Australian market licence.
10. What next?
Although the Bill has lapsed, there appears to be bipartisan support for
CSF. The start-up sector and the Federal Opposition have suggested the Bill was
an opportunity lost. Some suggest that extension to proprietary companies, and
less onerous gatekeeper obligations are needed. We expect further debate and
possible changes to the proposed regime soon.
No comments:
Post a Comment