Amendment Extends Equity Crowdfunding

In January this year we received our retail equity crowdfunding license which means for the first time in Australia early stage companies could turn to equity crowdfunding as an alternative for raising capital. One of the biggest concerns for these early stage companies was that they were required to convert from a proprietary company structure to a public unlisted structure.

Some concessions were given to those companies that needed to convert to a public unlisted company including exemptions from audits (when raising under $1m) and AGMs. However, the preparatory legal work, along with the ongoing compliance obligations, put off many entrepreneurs. The conversion process also entailed a one month waiting period on the Commonwealth Gazette, which caused substantial delay to the crowdfunding process, putting off any growth activity that could be implemented from the capital raised.

Responding to concerns regarding the inefficiencies in the new CSF regime from both early stage companies and equity crowdfunding platforms, the Corporations Amendment (Crowd-sourced funding for proprietary companies) Bill 2017 (Cth) was passed by the Senate on 12 September 2018 and will come into effect 28 days after receiving royal assent, extending equity crowdfunding to proprietary companies. This is great news for early stage companies as this form of capital is now more readily accessible with less regulatory red-tape slowing down the process. Many of the rules that applied to public unlisted companies under the old CSF legislation will continue to apply to proprietary companies, including the $25m asset and turnover caps, the requirement for the business to not be listed on any stock exchange and the company’s principal place of business being in Australia.

While the new legislation does require companies to include details of CSF shareholders on the company register, these will not count towards the 50 shareholder cap that applies to proprietary companies. This exemption continues to apply even if shares are transferred to another shareholder later, so long as the shares were originally issued through a CSF offer and that the company’s shares have not been traded on financial markets (in Australia or otherwise).

Additionally, proprietary companies utilising equity crowdfunding will be exempt from Chapter 6 of the Corporations Act 2001 (Cth) which deals with takeover rules that usually apply to companies with over 50 shareholders. This exemption means that proprietary companies raising capital through CSF will not have to navigate the complex and onerous rules in Chapter 6, despite having a diverse share register after raising funds through equity crowdfunding. This is a positive given that many early-stage companies will be aiming to position themselves for a sale in the future.

However, recognising that proprietary companies undertaking equity crowdfunding will bring on board CSF shareholders that most probably won’t have a personal connection with the business, the new legislation imposes additional requirements on proprietary companies to protect shareholders, including:

  1. A minimum of two directors, with at least one ordinarily residing in Australia if there are two, or a majority of directors residing in Australia if there are more.
  2. Annual financial reports (prepared to accounting standards) and directors’ reports to be distributed by proprietary companies with at least one CSF shareholder during the financial year. These may be distributed online, and no written communication is required.
  3. Audits required where companies raise $3m or more through CSF offers, with an auditor’s declaration to be included in the directors’ report. Where applicable, an auditor should be appointed within one month of the CSF offer closing.
  4. Notifying ASIC in certain circumstances, such as when issuing shares that causes a company to have CSF shareholders, or cancelling shares so that a company no longer has any CSF shareholders.
  5. Compliance with Chapter 2E of the Corporations Act 2001 (Cth) dealing with related party transactions.

Overall, these changes reflect a relaxing of the regulations surrounding the types of companies eligible for CSF in Australia. This is a positive and welcome change for the industry, with more entrepreneurs being able to access this type of capital and more investment opportunities available for investors.

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