New equity crowdfunding legislation passed

New legislation passed last month will allow start-ups better access to crowd-sourced funding (CSF) by reducing compliance and disclosure burdens for a five year period. No date has yet been set for the operative provisions of the Corporations Amendment (Crowd-sourced Funding) Act 2017 (CSF Act) to commence, but having proceeded to Royal Assent on 28 March 2017, it will be no later than 28 September 2017.

Following a number of years of discussion and a false start in 2015, the CSF Act will see Australia join countries such as the UK, Canada, New Zealand and the USA who all have existing CSF legislation. Those familiar with the 2015 Bill will note the following key changes in the CSF Act (which is set out in detail below):

• an increase in the maximum revenue and assets cap for eligibility from $5 million to $25 million
• an increase in the cooling off period from 48 hours to five days.

Eligibility

Under the CSF Act, start-ups earning less than $25 million in annual revenue and having less than $25 million in gross assets may be eligible to make CSF offers to the market and accept investment from retail investors.

However, the key sticking point of the CSF Act is that it will only apply to public companies. This means that to take advantage of the CSF regime, a start-up will have to be registered as, or convert to, a public company and as such commit to complying with the onerous reporting obligations imposed on fully-fledged public companies once the five year concession period has ended.

Raising capital through crowd-sourced funding

Under the CSF Act, an eligible company will be able to raise up to $5 million in any 12 month period and will be able to accept investment from ‘mum and dad’ retail investors. However, this is not without significant restriction.

The offer to invest must be made through the platform of a CSF intermediary which holds an Australian Financial Services Licence with CSF authorisation. The CSF intermediary will perform a gatekeeper function and will be required to deal with all applications and application money on behalf of the issuer.

Although disclosure obligations are reduced from the current requirements under the Corporations Act, the company is still required to prepare an offer document. Civil and criminal liability may be imposed where the issuer, the intermediary or some other party is responsible for a defective offer document.

Retail investment will also be restricted, with retail investors limited to a $10,000 investment per company in any 12 month period (although no restriction is placed on the number of companies an investor may fund). There are also a number of additional retail investor protections built into the CSF Act including:

• prohibitions on the provision of financial assistance for investment in a CSF offer by either the company making the offer or the intermediary (or their related parties)
• requirements on investors to accept a risk acknowledgement prior to submitting their application for the offer
• a cooling off period of five days.

Public company concessions

Should a company choose to adopt the CSF public company model, their compliance and reporting obligations will be significantly reduced during the five year concession period. Concessions from standard public company obligations include:

• exemption from the requirement to hold an AGM
• the option to provide reports to shareholders simply by making them available online
• an exemption from the requirement to appoint an auditor until the company has raised $1 million or more from CSF offers.

Recommendations

The CSF Act seems limiting compared to other, more liberal, international CSF markets, where such restrictions on CSF investment are not so severe. However, it does open up new avenues for start-ups to raise funds within Australia.

Companies face a very difficult decision in determining whether to adopt this model. Ultimately, with public company concessions only available for a limited period it will require taking a gamble on the position of the company in five years. Start-ups who are thinking about raising capital through CSF offers need to consider the possibility that, after the five year concession period, they could be left with a structure that is inappropriate for their business.