Legislation allowing Crowd-sourced Equity Funding (CSEF) for Public Companies was passed earlier this year, and ASIC is due to open applications for the regime at the end of September. However, a new Bill was introduced to Parliament last week that extends the regime to proprietary companies. The proposed changes are an exciting development for Australian startups that did not want to convert to an unlisted public company structure to access the regime.
Unlisted Public Companies
On 29 Sseptember 2019, the Corporations Act 2001 (Cth) was amended by the Corporations Amendments (Crowd-Sourced Funding) Bill 2016 (Cth) to create a framework for CSEF by eligible public companies.
As a result of the new legislation, small, unlisted public companies can raise funds from a large number of small-scale investors without the onerous disclosure, reporting and corporate governance obligations currently imposed on public companies seeking to raise funds. It is also widely expected that the ability of public unlisted companies to use the new CSEF legislation to raise capital will be extended to proprietary companies under the Corporations Amendments (Crowd-Sourced Funding for Proprietary Companies) Bill 2017.
The legislation aims to open new funding opportunities for startups and potential investors, while ensuring there are still adequate investor protections in place.
CSEF is the term given to the process under which a company raises funds from a large number of individuals who each contribute a small amount of money in return for equity in the company. Third-party websites/platforms typically facilitate this ‘raise’ (e.g. Kickstarter). CSEF is allowed in many other countries, including the UK and New Zealand.
Source: ASIC
The new CSEF framework includes:
- eligibility requirements;
- a cap on how much can be raised;
- disclosure requirements;
- obligations on the CSEF intermediaries (those who facilitate the offer of shares to potential investors, usually via their online platform);
- a prescribed process for raising funds through CSEF; and
- additional protections for investors.
A brief summary of each of the items referred to above is set out below.
| Company Eligibility Requirements |
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| How much can a company raise? |
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| Offer Process |
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| Disclosure & Governance Requirements |
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| CSEF Intermediary Obligations |
|
| Investor Protections |
|
Many commentators are of the view that the amendments fall short of helping startups access funding as the regime is only available to public unlisted companies. As the large majority of startup businesses are proprietary limited companies, in order to access the current regime they would need to transition to a public company (which increases their regulatory obligations and is an additional administrative and relatively costly exercise).
Although there are temporary exemptions from some of these obligations they are still seen as a barrier for many startups. As a result, there has been a push from the startup community to broaden the regime to include proprietary companies.
Proprietary Companies
In response to the success of the previous Bill (or possibly, the criticism) and as part of the 2017-2018 Federal Budget, the Government introduced the Corporations Amendment (Crowd-Sourced Funding for Proprietary Companies) Bill 2017 into Parliament on 14 September 2017. The Bill seeks to extend the CESF regime to proprietary companies, creating considerable opportunity for Australian startups.
If the Bill is passed, properietary companies will be able to raise funds through a prescribed CSEF regime which will require them to follow the regime discussed above in relation to public unlisted companies and also the additional requirements:
| Eligibility |
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| Disclosure and Reporting |
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| Investor Protections |
|
If the Bill is passed, the temporary corporate governance concessions (contained in the previous Act) which are available to proprietary companies that convert to public companies will be removed. Proprietary companies will no longer need to convert to a public company to access the regime and therefore these concessions are unnecessary.
There is an obvious element of risk to investors when a regime is implemented which significantly relaxes the previously highly robust obligations on companies looking to raise capital through the public or from retail investors. The Bill attempts to manage this risk through its various investor protections and considerable flexibility to tweak the regime as needed. The hope is that this is enough to pass the legislation, as the potential benefit to startups who have been unable to raise capital through traditional means is huge.
We will be following developments with the Bill closely. If you have any questions about crowd-sourced equity funding, get in touch with LegalVision’s startup lawyers.
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