Australia: Crowd-sourced funding regime finally gets Senate tick of approval

What you need to know

• The Turnbull government's crowd-sourced funding bill has passed through the Senate, introducing a regulatory framework for crowd-sourced equity funding in Australia which is expected to come into effect from September 2017.
• The new fundraising regime enables small unlisted public companies to seek out investors on licensed crowdfunding portals to raise up to $5 million a year and avoid barriers that small businesses and start-ups traditionally face when looking to raise capital (including onerous disclosure requirements under the Corporations Act 2001). Retail investors will be able to invest up to $10,000 per offer per year, in an unlimited number of businesses.
• The new framework is intended to promote innovation and growth amongst small Australian businesses, following in the footsteps of the US, UK, New Zealand and others who already have formal crowdfunding investment regimes in place.

The Turnbull government's crowd-sourced funding bill has passed through the Senate, introducing a regulatory framework for crowd-sourced equity funding in Australia.

The Corporations Amendment (Crowd-sourced Funding) Bill 2016 passed on 20 March 2017 and is expected to come into effect by September this year. This was the government's second attempt at establishing a crowd-sourced funding regime, with passage of the bill coming after more than two years of government debate and industry consultations.

What will the crowd-sourced funding legislation do?

In short, the legislation will:

• allow small unlisted public companies to advertise their business plans and seek out investors on licensed crowdfunding portals, enabling those companies to raise up to $5 million a year while avoiding barriers that small businesses and start-ups traditionally face when looking to raise further capital, including onerous disclosure requirements under Chapter 6D the Corporations Act 2001
• give retail investors access to a broader range of investment opportunities, allowing them to invest up to $10,000 a year each into an unlimited number of businesses
• provide new public companies that are eligible to crowd fund with temporary relief from certain reporting and corporate governance requirements (in effect, giving those companies a chance to adjust to the change from a proprietary to a public company so they can focus on the success of their businesses in the short-term rather than on the enhanced corporate governance requirements that come with converting to a public company)
• enable the Minister to exempt certain financial market and clearing and settlement facility operators from specified parts of the Australian Market Licence and licensing regimes.

The new fundraising regime is part of the government's National Innovation and Science Agenda, released in December 2015, which promoted crowd-sourced funding as a means of enabling small businesses to raise equity from the public and therefore broaden Australia's innovation industry. Its introduction also complements favourable tax concessions for investors in early stage innovation companies, which the government introduced in July last year.

Treasurer Scott Morrison has repeatedly advocated for the changes as a means of offering start-ups and early stage companies greater choice in how they fund and finance their operations, saying in the Second Reading of the Bill that the new framework will "serve as both a complement and a source of competition to more traditional funding options for small businesses, including bank debt products."¹ In adopting this framework, Australia is following in the footsteps of legislators in the US, UK, New Zealand and elsewhere who have already formally adopted crowd-sourced equity funding. One of the broader goals of this legislation is therefore to reduce the competitive disadvantage that local businesses currently experience, by making Australia a more competitive investment market in line with what is occurring overseas.

Mixed support from businesses and industry players

There has been support from sections of the business community, particularly existing crowdfunding platforms such as Equitise and CrowdfundUP, which have traditionally only been able to offer investment opportunities to 'sophisticated investors' with more than $2.5 million of assets outside the family home or income above $250,000 a year, or to retail investors under the 'small-scale offer' provisions of the Corporations Act (limited to 20 investors to raise a maximum of $2 million a year). Co-founder of online equity crowdfunding platform Equitise, Jonny Wilkinson, is reported here to have said he foresees "huge demand" from retail investors keen to invest in growth companies and that his company will launch offers as soon the crowdfunding framework is in place and licensing begins later this year.²

However not everyone is convinced. A number of industry players have expressed doubts about the regime's ability to truly promote innovation opportunities given that proprietary companies, which make up around 99% of Australian businesses, remain excluded and would be required to convert to unlisted public companies if they want to benefit from the new fundraising opportunities. Others see this as a reasonable measure, arguing that companies seeking to raise millions of dollars from investors should be willing to face and be held accountable by shareholders and therefore be transparent when it comes to company earnings and accounts. In any event, the legislation seeks to alleviate some of the regulatory burden by granting newly converted public companies a five year reprieve from (amongst other things) holding annual general meetings, auditing accounts and providing paper annual reports. Furthermore, the Treasurer has indicated that the government continues to explore options for proprietary companies and we should expect further amendments to be tabled later in 2017.

Who can participate?

The crowdfunding regime will be open to:

• unlisted public companies with less than $25 million of gross assets and less than $25 million annual turnover and who are not subsidiaries of or related to a listed entity. These companies may raise up to $5 million in any 12 month period, provided that they must complete a crowd-sourced equity funding offer within either 12 months of registration as or conversion to a public company. To participate, the company must register with a licensed crowdfunding platform and any offer to investors must be contained in or accompanied by an offer document containing all of the information specified in the regulations (which are far less onerous than the existing disclosure requirements in the Corporations Act)
• licensed crowdfunding platforms holding an Australian Financial Services Licence, who will be expected to act as 'gatekeepers' by undertaking due diligence on issuer companies and providing risk warnings to investors
• 'retail' or 'mum and dad' investors, who will be able to invest up to $10,000 per offer in a 12 month period (though they can invest in an unlimited number of offers during that time), provided they have accepted a risk acknowledgement prior to submitting a crowd-sourced equity funding application. Investors will also benefit from a five day cooling-off period for each investment.

Further specifics on how the regime will operate in practice will be set out in the Regulations, which are yet to be released. Nevertheless eligible companies and crowdfunding platforms should give some thought as to whether they wish to participate in the regime and, if so, what measures they will need to take now to ensure they are ready once the framework is up and running later this year.

Key takeaways

The new crowd-sourced funding regime presents an exciting opportunity for small companies to access investors who have, until now, been largely unreachable because of the onerous disclosure requirements faced by companies seeking to raise capital via share issues. While crowd-sourced equity funding may not be (commercially) desirable or appropriate for every small business, it does offer these companies an alternative to traditional fundraising options, such as bank debt. If you are a small business looking for additional capital, then Australia's new crowd-sourced funding regime may be just what you need to take that next step in the growth of your business.

Footnotes

¹ Federal Treasurer Scott Morrison, Second Reading of the Bill on 24 November 2016. The full reading is available at http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2Fd8b39000-045b-46aa-b142-3ba818466f26%2F0005%22.

² Article on Business Insider Australia, 'Companies are queueing to use Australia's new equity crowdfunding laws' by Chris Pash, 21 March 2017. Full text available at https://www.businessinsider.com.au/companies-are-queueing-to-use-australias-new-equity-crowdfunding-laws-2017-3.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories