On 12 September 2018, the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (Cth) was passed, allowing for amendments to the Corporations Act that would extend the availability of crowd-sourced funding (CSF) to proprietary companies. It is great to see that, as of today, these amendments have come into effect.
CSF allows a large number of individuals to make small contributions towards a company in exchange for an equity stake. This source of funding is particularly relevant for proprietary companies who, because of their inability to make public offers and the cap placed on their number of shareholders, are often restricted in their ability to raise larger amounts of capital through alternative means.
Eligibility for CSF
In order to be eligible for CSF, proprietary companies must ensure that they meet the following requirements:
- have at least two directors, the majority of which ordinarily reside in Australia;
- have their principal place of business in Australia;
- have less than $25 million in both gross assets and annual turnover; and
- not have a substantial purpose of investing in securities or interests in other entities or schemes.
Special Investor Protections
The new legislation amendments also introduce additional obligations for companies raising funds through CSF so that their investors can be protected and make informed decisions. Key obligations proprietary companies need to be aware of include:
- preparation of annual financial and director's reports in accordance with the accounting standards;
- having their financial reports audited if they raise $3 million or more from the CSF offer; and
- compliance with existing related party transaction rules under the Corporations Act that have previously only been applicable to public companies.
Other Key Amendments
The laws will remove temporary corporate governance concessions that were contained within the initial Corporations Amendment (Crowd-sourced funding) Act 2017 for proprietary companies that convert to or register as public companies in order to access CSF.
The legislation will also exclude CSF shareholders from the 50 shareholder restriction currently imposed on proprietary companies.
Managing an Expanded Register
Proprietary companies who wish to engage in CSF should be mindful of the large number of shareholders that arises from such a regime. Care should be taken to implement adequate management processes and procedures so that investor expectations can be managed accordingly.
Relevant Guides and Legislation
Existing ASIC guidance for public companies accessing the CSF regime is currently provided in ASIC Regulatory Guide 261.
We anticipate ASIC will issue updated guidance applicable to proprietary companies in due course. We will continue to watch this space.
A link to the relevant legislation is provided below:
While it has taken some time to get here, we look forward to seeing what new ventures (via a proprietary company structure) can achieve with this new and exciting source of fundraising.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.