By Shaun Restorick-Barton, Associate
This blog is a collaboration with Anna from PledgeMe.
Equity crowdfunding has been happening around the globe for the past few years. Over $2.5 billion was raised in 2015 through equity crowdfunding, from the UK (arguably the grandparent of equity crowdfunding) through to PledgeMe’s home country, New Zealand, where equity crowdfunding was legalised in 2014. PledgeMe were the first (equal) platform licenced to provide equity crowdfunding over the ditch.
We’ve seen a whole range of companies raise money through PledgeMe, from tech startups to craft beer companies like Parrotdog raising $2million in two days. It’s a powerful way for companies to bring their friends, family and fans in to help them grow and to engage beyond rewards-based crowdfunding.
In Australia, the Corporations Amendment (Crowd-sourced Funding) Act 2017 introduced the regulatory regime for this type of funding on 29 September 2017 which allows equity crowdfunding (or crowdsourced equity finance as your government-y folk like to call it). There’s been a lot of excitement, but not a lot of clarity on what that actually means for companies. So we’ve decided to change that!
1) You have to go through a platform
If you want to raise money through the CSF legislation, you need to go through a licensed platform. Currently, no one is licensed! Applications for the first cohort of platforms closed on 27 October 2017, and now we wait. We’ve had our first round of questions from ASIC, but don’t know how long it will take to become a licenced intermediary.
So, it’s anyone’s guess when intermediaries will be licensed. We don’t believe it will be before late January if our New Zealand experience is anything to go by. And even then, it’s only useful for companies that are (or want to become) publicly unlisted.
2) You need to be a publicly unlisted company
(at least until the legislation is amended to allow proprietary companies)
In order to equity crowdfund, you need to be a public unlisted company. Being a public unlisted company in Australia means some additional compliance and requirements. Not all of the requirements are bad, but overall they do mean running your company could cost more.
The government has brought in some exemptions if you raise less than $1million (and were not previously an unlisted public company).
When will proprietary (aka the 99%) be allowed to equity crowdfund?
We’re sorry to be the bearers of not so awesome news, but that could take a while. The legislation needs to be amended, and while everyone seems to think that’s a good idea and the amendment was put forward on 14 September 2017, it hasn’t happened yet.
Once the amendment is passed, it will take 6 months before it comes into effect. The government put out a request for submissions last week (even though, they’ve already acknowledged that the legislation should be extended), so it’s unlikely proprietary companies will be able to equity crowdfund until August 2018 earliest. Almost one year since the initial legislation came into effect.
Want to submit your thoughts on this? Here's the link. You have until 2 February 2018 to get your thinking in.
Law Squared’s two cents:
The amended legislation proposes to add extra hoops for proprietary companies to jump through, such as:
- annual financial and directors’ reports which comply with accounting standards must be prepared by the company, and be provided to shareholders and ASIC.
- companies that raise more than $3 million from crowd-sourced funding must have their financial statements audited and if they do not appoint an auditor, ASIC has the power to appoint one for them.
- crowd-sourced funded companies will have to include additional information on their corporate register about their crowd-sourced funding shareholders.
- crowd-sourced funded companies will also be required to lodge their constitution with ASIC.
Investor protections will also be extended under the proposed amendments, these include requiring the participating company to make changes to tag-along rights and related party transaction terms within their Shareholders Agreements.
3) It’s a lot of work
Honestly, truly, equity crowdfunding isn’t a silver bullet. You have to do all the work to prepare your offer document and have a company that your crowd is prepared to invest in for the long haul.
But, it has a lot more benefits than some traditional finance options. We truly believe it brings so much more than just funding though. It lets you bring in your crowd of family, friends, and fans. Your customers can not only love your product, but also own part of you - and sell what you do because they are a part of your journey.
Here are the three key ingredients to a successful equity campaign:
- Good company - we’re not saying that you need to be a “good” company, but you need to understand the levers of your business and be clear on how the money you’re raising will help you grow. Typically, this means you can show a track record of growth, and can really clearly explain where you want to go next.
Parrotdog had a brewery set up in Wellington, but had hit capacity in their central city space. They knew if they built a new brewery they could triple production once it was launched. They also knew they had demand for their product that they couldn’t meet, so they went out to their crowd to help them fund the set-up their new Lyall Bay brewery. They raised their maximum goal of $2million in two days from a crowd of avid beer drinkers and supporters. Their crowd got a 10% discount for life, and are now out there promoting their beer because they own it.
In their latest round, the Parrotdog crew had some comprehensive growth plans, but needed additional capital to hit go. You can check out their full plan here, and they're currently raising through the New Zealand public.
- Good crowd - you need to know who your crowd is! This could be your family, friends, and definitely customers.
When Brianne from Ethique wanted to raise money through equity crowdfunding campaign, she went out to her customer base. Her customers love the ethos of her solid hair care business, because her main focus is to reduce waste. In the last few years, their company has stopped over 200,000 bottles from going to landfill.
