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Australia's new equity crowd funding laws
Issue: 512 - Thursday, 27 April 2017
In this Issue
- Australia's new equity crowd funding laws
1. Australia's new equity crowd funding laws
After a long and difficult birth, Australia's new equity crowd funding laws received Royal Assent on 28 March 2017. The Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) (CSF Act) is expected to take effect by September this year.
The laws amend the fundraising provisions of the Corporations Act 2001 (Cth) to allow unlisted Australian public companies with consolidated gross assets and consolidated annual revenue of less than $25 million each (eligible CSF companies) to raise capital via crowd-sourced equity funding (CSF).
The expectation is that the laws will open up early-stage capital markets by providing a reduced disclosure funding option to the traditional methods of raising capital under the Corporations Act while allowing retail investors direct access to early‑stage financing activities of Australian start-ups.
Key concepts
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Who can crowd fund? |
Only eligible CSF companies are able to access the CSF regime. |
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How are offers made? |
All CSF offers must be made through a 'CSF intermediary'. A 'CSF intermediary' is a financial services licensee whose licence authorises the licensee to provide a crowd funding service. Accordingly, CSF intermediaries will need an Australian Financial Services Licence (AFSL) to operate a CSF platform. To make a CSF offer, the issuer must publish a CSF offer document on the platform of only one CSF intermediary. The information to be included in the CSF offer document, including the form of risk warnings, and information in relation to the issuer, the offer and investor rights, will be set out in the Regulations (yet to be made). All applications and application moneys are handled by the intermediary. All offers must be closed within three months (if not stated to close earlier). |
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Is there a cap on how much can be raised? |
There is a cap of $5 million on the amount an issuer can raise using crowd funding in a 12-month period. Importantly, the cap includes funds raised by the issuer within the past 12 months under the 20/12 exemption (and under offers made via an AFSL holder) but excludes funds raised under the sophisticated and professional investor exemptions. |
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Is there a cap on how much can be invested? |
There is a $10,000 cap on the amount a retail investor can invest with a particular company via the same intermediary within a 12-month period to limit the investor's exposure to a single company. |
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Are there restrictions on the use of funds raised? |
The CSF regime cannot be used to raise money for 'blind pools'. Funds cannot be raised if they are intended to be used by the issuer to any extent for investing in securities or interests in other entities or managed investment schemes. |
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Who is liable for a defective offer document? |
The CSF intermediary, the issuer and other persons responsible for the CFS offer document are subject to potential civil and criminal liability for defective CSF offer documents. |
Relief for newly incorporated or converted public companies
New public companies that are eligible and intend to crowd fund at the time they are registered will have relief from certain corporate governance and reporting concessions for up to five years. The concessions are only available to companies that successfully complete a CSF offer within 12 months of registration, and have not undertaken any fundraising offers requiring disclosure.
These concessions include an exemption from the annual general meeting requirement and the option to provide only online financial reports to shareholders. Such companies are also not required to appoint an auditor for the five-year period or until the company has raised more than $1 million from CSF offers or other offers requiring disclosure.
What is happening with proprietary companies?
A key issue in the gestation of the CSF Act was that it did not extend to proprietary companies. Proprietary companies are the overwhelming preferred structure of choice for small businesses.
The Treasurer has stated that work is already underway to extend the laws to proprietary companies and that "an extension of the framework will be introduced through subsequent legislation in the near future". Given the CSF Act is the government's second attempt at establishing a CSF regime, with the passage of the legislation only achieved after more than two years of debate and consultation, the Treasurer is clearly an optimist.
Key takeaway
In the meantime, while the requirement to register as a public company will not be desirable or appropriate for every small business, the new laws will no doubt assist some start-ups to raise capital by accessing investors who have, until now, been largely off-limits because of the fundraising disclosure requirements of the Corporations Act.
Graham Nagle is a legal practitioner director at commercial law firm Lennox Partners – graham.nagle@lennoxpartners.com.au
Disclaimer: The content of this Bulletin is general information only. It is not legal advice. The statements and opinions are the expression of the author, not Law Central, and have not been checked for their accuracy, completeness or changes in the law. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin.
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