Equi­ty Crowd Source Fund­ing — Part 1: A basic primer

On 28 March 2017 the Cor­po­ra­tions Amend­ment (Crowd-sourced Fund­ing) Act 2017 (Cth) (Act) received Roy­al Assent, paving the way for crowd-sourced equi­ty fund­ing.

What is Equi­ty Crowd Source Funding?
It is a mech­a­nism (an online plat­form) that will enable eli­gi­ble com­pa­nies to raise cap­i­tal by offer­ing secu­ri­ties (only new ordi­nary shares) in the com­pa­ny to a large num­ber of investors, includ­ing retail investors.

With­out the Act, a com­pa­ny may only offer secu­ri­ties to retail investors with­out a detailed and exten­sive dis­clo­sure doc­u­ment (gen­er­al­ly referred to as a prospec­tus), if the offer falls with­in one of the lim­it­ed excep­tions set out in the Cor­po­ra­tions Act 2001 (Cth). Fail­ure to com­ply with this require­ment is, amongst oth­er things, a crim­i­nal offence.

Who may oper­ate the online platform?
The law cre­ates a new type of finan­cial ser­vice, being a crowd-fund­ing ser­vice and a per­son that oper­ates a crowd-fund­ing plat­form will be regard­ed as pro­vid­ing such a ser­vice. The Act states that the per­son must hold an AFSL that express­ly autho­ris­es the pro­vi­sion of a crowd-fund­ing ser­vice. The leg­is­la­tion refers to this per­son as a CSF inter­me­di­ary. The CSF inter­me­di­ary occu­pies a cen­tral role in the CSF régime.

How much may a com­pa­ny raise under the CSF régime? 
A com­pa­ny may raise up to $5 mil­lion in any 12 month period.

What is an eli­gi­ble company?
The com­pa­ny seek­ing to raise the funds must:

• be a pub­lic company

• have its prin­ci­pal place of busi­ness in Aus­tralia and the major­i­ty of its direc­tors must ordi­nar­i­ly reside in Australia

• not be a list­ed company

• not have as its main pur­pose invest­ing in securities

• not have con­sol­i­dat­ed gross assets or annu­al rev­enue of more than $25 million

What is the rel­e­vance of being a pub­lic company?
A com­pa­ny that is a pub­lic com­pa­ny (as opposed to a pri­vate or pro­pri­etary com­pa­ny) is one to which the Cor­po­ra­tions Act impos­es fair­ly strin­gent cor­po­rate gov­er­nance and report­ing requirements.

Pub­lic com­pa­nies must, for exam­ple, have an audi­tor, pre­pare finan­cial state­ments that must be audit­ed, send the finan­cial state­ments to all share­hold­ers and con­vene annu­al share­hold­ers’ meet­ings at least once every year. All these require­ments can be both cost­ly and time-con­sum­ing, par­tic­u­lar­ly if the com­pa­ny has a large num­ber of shareholders.

Although the new Act requires com­pa­nies seek­ing to raise funds via the CSF régime to be estab­lished as, or be con­vert­ed into, a pub­lic com­pa­ny, the cor­po­rate gov­er­nance and report­ing require­ments described above may be dis­re­gard­ed for a max­i­mum of five years from the date of reg­is­tra­tion as, or con­ver­sion to a pub­lic com­pa­ny. So, under this con­ces­sion, the fundrais­ing com­pa­ny will not be required to hold an annu­al gen­er­al meet­ing under the usu­al rules; it may pro­vide (unau­dit­ed) finan­cial reports to its share­hold­ers online (as opposed to print­ing and mail­ing them out); and the com­pa­ny will not be required to appoint an audi­tor or to have audit­ed finan­cial reports until the com­pa­ny has raised more than $1 mil­lion from CSF offers.

