Currently, the Corporations Act 2001 limits access to crowd-sourced funding (CSF) to public unlisted companies, effectively excluding 99.7% of Australian companies from raising capital through this route. The Corporations Amendment (Crowd-Sourced Funding for Proprietary Companies) Bill 2017 (the Bill), if passed, will extend CSF to privately-held companies. This would open up significant opportunities for the growth, particularly, of innovative small businesses and start-ups, who will be able to raise up to $5 million for each 12-month period using CSF.
CSF is a way for companies to raise funds from a large number of individuals who pay money in exchange for equity in the company. To do this, an eligible company can make offers for ordinary shares on the platform of a licenced CSF intermediary, which typically takes the form of a website.
Will you be eligible?
The Bill proposes to allow private companies access to CSF if it:
- has less than $25 million in gross assets and annual revenue;
- is not accessing CSF for the purposes of investment; and
- has its principle place of business in Australia.
These criteria parallel the existing requirements that unlisted public companies must meet to access CSF. In addition to these requirements, the Bill would introduce increased reporting and governance obligations for private companies seeking CSF in order to protect investors and give them confidence in the market. Specifically, in this instance private companies must:
- maintain a minimum of 2 directors;
- prepare annual financial and directors' reports in accordance with accounting standards;
- have their financial reports audited once they raise $3 million or more from CSF offers; and
- comply with the existing related party transaction rules that apply to public companies.
Private companies will need to weigh up the advantages of accessing public funding through CSF versus the costs of complying with these obligations.
Why use crowd-sourced funding?
CSF can give companies both marketing edge and greater access to equities markets, as CSF platforms allow companies to introduce their idea and vision to a large market of unique users and potential investors. The CSF platform can also be a valuable way to receive feedback and observe the public's reaction to your company, its products and services.
For public companies, CSF presents a less costly means of offering equity due to the lower costs of the required disclosure documentation. For private companies, CSF is an important alternate method of fundraising as private companies under current law are only able to raise funds from the public under limited circumstances, such as through sophisticated investors or to a limit of $2 million from retail investors. CSF may also be an attractive substitute to debt capital if businesses, particularly those in the early stages, are unable to meet regular loan repayments or have insufficient collateral or credit-related information.
How can private companies currently access CSF?
Private companies wishing to access CSF must convert to a public company, and to encourage this, the current legislative framework for CSF offers a range of temporary corporate governance concessions. Some of these concessions mean that private companies who have converted to access CSF do not need to hold annual general meetings, audit financial reports, and distribute annual reports until the earlier of:
- the company raising $1 million through CSF;
- the company no longer meeting the eligibility requirements;
- the company not completing a successful CSF offer within a 12-month period; or
- 5 years passing since registration as a public company.
For private companies who do not wish to convert to a public company, the Bill has been passed by the House of Representatives and introduced to the Senate, so it may be only a matter of a few months before private companies can start to access crowd-sourced funding.
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.