The latest amendments to the Corporations Act extend Crowd-Sourced Funding Rights to private companies as well as unlisted public companies. The Amending Act removes the need for a proprietary company to convert to an unlisted private public company before seeking crowd-sourced funding. This means a private company which has more than one director can keep its current company structure and issue more shares in the company, facilitating a faster raising of capital injection into the company, subject to meeting requirements under the Corporations Act.
What is the Crowd-Sourced Funding legal regime?
In 2017, a new pathway for certain small public companies to raise capital from small investors opened up. The Corporations Amendment (Crowd-Sourced Funding) Act 2017 allowed public companies not listed on the Australian stock exchange to offer ordinary shares (so, actual equity or part-ownership of the company) to investors. This was a welcome response to the rise of small, innovative ‘start-ups’ and made capital-raising easier for them by making small investments in them a bit more secure and attractive. This reform was welcomed, but also criticised because it didn’t extend to proprietary companies.
The Corporations Amendment (Crowd-Sourced Funding for Proprietary Companies) Act 2018, which was passed on 12 September 2018, has now extended the Crowd-Sourced Funding regime to private companies. Like all proprietary companies, it must have 50 or less ordinary shareholders, but this does not include Crowd Sourced Funding (“CSF”) shareholders.
What Are the Basics for a Company to Qualify as an ‘Eligible CSF Company’?
To qualify to issue CSF shares, companies must –
- Be worth less than $25 million and have annual revenue of less than $25 million;
- Not be for the purpose of investing in other companies or schemes;
- Maintain a minimum of two directors;
- If there are two directors, one must live in Australia;
- If there are more than two directors, a majority must live here;
- Include comprehensive details of shareholdings in their company register;
- Comply with existing ‘related party’ transaction rules that apply to public companies;
- Prepare annual financial and directors’ reports in accordance with accounting standards, but they need not be printed and can be displayed on a website;
- Have their financial reports audited once they raise $3 million or more from Crowd-Sourced Funding offers.
What Does the CSF Regime Allow?
An eligible CSF company is allowed to offer ordinary shares up to the value of $5m every year. Unlike stock exchange shares, there is a limit per investor of $10,000 a year and also a five-day cooling-off period after purchase for share buyers. This is intended to protect mum-and-dad investors in what might be a riskier investment than stock exchange shares.
Why is this new regime helpful?
Previously, a private company could not crowd-source funds from more than 50 non-employee shareholders without first converting into an unlisted public company. Now, ordinary Pty Ltd companies can also participate in Crowd-Sourced Funding. This allows them to raise funds with disclosure and reporting requirements which are far less burdensome than those under Chapter 6D of the Corporations Act applying to public companies which offer new shares to potential investors.
Some relaxing of the reporting and disclosure requirements ordinarily required for a public company can result in costs savings for an “eligible CSF company”, meaning more funds would be available for reinvestment into costly research and development usually associated with an innovative start-up business.
How Does This Look to a Small Investor?
Crowd funding also provides opportunities for small investors, with an investment of as little as $50 in a venture. Now, although these shares won’t be on the TV finance report, they are still equity, or actual part-ownership, of the company. Like any investment they have risks, so the new system still requires companies to provide a disclosure document with the offer of shares, just like an Initial Public Offering (IPO) on the stock exchange, which contains information on the company.
These documents don’t need to be as detailed as IPOs are and there is an outline in the Act of what information has to be disclosed. Just briefly, that covers matters like the proposed capital structure, financial statements, events materially affecting the company since its most recent financial statement, and the voting power of other shareholders.
However, as mentioned before, the amending Act which was passed in September 2018 did tighten up annual reporting requirements for CSF companies so that shareholders receive the same sort of information which shareholders in public companies receive.
How Will These Shares Be Bought and Sold?
Just like when you buy listed shares on a stock exchange, the shares offered by an eligible CSF company have to be offered through registered intermediaries who are licensed to undertake a crowd-funding financial service.
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