Equi­ty Crowd Source Fund­ing Part 2: Reg­u­la­to­ry Update

Aus­trali­a’s equi­ty crowd source fund­ing régime (CSF Régime) came into effect in Aus­tralia on 29 Sep­tem­ber 2017. The rel­e­vant pro­vi­sions now sit with­in Part 6D.3A of the Cor­po­ra­tions Act 2001 (the Act) and of the Cor­po­ra­tions Reg­u­la­tions (2001) (the Reg­u­la­tions).

The CSF Régime offers an oppor­tu­ni­ty for start-ups and small busi­ness­es to raise funds from retail investors with­out a detailed and exten­sive dis­clo­sure doc­u­ment or by rely­ing on the so-called ​“20/12 rule” or ​“small scale offer­ing” exemp­tion.[1] Sim­i­lar regimes oper­ate in the UK, New Zealand, Cana­da and USA.

Our pre­vi­ous arti­cle cov­ered the top­ics includ­ing the eli­gi­bil­i­ty cri­te­ria to be sat­is­fied by a com­pa­ny seek­ing to raise equi­ty cap­i­tal via the CSF Régime.

This arti­cle digs a lit­tle deep­er now that the Reg­u­la­tions have been pro­mul­gat­ed and the gov­ern­ment intends to change one of the eli­gi­bil­i­ty cri­te­ria. ASIC has also pub­lished two Reg­u­la­to­ry Guides (261 and 262). These will need to be updat­ed once the change out­lined below comes into force.

Pro­posed Change

Fol­low­ing exten­sive pub­lic con­sul­ta­tion, the gov­ern­ment altered its posi­tion on the require­ment that a com­pa­ny seek­ing to raise funds under the CSF Régime must be a pub­lic company.

As not­ed in our pre­vi­ous arti­cle, a pub­lic com­pa­ny is sub­ject to a raft of strin­gent cor­po­rate gov­er­nance and report­ing require­ments that do not apply to pro­pri­etary com­pa­nies. At present, it is nec­es­sary for a com­pa­ny wish­ing to access the CSF Régime to con­vert to a pub­lic com­pa­ny. Although the gov­ern­ment grants a few tem­po­rary con­ces­sions, it is con­sid­ered that the time and costs asso­ci­at­ed with com­ply­ing with these pub­lic com­pa­ny require­ments are an anath­e­ma to the stat­ed objec­tive of reduc­ing reg­u­la­to­ry bar­ri­ers and com­pli­ance costs for start-ups and SME busi­ness­es look­ing to raise capital.

Pro­posed amend­ments to the leg­is­la­tion are cur­rent­ly before the Sen­ate, with the aim to extend the CSF Régime to pro­pri­etary com­pa­nies but with a few addi­tion­al require­ments. The addi­tion­al require­ments that will need to be com­plied with by pro­pri­etary com­pa­nies to access the CSF Régime, as com­pared with the require­ments of pro­pri­etary com­pa­nies in gen­er­al, are set out below:

It is hoped that the amend­ments will be approved by the Sen­ate and receive Roy­al Assent before the end of 2018.

CSF inter­me­di­ary

Whilst the forth­com­ing con­ces­sions to be made by the gov­ern­ment to the pub­lic com­pa­ny require­ment are wel­come, the duties and oblig­a­tions of the CSF inter­me­di­ary remain unal­tered and are exten­sive and numerous. 

In effect, the CSF inter­me­di­ary is akin to a gate keep­er. Its oblig­a­tions include:

• under­tak­ing fair­ly rig­or­ous dili­gence inquiries on the com­pa­ny, its busi­ness and officers;
• ensur­ing that the infra­struc­ture of the online plat­form under which CSF offers are made sup­port a host of fea­tures pre­scribed by the leg­is­la­tion. This entails an inter­me­di­ary hav­ing in place poli­cies, sys­tems and pro­ce­dures to ensure that it com­plies with its gate­keep­er obligations;
• com­ply­ing with detailed pro­ce­dures for mak­ing the CSF offer, such as when the offer may open, when it may be closed and when the offer may be regard­ed as com­plete. In addi­tion, the inter­me­di­ary must have a com­mu­ni­ca­tion facil­i­ty in place to allow poten­tial investors, the issuer and inter­me­di­ary to com­mu­ni­cate with each oth­er about a par­tic­u­lar CSF offer; ;
• deal­ing with sub­scrip­tion funds and when to refund those monies;
• ensur­ing that it does not pub­lish or con­tin­ue to pub­lish on its online plat­form an offer doc­u­ment that is defec­tive (mis­lead­ing, decep­tive, con­tain­ing omissions).

Giv­en that a breach of many of the oblig­a­tions to which a CSF inter­me­di­ary is sub­ject may result in crim­i­nal lia­bil­i­ty, a CSF inter­me­di­ary will need to under­take a thor­ough ver­i­fi­ca­tion exer­cise pri­or to pub­lish­ing a CSF offer doc­u­ment on its CSF plat­form and then close­ly mon­i­tor the plat­form while the offer remains open. With the abil­i­ty of the com­pa­ny to com­mu­ni­cate direct­ly with prospec­tive investors, via the online plat­form, CSF inter­me­di­aries will need to ensure that these com­mu­ni­ca­tions are vet­ted in order to avoid the com­pa­ny care­less­ly (or worse) dis­sem­i­nat­ing false or mis­lead­ing information.

To date, as far as we are aware, sev­en com­pa­nies have been issued with Aus­tralian Finan­cial Ser­vices (AFS) licence autho­ri­sa­tions to act as inter­me­di­aries to pro­vide a crowd-sourced fund­ing ser­vice. These are Big Start, Bill­fol­da, Bir­chal Finan­cial Ser­vices, Equi­tise, Glob­al Fund­ing Part­ners, IQX Invest­ment Ser­vices and On-Mar­ket Bookbuilds.

Con­clu­sion

The jury is still out on the effec­tive­ness of the cur­rent CSF Régime and the impact which the pro­posed amend­ment will have on the régime. The com­pli­ance require­ments remain exten­sive for CSF inter­me­di­aries and the extent to which investors will embrace the CSF Régime is yet to be seen.