Is a dis­clo­sure doc­u­ment still required?
Yes, a CSF offer doc­u­ment must be pre­pared in rela­tion to each CSF offer. How­ev­er, there is no require­ment for the doc­u­ment to be lodged with ASIC. The lev­el of dis­clo­sure to be includ­ed in the offer doc­u­ment will, in gen­er­al, be less rig­or­ous and detailed than the require­ments that apply to the more usu­al dis­clo­sure doc­u­ments. Details of what a CSF offer doc­u­ment must con­tain will be spec­i­fied in the reg­u­la­tions, which are yet to be pub­lished. Also, the infor­ma­tion con­tained in the offer doc­u­ment must be word­ed and pre­sent­ed in a clear, con­cise and effec­tive manner.
ASIC will retain the pow­er to issue a stop order if it becomes aware that the infor­ma­tion in a CSF offer doc­u­ment does not com­ply with the regulations.

Pub­li­ca­tion of the CSF offer doc­u­ment will be on the online plat­form of the CSF Inter­me­di­ary and the plat­form must include a facil­i­ty that enables a per­son to apply for secu­ri­ties to which the CSF offer relates. In fact, only offers for sub­scrip­tion made through the online plat­form may be accepted.

Investor pro­tec­tions
There are a num­ber of investor pro­tec­tions that apply to all investors and some that apply only to ​“retail clients.” With regard to the lat­ter, the pro­tec­tions include the following:

• a retail investor may not invest more than $10,000 per issuer via a par­tic­u­lar inter­me­di­ary with­in a 12 month peri­od. No lim­it applies to non-retail investors.

• a retail investor has 48 hours after mak­ing the invest­ment to change his mind and with­draw the invest­ment— a cool­ing off period.

• nei­ther the issuer nor the CSF inter­me­di­ary may pro­vide finan­cial assis­tance to the retail investor in con­nec­tion with the investment.

• a retail investor must be giv­en and sign a risk acknowl­edge­ment state­ment before its appli­ca­tion is capa­ble of being accepted

Who is a retail client?
An investor will be a retail client unless one or more of the fol­low­ing tests are satisfied:

• the price of the secu­ri­ties on offer or the val­ue of the finan­cial prod­uct is $500,000 or more

• the secu­ri­ties are being acquired by a small busi­ness (employ­ing less than 20 peo­ple or in the case of a man­u­fac­tur­ing busi­ness, less than 100 people)

• where the secu­ri­ties are being acquired by a busi­ness that is not a small busi­ness, the investor pro­duces a cer­tifi­cate from a qual­i­fied accoun­tant con­firm­ing net assets of at least $2.5million or gross income (dur­ing the last 2 finan­cial years) of $250,000 respectively;

• the investor is a pro­fes­sion­al investor.

What is the role of the CSF Intermediary?
The role of the CSF inter­me­di­ary is car­di­nal and includes:

• ‘gate­keep­er ’ oblig­a­tions, such as per­form­ing var­i­ous dili­gence checks, exer­cis­ing its judge­ment as to whether to not pub­lish or con­tin­ue to pub­lish an issuer’s offer document;

• ensur­ing the online plat­form oper­ates in accor­dance with the require­ments set out in the Act;

• ensur­ing that retail investors receive the ben­e­fit of the rel­e­vant investor pro­tec­tions to which they are entitled;

• the oblig­a­tion to close or sus­pend an offer as required and han­dle appli­ca­tion monies appropriately. 

The CSF régime is intend­ed to assist small-scale busi­ness­es (includ­ing start-up com­pa­nies) raise funds from a large num­ber of investors by pro­vid­ing an addi­tion­al fund­ing option for these com­pa­nies that might oth­er­wise strug­gle to obtain finance. Although there are cur­rent­ly a num­ber of oper­a­tors of online plat­forms offer­ing invest­ments in Aus­tralian com­pa­nies, leg­isla­tive imped­i­ments have pre­clud­ed com­pa­nies from being able to tap into the retail invest­ment com­mu­ni­ty. The new Act address­es this issue. How­ev­er whether and to what extent the CSF régime will be embraced, will depend in a large part on whether AFSLs believe the oblig­a­tions and risks to be under­tak­en and assumed as a CSF inter­me­di­ary will be suf­fi­cient­ly off­set by the ben­e­fits (finan­cial and oth­er­wise) to be gained from the new busi­ness mod­el this presents to them. 

Next month, in Part 2, we will exam­ine and explain the duties and oblig­a­tions of the all-impor­tant CSF inter­me­di­ary and the process to be fol­lowed when a com­pa­ny offers secu­ri­ties via the CSF régime.