In her first round, she raised $200,000 in two weeks, and 80% of her investors were current customers. 3 of them were chemists, and when she had trouble doubling her batching in her new factory one of those shareholders came in and helped her solve that problem in like ten minutes.
In her second equity crowdfunding round over 1,200 of her customers registered their interest in investing before launch, and it took 90 minutes for the campaign to meet it’s goal of $500,000 once it went to the public.
- Good comms - you can have a great crowd, and a well honed company, but if you don’t communicate what you’re up to no-one will know to invest! So you need to think about how you can get the word out there about your campaign, without promising the world. We’ve written up a guide with our New Zealand lawyers on how to communicate in a way that is not “false or misleading” here.
Example: Yeastie Boys (2015 round)
Yeastie Boys famously told us that email was dead, and that they were going to do everything over Twitter.
Thankfully, we managed to talk them into setting up an interested investor newsletter, and they went out asking for their crowd to be part of their "back-up band". They got their crowd to provide their names, emails and reward ideas for shareholders in addition to part ownership of the company. They got perk ideas ranging from shareholder branded beer, to home brewing sessions with the founders, to Stu’s pants (he wears pretty fantastic pants). In the end, they decided to offer all shareholders a discount, and investors over $2,000 the option to homebrew with the boys after the AGM. Only 200 of their interested investors got in before their campaign met its maximum goal of half a million dollars in half an hour.
4) Other things to think about from a legal perspective
As mentioned above, raising funds through the crowdsourced method is an exciting new opportunity for an Australian business. However, companies need to engage with the process properly and comply with their legal obligations.
To fulfil your legal responsibilities, you will need to provide fairly detailed disclosures to potential investors and ensure that those disclosures satisfy the requirement to be clear, concise and effective.
You may consider writing your offer document using the template provided by ASIC which will include the following types of disclosures:
- your company’s structure (which will need to be changed to a public unlisted company using this form);
- your company’s historical financial statements;
- background information about the company and its team; and
- information and warnings about CSEF and the risks of investing through CSEF.
To be able to participate in equity crowdfunding, investors will:
- have to provide confirmation on the platform that they are aware of the risks of investing in this manner;
- be restricted from investing more than $10,000 in any company in any 12 month period; and
- will also have a five day cooling off period where they can withdraw their investment if they change their mind.
To change your company from a proprietary limited (Pty Ltd) company to an unlisted public company you will need to complete the above form. It’s not just a form filling exercise, you will also need to pass a Special Resolution of your board and shareholders, amend your company constitution and complete a number of internal governance procedures.
We would recommend that you have your legal and financial advisors provide you with guidance before and during your crowdsourced equity journey.
While this is a new investment method in Australia and you may be afforded some leniency if you make a simple error along the way, we cannot stress enough that you are dealing with individual’s funds and this must be treated with the utmost importance.
5) Things to think about after you raise
We know this is a bit premature since no-one is licensed yet. But if you’re thinking about raising money in this way, you need to be clear on what this will mean for your company after!
- Audits - if you’re a public unlisted company, you’re expected to complete (and lodge) annual audits. There is an exemption if you’ve changed specifically to equity crowdfund, but only if you raise under $1 million, and only for the first five years. There are a few other things that could trigger you back into needing to complete audits, so chat with your lawyers. Audits aren’t necessarily a bad thing, in a lot of ways, it’s good for your crowd to know someone else has helped check your numbers, processes and work. BUT, they can be pretty expensive, and if you’re growing an early stage business it’s probably not the best use of capital raised. The estimated costs in Australia will sit around $20,000 per year.
- AGM’s - You do not need to hold an AGM for the first 5 years from conversion (though, if 5% of your shareholders request it, you will need). But, AGM’s can be awesome for engaging your shareholders! So, even if you don’t want to run one we reckon you probably should. Get your shareholders in, and tell them how they can help you - which leads into our next point.
- Shareholder comms - there are some things you’re legally required to keep your shareholders in the loop about, but you should really just communicate with them because they’re probably your biggest fans! You should tell them how things are going, ask for support, give them clear ways they can help you grow faster (and better) if that’s what you’re aiming to do. We’ve seen companies ask for everything from contacts in new cities, to support figuring out the new batching for a product, to beds to sleep on when travelling.
Interested in learning more about equity crowdfunding? Book in a time to chat with Anna here, either on the phone, Skype or #IRL in Brisbane. Anna's got a wealth of knowledge helping companies getting ready to crowdfund - from craft beer kids to chocolate companies to single bladed wind turbines to urban farms. She's in Queensland thanks to the awesome support of the Advance Queensland, as part of the #HotDesQ programme.
If you want some legal support from us, get in touch with the crew at Law Squared. We have offices in Melbourne, Sydney, and Brisbane and are focussed on supporting companies with an entrepreneurial mindset.
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