LegalVision Brief: Crowd-Sourced Equity Fundraising Reforms (CSEF)

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Table of Contents

• What is the Current Law?
• Sophisticated Investor Test
• Professional Investor Test
• What are the Reforms?

On 3 December 2015, crowd-sourced equity fundraising legislation was introduced to Parliament. The reforms aim to make it easier for startups, new companies, and smaller companies to issue securities through options or shares and raise money from the public without a disclosure document. Below, we set out what are the reforms to crowd-sourced equity fundraising, and how will this affect startups raising capital.

What is the Current Law?

Under Chapter 6D of the Corporations Act (the Act), current equity fundraising laws permits companies to do the following:

• Issue an unlimited amount of securities (including options or shares); and 
• Raise an unlimited amount of equity capital without a disclosure document to specified groups as set out in section 708 of the Act. 

The policy reason informing this restriction is that typically, these groups are better able to assess the risks of investing in a private or public unlisted company. The most commonly used exemptions in section 708 are those for sophisticated and professional investors. Notably, if a company exceeds 50 non-employee shareholders, it is required to become a public company and comply with specified disclosure obligations.

Sophisticated Investor Test

Under section 708(8) of the Act, sophisticated investors satisfy the test by either:

• Making an investment of at least $500,000, or 
• Providing an accountant’s certificate verifying you have net assets of at least $2.5 million, or a gross income of at least $250,000 for each of the last two financial years. 

Professional Investor Test

Under section 708(11) of the Act, professional investors satisfy the test if they are a financial services licensee, or, at least, $10 million of gross assets. 

What are the Reforms?

The Government’s reforms seek to open up a new equity source for startups and small businesses looking to expand and include mandatory disclosure to help protect retail investors. Current equity capital raising laws don’t prescribe mandatory disclosure requirements, but there are public company disclosure requirements. The crowd-sourced equity fundraising legislation proposals are as follows:

• The crowd-sourced equity fundraising reforms apply to companies where the principal place of business and majority of directors reside in Australia. These are Australian law reforms to support Australian companies.
• The crowd-sourced equity fundraising exemption is available to non-listed public companies that are below specific asset and turnover tests of $5 million.
• The exemption has a fundraising cap of $5 million in a 12 month period. It is important to remember that companies can raise additional funds and issue additional securities under the other exemptions in Chapter 6D, including to sophisticated investors and professional investors.
• There are no aggregate investor limits, and there is a per-issuer investor cap of $10,000, so the most that a public investor can invest in one company under these exemptions is $10,000. Although this amount might seem low, it is higher than the average retail investment seen in New Zealand or the United Kingdom.  
• The company raising capital has reduced disclosure and governance arrangements for up to five years, compared to the standard public company disclosure and governance requirements. We discuss disclosure documents for public companies, crowd-sourced equity fundraising public companies, and private companies in our next article.

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Are you looking to raise equity capital in 2016? As a tech start-up ourselves, we know the steps, the law and market practice. Questions? Ask one of our start-up lawyers on 1300 544 755.