By Clea Cole (Lawyer) and Kate Landells (Senior Associate)
In last Tuesday’s budget papers, the Government committed to making it easier for start-up companies to raise capital by releasing draft legislation to extend the crowd-sourced equity funding regime (CSF) to proprietary companies in the form of the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (Cth).
The current CSF regime applies only to public companies and will commence operation on 29 September 2017 (see our earlier post on this legislation).
To recap, the key features of the CSF regime are as follows:
- To be eligible to undertake a CSF offer, a company must be a public company limited by shares, with an annual turnover or gross assets of less than $25 million.
- Eligible companies can raise up to $5 million in any 12 month period by making CSF offers to investors via online platforms run by CSF-intermediaries.
- CSF offers cannot be open for more than 3 months.
- Investors will be able to invest up to a maximum of $10,000 in any one company annually. This will be subject to a five-day cooling off period, a measure designed to limit risk for retail investors.
- The regulatory burden for eligible CSF companies is less. If an eligible company raises CSF within 12 months of its registration or conversion to a public company:
- it may be exempt from holding annual general meetings for five years; and
- it will only have to appoint an auditor within the first five years if it has raised more than AUD $1 million from CSF offers or has made other offers requiring formal disclosure.
- In order to undertake a CSF offer, eligible companies must prepare an offer document containing prescribed information. Misleading or deceptive statements in the offer document (or any omissions with respect to the prescribed information) may put companies at risk of civil or criminal penalties.
One of the key criticisms of this CSF regime is that it does not extend to proprietary companies. The Government’s new draft legislation will do just that, potentially improving access to finance for start-ups.
Specifically, the amendments will remove the need for a proprietary company to convert (or incorporate as) a public company in order to undertake a CSF offer. However, there are additional obligations, including the following:
- a proprietary company will be required to have a minimum of two directors before it is eligible to access the CSF regime;
- a proprietary company that makes a CSF offer will have to comply with the CSF regime and include details about its CSF offers and CSF shareholders in its company register and will also have to notify ASIC of certain details; and
- a proprietary company that has CSF shareholders will:
- have to prepare annual financial and directors’ reports in accordance with accounting standards;
- be subject to the related party transaction rules in Chapter 2E of the Corporations Act; and
- not breach the takeovers rules in the Corporations Act if its constitution contains appropriate CSF exit arrangements. That is, a provision that requires someone who acquires more than 40% of the voting shares in the company to offer to purchase all other securities in the company on the same terms.
Additionally, the CSF regime will extend the shareholder cap for proprietary companies. Currently, proprietary companies are unable to have more than 50 non-employee shareholders or make a public offer. The proposed legislation will amend this cap so that CSF shareholders are not counted.
In the Bill’s Explanatory Memorandum (available here), the Government provides that these additional company obligations will help to ensure the sustainability of the CSF regime and give investors’ confidence in the market by ensuring that:
- companies meet minimum standards; and
- investors have basic information available to them.
The Government is delivering these amendments to the CSF regime by providing $4.5 million to the Australian Securities and Investments Commission to implement the program.
If these amendments are delivered this will be a win for small businesses.
However, it is likely there will be a lag between the implementation of the CSF regime later this year and its extension to proprietary companies.