Crowd sourced equity funding for Australia – getting closer

In an earlier post in February this year, I noted that the Government was moving towards the introduction of crowd sourced equity funding, or CSEF, in Australia, following the issue of a Treasury discussion paper in late 2014 that had described three possible approaches to this reform.

CSEF means raising comparatively small amounts of equity from a spread of investors, usually using an online platform. Other countries such as New Zealand and the UK have adopted reforms that allow companies access to CSEF along with exemptions from the full raft of disclosure obligations and liabilities that would apply to a traditional equity raising via prospectus.

Now the Government has moved the process along further, issuing a consultation paper announcing its intentions on the introduction of a CSEF system for public companies, and seeking public comment on whether, and if so how, it should extend to proprietary companies.

Submissions in response to the consultation paper are due by Monday, 31 August.

The Government’s CSEF model for public companies

The consultation paper sets out the Government’s proposed CSEF model for public companies. It has the following features.

  • The issuer would have to be a public company. There would be no need to convert to special kind of CSEF company.
  • Issuers would be allowed exemption from some costly public company obligations. For example, no requirement to hold an AGM, and no requirement to appoint an auditor for small scale issuers. These exemptions could apply for up to 5 years.
  • Reduced disclosure requirements would apply in place of a full prospectus. There would only need to be a tailored CSEF document, covering facts about the company and its structure, financial statements, facts about the CSEF raising, and mandatory risk warnings.
  • Issuers could raise up to $5 million in any 12 month period.
  • Intermediaries would have to hold an Australian Financial Services Licence. There would be no restriction on intermediaries taking up shares in the issuer or on their fee structures, but investments and fees would have to be disclosed.
  • Investors could not invest more than $10,000 in 12 months in any one CSEF issuer, or more than $25,000 in 12 months in CSEF issuers in total.

In the Treasury paper, two main reform models had been canvassed: the ‘CAMAC model’ which had been proposed by the Corporations and Markets Advisory Committee in May 2014, and the ‘New Zealand model’ which was adopted in NZ in 2014.

The Government has resisted the temptation to promote trans-Tasman harmony and simplicity by copying out the New Zealand model.

Rather, the model proposed in the consultation paper is a mix of the two. For example, the concept of caps on amounts invested is from the CAMAC model, while the use of the existing public company structure rather than creation of a new form of company adopts the New Zealand approach.

Consultation on CSEF for proprietary companies

The Government invites comment on several issues affecting the shareholder base and equity funding options of proprietary companies.

Generally, proprietary companies are intended to be companies that are smaller and more closely held than public companies. They are not allowed to raise funds from the public.

The 50 shareholder limit

Consistently with the ‘smaller and closely held’ concept, proprietary companies are not allowed to have more than 50 non-employee shareholders.

The Government seeks views on whether this limit remains appropriate or whether, for example, it should be raised to 100.

The 20 shareholder/12 month small scale offering exemption

Proprietary companies already have an exemption from the restriction on public offerings when using the “small scale offering exemption”, which allows funds to be raised from up to 20 shareholders contacted personally in a 12 month period.

The Government seeks comments on whether this exemption requires amendment to make it more useful to proprietary companies.

Making CSEF available to proprietary companies

The consultation paper notes that previous comments have suggested proprietary companies should be able to access CSEF.

The Government invites further comment on this, but notes that if it was permitted, additional transparency obligations would probably need to be imposed on proprietary companies using CSEF to raise funds. That is, they would lose some of the exemptions from disclosure and reporting that they currently enjoy.

Where next?

It seems likely that the Government will now proceed to introduce CSEF for public companies, along the lines of the model described above, which has some similarities to but also some differences from the existing NZ model.

As for proprietary companies, the future looks less clear. The consultation paper seems to imply a degree of scepticism.

  • The implication of the discussion of the existing small scale offering exemption seems to be a view that it already supplies a measure of the flexibility that proprietary companies need.
  • The Government would want to impose additional transparency obligations on proprietary companies, perhaps to a point where they would be in the same position as public companies using CSEF and enjoying the proposed transparency relief.
  • Transparency relief for public company CSEF issuers is only to be available for a limited period of up to 5 years, indicating that CSEF issuers are expected to transition to ‘normal’ public company status eventually. This would imply that even if proprietary companies were allowed to use CSEF without converting initially, they would need to do so later in any case – and perhaps there is no point delaying their conversion.

It remains to be seen what comments the Government will get from the consultation process and how it will respond; but, from the tone of the paper, I would be surprised if the Government ultimately decided to proceed with CSEF for proprietary companies.

Other corporate law reforms

While most of the consultation paper is concerned with CSEF, it also seeks comment on a few other corporate law reforms the Government is contemplating. They include the following.

Annual solvency resolutions
    • Removing the requirement for at least some companies to pass an annual resolution confirming their solvency.
    Share registers
    • Removing the requirement to maintain a share register, allowing third parties to rely instead on information filed with ASIC.
    Document execution
    • Sole director companies. Simplifying execution of documents by sole director companies with no company secretary. Currently, for most companies, the Corporations Act specifies a document execution method which third parties can rely on, without needing to review the company’s constitution or board resolutions to check that all proper procedures have been followed. For example, third parties can assume due execution if the document is signed by two directors, or a director and a company secretary. The current provisions do not apply to sole director companies without a company secretary, and this would be rectified.
    • Split execution. Clarifying that where a document is signed by two directors, or a director and a company secretary, their signatures do not have to appear on the same hard copy of the document.*
    • Foreign companies. Clarifying how deeds may be executed by foreign companies, particularly those from countries where the concepts of deeds and/or common seals are not recognised.

    * The case of Re CCI Holdings Ltd [2007] FCZ 1283 has said that this is already the law, but some lawyers doubt the correctness or precedent value of the case.

    These are all valuable micro-reforms that would either remove existing administrative burdens which appear to offer little benefit, or would remove areas of current legal doubt which have the ability to impede commercial transactions.

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