The Corporations Amendment (Crowd-sourced Funding) Act 2017 which commenced operation on 29 September 2017, aims to bridge the ‘capital gap’ experienced by many small businesses and start-ups as they struggle to finance further development using traditional avenues. Under the new legislation, Australian unlisted public companies with an annual turnover and gross assets of less than $25 million are eligible to raise up to $5 million a year in capital through crowd-sourced equity funding (CSF), using internet-based intermediaries. Retail investors may contribute up to $10,000 per company per 12-month period and can receive equity shares in return.
The Act aims to remedy issues with access to finance, which has been labelled a ‘major impediment to improved productivity and innovation,’ and disproportionately affect small to medium sized businesses, constituting 95 percent of Australian enterprise.
The proposed benefits of the Act are two-fold. First, the Act seeks to make funding for small public companies more accessible. Second, it aims to increase opportunities for retail investors and lower the risk of these investments by implementing strict requirements on CSF intermediaries. The new legislation is based on a model integrating New Zealand’s CSF regime with recommendations made by the Corporations and Markets Advisory Committee, to allow Australian companies to compete against their international counterparts, where CSF is already available.
What are the impacts on business?
Unlisted public companies will be eligible if they have share capital, their principal place of business is in Australia, and the majority of the company’s directors reside in Australia. Eligible companies may raise $5 million a year through CSF, which is ‘generous’ as many other countries have limited CSF to $2 million. However, companies cannot use CSF to raise funds for investment purposes, which is largely permitted in the US, UK and Canada. The Act imposes additional disclosure requirements, but CSF is said to have ‘lower disclosure costs than traditional public equity offers.’ Foreign companies will be unable to raise CSF funds in Australia, arguably to allow Australian companies a competitive edge.
To benefit from the CSF scheme, small proprietary companies may choose to convert to an unlisted public company structure. The legislation provides for this conversion by decreasing public company governance requirements, such as the requirement to hold annual members’ general meetings and to appoint an auditor in certain circumstances, for newly converted companies for a five-year period. However, the conversion would likely entail costs to small proprietary companies.
Investments through CSF will be capped at $10,000 per company and per 12-month period and are subject to an unconditional five-day cooling-off period, in which the offer may be withdrawn. There is no cap on investment across different companies. A risk acknowledgement statement will also need to be signed before investing.
Businesses that would like to act as intermediaries in the new CSF scheme must have a financial services licence and comply with strict requirements, including disclosing fees paid to them, and undertaking due diligence checks on issues before marketing them. Intermediaries that do not comply with these obligations may commit an offence, and may be liable for $900-$54,000, and/or five years’ imprisonment. Offers made by investors must be communicated through a CSF offer document, which is published on the intermediary’s platform, and all payment must be made through the intermediary.
The future of CSF for proprietary companies
As over 99.7 percent of Australian companies are excluded under the new CSF regime, the Government is currently investigating extending the regime to include proprietary companies. The Corporations Amendment (Crowd-sourced funding for Proprietary Companies) Bill 2017 was released with the Budget earlier this year. The Bill’s draft Explanatory Memorandum acknowledges the costs associated with converting a proprietary company to a public company for the purpose of accessing the CSF system.  If passed, CSF would be available to proprietary companies, with lower costs and more stringent governance and reporting requirements than if they were to convert to public companies under the current CSF regime.