Currently, there is no specific legislation governing equity crowdfunding in Australia. In February 2016, the Corporations Amendment (Crowd-sourced Funding) Bill 2015 (Cth) was introduced. This Bill is the biggest move in support of establishing a primary market for CSEF (crowd sourced equity funding) securities. The Bill was based on recommendations made by the Corporations and Markets Advisory Committee. This Bill lapsed upon the dissolution of the Senate on 9 May 2016 and is set to be presented before the Senate at the formation of the next parliament.
The Bill aims to achieve a number of goals, including:
- enable retail investors to invest in small and startups;
- protect investors from the risks associated with business failure and fraud; and
- reduce the securities and financial regulatory barriers to invest.
If the Bill passes, it will make it easier for investors to invest in return for equity in businesses.
Crowdfunding: Requirements of the Bill
There are a number of requirements and obligations imposed by the Proposed Corporations Amendment (Crowd-sourced Funding) Bill 2015 (Cth). Prior to the Bill lapsing, it stipulated a number of requirements, including:
- The issuing of securities must be from the company making the offer;
- At the time of the offer; the company must be deemed an ‘eligible CSF company’
- The securities satisfy the eligibility conditions specified in the regulations;
- The offer must be compliant with the ‘issuer cap’; and
- The company has no intention for the funds sought under the offer to be utilised by the company or other party associated with the company to invest in securities or interests in other bodies or schemes.
Obligations of CSF Intermediary
Those intending to operate a crowd-funding platform, i.e. the intermediary, would have been required to hold either an Australian Financial Services Licence (AFSL) and in some conditions need also acquire an Australian Market Licence (AML).
For intermediaries required to obtain an AFSL, the Bill creates a new type of financial service, being the crowd-funding service.
Under the CSF regime, the intermediary would have had numerous obligations including:
- ‘gatekeeper’ obligations, which entail the non-disclosure of and or ceasing continued publication of an an issuer’s offer document by the intermediary;
- are obligated to ensure the provision of the necessary communication facilities;
- the obligation to notify potential investors on the platform of the CSF risks, rights regarding cooling-off periods, possible fees incurred and interests in an issuer company;
- retail clients are to be covered by the relevant investor protections and adherence to the obligation that providing financial assistance is not permitted.
- the obligation to terminate or suspend an offer as needed and to responsibly process money received in the application
The proposed bill also mandates the process for making a CSF offer. This would have involved a CSF eligible company publishing a CSF offer document on a single CSF intermediary’s platform;
- In preparation for CSF offers, a new document type known as a ‘CSF offer document’ must be drafted ;
- Consent of relevant persons associated with the offer document must be obtained before its publication;
- When making a CSF offer, a company and associated entities may not have over one offer open concurrently with another CSF offer previously made by the company is open or suspended; and
- Rules for determining when a CSF offer is ‘open’, when it may and when it must be ‘closed’, and the conditions that must be satisfied before an offer can be ‘complete’.
Government Support: Startup Needs
Early stage and growth companies want access to risk-capital to grow. They want support from the government to allow crowdfunding platforms. These platforms will open up new opportunities for businesses to raise growth capital. Startups encourage broad-based small scale retail investment – they want the government to facilitate such investment.
Startups also want relaxed regulatory reporting requirements. Requirements include reporting and corporate governance (including continuous disclosure, AGMs, audited financial reports and half-yearly reporting). This will provide greater flexibility in issuing Australian market licences and clearing and settlement facility licensing regimes.
The Bill only allows public unlisted companies with share capital to rely on equity crowdfunding. This prevents an overwhelming majority of small and medium enterprises to gain access to the platform. Proprietary companies that wish to make a CSEF offer must become public companies. To further restrict access, the Bill only permits companies with total assets of less than five million and an annual revenue of less than five million (the assets and turnover test).
Government Support-Investor Needs
Investors want to minimise the risks involved in participating in crowdfunding regimes. They want CSEF intermediaries to hold an Australian Financial Services Licence. They also want ASIC to conduct due diligence checks on the issuer (CSEF intermediary), provide risk warnings to investors, and provide a means of communication between the issuer and potential investors. Investors are also protected with a $10,000 cap per investor in a period of 12 months.
Australia has a solid foundation, as evidenced by the lapsed Bill, on which to base its CSEF regulation. However, there are further regulatory opportunities, many of which were presented in the findings of the Corporations and Markets Advisory Committee and 2015 Treasury report on crowd-sourced equity funding. Questions? Get in touch with our startup lawyers on 1300 544 755.