Changes to Australia's crowd-sourced funding (CSF) laws have opened up new funding opportunities for certain private companies, allowing them to access and raise new capital through crowd-sourced equity funding. Previously, private companies seeking to raise equity via CSF were obliged to convert to a public company entity before they were eligible to do so.
Expected to take effect from mid-October, small private companies with annual revenue of less $25 million and gross assets below $25 million will be authorised to publish offers on ASIC-licensed CSF portals and raise up to $5 million in any 12 month period. The changes are expected to favour and facilitate growth among small business, start-ups and technology companies, by facilitating access to a broader funding base.
The amendments to the Corporations Act 2001 (Cth) were contained in the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017, which has now been passed by both Houses of Parliament and is currently awaiting Assent. It introduces a key exemption, whereby investors who acquire shares by way of CSF will not be counted towards the 50 shareholder cap imposed on private companies, meaning these companies will be able to raise funds from a larger pool of investors. The exemption will travel with the shares, allowing investors to realise their investment without compromising the structure of the company.
The exemption is not without restriction – access to CSF comes with additional governance and reporting obligations, a trade-off design to protect investors and to reflect the broadening of the company's shareholder base. These were summarised in our original article on the draft bill and have been updated as follows:
- Minimum number of directors – A private company must have at least two directors before it can engage in CSF, rather than the usual one
- Additional reporting obligations – A private company making CSF offers must include additional information in its company register, including the date of each issue of shares as part of a CSF offer, the number of such shares issued and the date on which a shareholder ceases to be a CSF shareholder. ASIC must also be notified when a private company starts and/or ceases to have CSF shareholders
- Additional financial reporting obligations – A private company engaged in CSF must prepare annual financial and directors' reports, to ensure financial transparency for current and potential CSF investors. Companies that raise in excess of $3 million from CSF must also audit their annual financial reports
- Restrictions on related party transactions – Existing restrictions on related party transactions will be extended to private companies engaged in CSF, to protect public investors against potential fraud and/or transactional bias
- Takeovers – A private company that has CSF shareholders will be exempt from takeover rules in Chapter 6, but noting that additional conditions may be imposed by regulation if required to protect investors.
The extension of CSF rights to private companies is an exciting development for small business, start-ups and the fin-tech industry generally. That said, companies looking to take advantage of the changes will need to carefully assess their eligibility and make sure they both understand and implement the additional requirements.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.