The aim of crowd sourced equity funding (CSEF) is to enable companies, particularly innovative start-ups, to raise comparatively small amounts of equity funding from a spread of investors, usually via an online platform, with less disclosure than would be required in a full prospectus.
In a post in August this year, I noted that the Government had issued a consultation paper on the introduction of CSEF in Australia.
Having completed consultation, the Government has now introduced a Bill – the Corporations Amendment (Crowd-sourced Funding) Bill 2015 – for its preferred CSEF model.
Features of the CSEF model
Who is eligible?
To be eligible to use the CSEF system in place of a full prospectus, a company must satisfy the following tests (among others).
- Have (or convert to) public company status. In its consultation paper, the Government had touched on the possibility also making CSEF also available to proprietary companies, but it has not gone down that path.
- Gross assets less than $5 million, and consolidated annual revenue less than $5 million. Assets and revenue of related companies are included in the calculations.
- Principal place of business in Australia, and a majority of Australian resident directors.
How does it work?
CSEF allows a company to offer shares by having a CSF offer document – which includes or is accompanied by the offer terms – posted on the platform of a single CSF intermediary. This is the only way an offer can be made under the CSEF regime.
The required content of the CSF offer document will be specified in regulations, but will be less detailed than for a full prospectus. The content of the CSF offer document must be ‘worded and presented in a clear, concise and effective manner’ (which is the same test as currently applies to a prospectus).
There is an issuer cap: a company may not use CSEF to raise more than $5 million in 12 months.
There is also an investor cap: an investor may not invest more than $10,000 in 12 months in a single company via a single CSF intermediary.
The CSF intermediary’s role
The regulation and integrity of CSF intermediaries is an important plank in the reform.
A CSF intermediary must hold an AFSL (Australian Financial Services Licence). It may also need to hold an AML (Australian Markets Licence), or obtain an exemption.
The CSF intermediary must fulfil ‘gatekeeper’ obligations, which include:
- conducting prescribed checks before publishing the CSF offer document – the checks, and the standard to which they must be conducted, will be specified by regulation;
- not publishing a CSF offer document if any of the following four circumstances apply:
- it is not satisfied as to the identity of the company or its directors or officers;
- it has reason to believe any of the directors or officers are not of good fame and character;
- it has reason to believe the company, directors or officers have engaged in misleading and deceptive conduct;
- it has reason to believe the offer does not satisfy the criteria for a CSF offer;
- taking down a CSF offer document if it becomes aware that any of the four circumstances apply.
The Explanatory Memorandum for the Bill says that: ‘The purpose of the gatekeeper obligations is not to require the intermediary to conduct exhaustive due diligence’ [para 3.37], but rather just to ensure that the CSF offer document is not published in the four specified circumstances. However, as failure to conduct the prescribed checks is an offence, punishable by fine plus up to a year’s imprisonment, it seems likely that CSF intermediaries will take their due diligence obligations seriously.
The CSF intermediary’s platform must meet specified requirements, including the following.
- It must have an ‘application facility’ and a ‘communication facility’.
- The application facility must be able to detect and prevent breaches of the investor cap ($10,000 in 12 months).
- The communication facility must include a system for allowing users to make posts, which can be seen by other users, and for the company and intermediary to reply to them.
The Explanatory Memorandum [para 3.64] has an interesting explanation for the prescriptive requirement for a blog-like post system: it is ‘consistent with one of the premises underlying crowd-funding, which is that investors can, in part, rely on the collective wisdom of the ‘crowd’ in making their investment decision’.
Public company governance relief
The Bill offers the following relief, for up to 5 years, to companies that convert to public company status to access CSEF (but not to companies that were already public companies):
- no requirement to hold an Annual General Meeting;
- online-only distribution of financial reports;
- no need for an auditor, or for audited financial reports, unless more than $1 million has been raised.
Up to a point.
Back in May 2015, Malcolm Turnbull (in his pre-Prime Minister role) was reported as being attracted to the idea of just copying out the NZ legislation, replacing ‘New Zealand’ with ‘Australia’.* In the end the Government has not gone down that path. There are some significant differences:
- Issuer caps: Australia – $5 million in 12 months; NZ – $2 million in 12 months.
- Investor caps: Australia – $10,000 in 12 months; NZ – none, though adopting a cap can reduce disclosure requirements.
- Public company governance relief: Australia – AGM, financial reporting, audit; NZ – none.
The requirements for a principal Australian place of business and a majority of Australian directors mean that most NZ companies won’t be able to use the system to access CSEF investors in Australia via a joint NZ/Australian offering.
** http://www.afr.com/technology/malcolm-turnbull-says-australia-could-follow-new-zealand-crowdfunding-laws-20150517-gh3rur, accessed 8 December 2015
Apart from monitoring the process of the Bill through Parliament, the next major point of interest will be release of draft regulations. The Bill relies on the Regulations to cover two very important matters:
- what information the CSF offer document has to contain [s 738]; and
- what checks the CSF intermediary has to undertake in performing its ‘gatekeeper’ obligations [s 738Q].