In 2017, Australia finally introduced an equity crowdfunding regime into law. However, a significant hurdle for businesses aiming to use equity crowdfunding was the requirement that eligible companies be unlisted public companies. In September 2018, the Australian Parliament passed the long-awaited changes to the existing equity crowdfunding laws to allow proprietary companies (also known as private companies) access to equity crowdfunding. This article explores the new changes to the equity crowdfunding laws and what they mean for your business.
What is Equity Crowdfunding?
Equity crowdfunding, also known as crowd-sourced funding, aims to provide an alternative for startups seeking investment outside of traditional, sophisticated investors, angel investors and venture capitalists (VCs).
Further, equity crowdfunding offers startups the opportunity to raise capital through investment from potentially large ‘crowds’ of retail investors.
The Existing Crowdfunding Laws
Although the 2017 laws were an exciting development, they restricted access to equity crowdfunding to unlisted public companies. Overwhelmingly, startups and SMEs in Australia are private companies.
Companies seeking investment through equity crowdfunding could potentially bring on hundreds of shareholders, whereas ordinarily private companies are limited to a maximum of 50 non-employee shareholders.
Further, public companies have greater flexibility in shareholder numbers. However, they must satisfy more stringent reporting and corporate governance obligations because they raise funds from the public.
There were some temporary corporate governance concessions made available to companies that became public companies in order to access the crowdfunding regime. Despite this, the need to convert to a public company and the additional reporting requirements were a significant deterrent to many businesses wanting to use the equity crowdfunding regime.
What Are the New Changes?
The amendments to the equity crowdfunding laws extend access to the equity crowdfunding regime to eligible private companies. The laws will take effect from October 2018.
Accordingly, startups and SMEs will not have to become public unlisted companies to engage in equity crowdfunding. This significantly broadens the pool of eligible companies that can raise capital online through crowdfunding platforms.
Your company may be eligible to crowdfund for investors if your company is a private company that:
- has at least two directors;
- has a principal place of business in Australia;
- is not a listed company;
- has consolidated gross assets of less than $25 million;
- has consolidated annual revenue of less than $25 million; and
- has a primary purpose other than investing in securities.
If your business has previously considered raising funds from retail investors through crowdfunding but was hesitant due to the onerous reporting requirements of a public company, you may now have the opportunity to raise capital in this way.
What Can My Business Raise?
Through equity crowdfunding, private companies and unlisted public companies can raise up to $5 million within any 12 month period.
Further, retail investors can invest up to $10,000 in a crowdfunding company.
However, certified sophisticated investors (those with net assets of $2.5 million and annual incomes of more than $250,000) can invest more than this cap.
What Are the Restrictions and Limitations?
Private companies no longer have to become public to use equity crowdfunding. However, private companies who crowdfund with shareholders who acquired shares through crowd-sourced funding (known as CSF shareholders) will have additional reporting obligations and different corporate governance rules.
|Normal Rules for Private Companies||Crowdfunding Rules for Private Companies|
|Must have a minimum of one director.||Must have a minimum of two directors.|
|Can have a maximum of 50 non-employee shareholders.||Investors who acquire shares in private companies through a crowdsource funding offer are excluded from the ordinary 50 non-employee shareholder cap.|
|Small private companies do not typically need to provide annual financial and directors’ reports.||Private companies with CSF shareholders must prepare annual financial and directors’ reports in accordance with accounting standards.|
|Small private companies do not typically need to have their financial statements audited.||Private companies that raise $3 million or more from equity crowdfunding offers will have their financial statements audited.|
|Usually, public companies, not private companies, have to comply with related party transaction rules. These rules prevent companies from providing a financial benefit to a related party such as a director and their relatives.||Private companies with CSF shareholders must comply with related party transaction rules.|
|No existing requirements.||Private companies that make an equity crowdfunding offer must record details of their offer and the shareholders as part of their company register.|
How Do I Raise Funds Through Equity Crowdfunding?
Equity crowdfunding uses online platforms that act as ‘crowd-sourced funding intermediaries’. These intermediaries facilitate the interaction between companies and investors. Companies can make the offer of shares in their company and investors have the opportunity to invest in exchange for receiving shares.
Some well-known licensed crowdfunding platforms in Australia include:
- Birchal; and
However, to receive funding, your business will need to prepare an offer document that sets out:
- the details of the investment;
- a prescribed risk warning; and
- a five-day cooling-off period for investors.
This offer document discloses information about the company to prospective investors. Additionally, it clearly sets out the risk of investing in early stage ventures via crowd-sourced funding.
Your offer and campaign to attract investors should be engaging but also comply with the requirements of your crowdfunding platform. However, you should ensure you are not misleading or deceptive so as to not breach the Australian Consumer Law.
Equity crowdfunding is a new and developing source of raising funds in Australia. Many startups and SMEs were previously unable to take advantage of the scheme because of the requirements to transition to a public company and the related corporate governance obligations.
However, the changes to the equity crowdfunding laws extend the regime to private companies. This is a long-awaited development and means that your business may be eligible to raise funds in this way. Therefore, if you want to discuss equity crowdfunding as a capital raising option, contact LegalVision’s capital raising lawyers on 1300 544 755 or fill out the form on this page.
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