Until it lapsed on the 9 May 2016 upon the announcement of the government’s double dissolution, the Corporations Amendment (Crowdsourced Funding) Bill 2015 (Cth) “Crowdfunding Bill” (the Bill) looked poised to introduce comprehensive reforms to CSEF regulation in Australia. Post-election, the responsibility falls on the next Government to carry the Bill forward. This article explores opportunities for stakeholders looking to raise funds through crowdfunding once it becomes law.
Crowdsourced Funding Goals and Investment Opportunities
The goal of the Bill was to balance stakeholder interests (businesses and investors), while ensuring regulations are strictly enforced. The aim should be increased investment opportunities for small-scale retail investors and providing a new way to access funds for SMEs. There are three main stakeholders:
1. companies (issuers) that propose to raise funds;
2. crowd investors; and
3. intermediaries that host the platform through which offers are made to crowd investors.
In light of the now suspended Bill and its proposed measures, Australia’s CSEF opportunities will aim to reduce compliance costs, reduce regulatory restrictions, increase the flexibility of capital raising, introduce new corporate structures and incentivise online investment through offering equity. The 2014 Corporations and Markets Advisory Committee report and the Treasury’s 2015 consultation paper on the topic covered these areas.
Mitigating Compliance Costs
Compliance costs could be mitigated by way of facilitating document execution and simplifying the lodgment of forms with regulators. In 2015, it was noted that this could be accomplished through the execution of company documents by a sole director vis-a-vis a minimum of two. Another proposal was that government regulators require the lodgement of forms online as ASIC has increasingly been doing. This is more convenient and beneficial for proprietary owners.
Reducing Regulatory Burden
Proposed changes to regulatory restrictions, such as modifying or removing the solvency resolution requirement and share registry notification to ASIC, could significantly reduce regulatory burden. A solvency resolution serves to resolve that the company can pay its debts as and when they fall due. Currently, ASIC imposed the provision of a solvency resolution, in what is a difficult and costly process for proprietary owners.
Additionally, it was proposed that the particularly beneficial small scale offering exception, a non-disclosure provision stipulated in s 708 of the Corporations Act (Cth), be increased beyond the maximum 20 person limit in any 12 month period currently required to satisfy it.
Increasing Capital Raising Flexibility
Recommendations for increasing the flexibility of capital raisings were proposed in the form of revising the shareholder limit of 50 and applying the CSEF framework for public companies to proprietary companies.
Introducing New Corporate Forms
In its report, CAMAC labels the present company structures in Australia as ill-suited to companies seeking equity crowdfunding, due largely to onerous compliance requirements. For better suitability, CAMAC proposed the introduction of ‘exempt public company’.
This idea is explored further in the 2015 treasury report. In the report, it was put forward that an approach well aligned with the exemptions for public companies using CSEF would be to extend the increased shareholder cap to five years following a proprietary company’s first CSEF raising for businesses with annual turnover and gross assets of less than $5 million.
Offering Equity to Investors
Offering equity to investors to entice capital raising would be advantageous for proprietary owners, given the stringent disclosure obligations under the Corporations Act 2001 (Cth). Without the added incentive, these requirements would be difficult to fulfil conjunction with the already high costs of fundraising.
Whilst CSEF regulation is yet to be fully explored and articulated in Australia, the new government will has a wealth of insights to draw upon from across government reports, proposed legislation and regulatory models abroad. Further changes can be implemented to assist social enterprises and not for profit organisations. These types of organisations are currently restricted to access funds as they are required to become an unlisted public company to access funds. Australia has the unique opportunity to discerningly select and implement those recommendations best suited to the regional regulatory environment, promoting investment and fostering innovation. Questions? Contact our IT and business lawyers to find out how to prepare for the CSEF reforms.