By Zuong Dang, Lawyer
For the startup sector, it’s the good news we have been waiting for. After two years of anticipation, on 12 September 2018, the Federal Parliament passed the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (Cth). Crowd-sourced funding (CSF) is a form of funding that allows entrepreneurs to raise funds from a large number of investors.
This new law allows private companies in Australia to crowd-source up to $5 million a year through crowdfunding platforms from October 2018. CSF is currently only available to public unlisted companies, and the much anticipated extension of CSF to private companies will enable more businesses to obtain funding from every day (retail) investors without the prior constraints.
This is a significant move by the government to boost innovation and investment in Australian entrepreneurs and startups.
The new CSF laws for private companies will largely mirror the existing CSF public company laws.
Here are the key points to remember:
Eligibility to access CSF - a company must have less than $25 million in gross assets and annual turnover, not be listed on a stock exchange and its principal place of business must be Australia.
Fundraising and investor caps - a retail investor may invest a maximum of $10,000 in a company over a 12-month period and a company accessing CSF may raise a maximum of $5 million over a 12.month period through a CSF raise.
Initial disclosure - companies participating in CSF will need to uphold higher governance reporting obligations to protect the large number of investors they will be able to have. CSF companies need to include some additional generic disclosures around company type, capital structure and any other rights or conditions associated with shares (such as tag-along and drag-along rights).
Role of the intermediary - a CSF intermediary is a financial services licensee whose licence expressly authorises the licensee to provide a crowd funding service. The intermediary will carry through the same gatekeeper obligations with respect to both proprietary and public companies that access CSF. These include conducting certain checks on the issuer and management as well as ensuring disclosure documents are completed and clear. Our friends at Equitise (https://equitise.com) have got you covered!
The government made it clear in the Explanatory Memorandum that it is important that private companies taking part in CSF are not burdened by unnecessary governance obligations. These include:
Number of directors - proprietary companies will be required to have a minimum of two directors (rather than a minimum of one director).
Annual general meetings - private companies will not be required to hold an annual general meeting.
Related party transactions - proprietary companies will be subject to the related party transaction regime in Chapter 2E of the Corporations Act 2001 (Cth).
Private companies with CSF shareholders will have to prepare annual governance and directors’ reports in accordance with accounting standards. A CSF private company would be required to undertake an audit where it raises more than $3 million from a CSF raise. This threshold will also be carried through to the transitional governance concessions that apply to newly converted public companies.
What to expect
It is no doubt that the new crowdfunding laws represent the most powerful legislative change in the capital raising space for some time. The CSF model has proven to boost employment and growth in countries such as the US and the UK, and it allows for a diverse class of everyday investors to take part in driving the startup ecosystem. We expect to see more of both private and unlisted public companies prepare for a CSF capital raise in the next few months and the number of everyday investors to take part in the same will increase exponentially.
Having helped a number of clients through the CSF model, we’d love to have a chat with you about applying this to your business, so feel free to drop us an email at firstname.lastname@example.org.
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