The Federal Government pursuant to its 2017 Budget intends to extend the legislative framework for crowd-sourced funding (CSF) by introducing a new Crowd-Sourced Equity Framework regime for proprietary companies.[1]
Currently, the Corporations Amendment (Crowd-sourced Funding) Act 2017 (the CAA)[2], which comes into force on 29 September 2017, only creates a CSF framework for public companies.[3]
However, it is the view of the Government that enabling proprietary companies’ access to a new funding source by extending CSF to proprietary companies will “enable small and innovative business types more alternatives to raise capital and easier access to such capital.[4]
What is CSF?
CSF is a type of funding that allows companies to raise funds, typically online, from a large number of individuals who make small contributions towards the company.[5]
This type of funding is often a “preferable type of funding for innovative and early stage companies”.[6]
The current limitation
The CAA “amends the Corporations Act 2001 (the Corporations Act), and makes minor amendments to the Australian Securities and Investment Commission Act 2001, to provide a CSF legislative framework”.[7]
As stated above, this framework only provides for public companies. Section 14 of the CAA inserts section 738H into the Corporations Act. Section 738H(1) provides that a company is an eligible CSF company at a particular time (the test time) if all of the following conditions are satisfied:
- “the company is a public company limited by shares;
- the company’s principal place of business is in Australia;
- a majority of the company’s directors (not counting alternate directors) ordinarily reside in Australia;
- the company complies with the assets and turnover test;
- neither the company, nor any related party of the company, is a listed corporation;
- neither the company, nor any related party of the company, has a substantial purpose of investing in securities or interests in other entities of schemes”.[8]
Currently the Corporations Act provides that a proprietary company is unable to have more than 50 non-employee shareholders,[9] or make a public offer.
Therefore, in order to be an eligible CSF company, a proprietary company would need to convert to a public company limited by shares.[10]
The extension to include proprietary companies as eligible CSF companies
The Government has released for public consultation a draft bill, the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (the Exposure Draft), that extends upon the CCA to enable proprietary companies to access a CSF without transitioning to public company status.[11]
The Exposure draft intends to repeal section 738H(1)(a) (above) and replace it with the new section 738(1)(a) that extends an eligible CSF company to include a proprietary company as follows:
- “the company is a public company limited by shares, or the company is a proprietary company that:
- has at least 2 directors; and
- meets all the other requirements (if any) prescribed for the purposes of this subparagraph”.[12]
Further, the existing shareholder cap in section 113 of the Corporations Act, which provides that proprietary companies are unable to have more than 50 non-employee shareholders, is being amended so that CSF shareholders are not counted as part of the cap.[13]
The proposed amendments to the Corporations Act will also impose additional obligations and requirements on proprietary companies accessing the CSF regime in order to provide adequate investor protections.[14]
These obligations and requirements for CSF proprietary companies will include:
- a minimum of two directors, with the majority of those directors ordinarily residing in Australia;[15]
- to prepare annual financial and directors reports in accordance with accounting standards and have those reports audited if the proprietary company raises more than $1 million from CSF offers;[16]
- to provide the reports to members in accordance with section 314 of the Corporations Act and to ASIC in accordance with section 319;[17]
- to be subject to the related party transaction rules in Chapter 2E of the Corporations Act;[18]
- to include details about a CSF offer, shareholders and additional information in the company register;[19] and
- to inform ASIC if the proprietary company starts or stops having CSF shareholders.[20]
It is the opinion of the Government that the additional obligations and requirements imposed on proprietary companies accessing the CSF regime will help ensure the sustainability of the CSF regime and give investors’ confidence in the market by ensuring that minimum standards are meet and investors have basic information available to them.[21]
Summary
If the Exposure Draft is implemented as legislation, proprietary companies will no longer need to transition to a public company in order to access the CSF regime.
At this stage however, proprietary companies may have to face the question of whether to convert to a public company structure to access the CSF regime in September or wait in hopes of accessing the CSF if the Exposure Draft is implemented.[22]
If you have any queries or wish to seek advice in relation to CSF, please contact Michael Bishop or Jess Tomlinson on (03) 9614 7707.
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[1] Commonwealth, Budget 2017-18, Budget Paper No. 1 (2017) pg 1-24; Commonwealth, Budget 2017-18, Budget Paper No. 2 (2017) pg 165.
[2] The Corporations Amendment (Crowd-sourced Funding) Act 2017 will commence on 29 September 2017.
[3] Exposure Draft Explanatory Memorandum, Exposure Draft Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017pg 3.
[4] Ibid pg 5.
[5] Ibid.
[6] Ibid.
[7] Australian Securities & Investments Commission, Crowd-sourced Funding (26 May 2017) Australian Securities & Investment Commission <http://asic.gov.au/regulatory-resources/financial-services/crowd-sourced-funding>.
[8] Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) sch 1 cl 14.
[9] Corporations Act 2001 (Cth) s 113.
[10] Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) sch 1 cl 14.
[11] Exposure Draft Explanatory Memorandum, Exposure Draft Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017pg 3.
[12] Exposure Draft Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 cl 39.
[13] Ibid cl 5.
[14] Exposure Draft Explanatory Memorandum, Exposure Draft Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017pg 3.
[15] Exposure Draft Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 cl 14.
[16] Exposure Draft Explanatory Memorandum, Exposure Draft Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 pg 6, 8.
[17] Ibid pg 11.
[18] Ibid pg 11.
[19] Ibid pg 7, 9.
[20] Ibid pg 10.
[21] Ibid pg 6.
[22] Harry New and John Bassilios, Private companies face public conundrum under new crowdfunding rules (24 May 2017) Australia Financial Review < http://www.afr.com/leadership/entrepreneur/private-companies-face-public-conundrum-under-new-crowdfunding-rules-20170524-gwburg>.
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