The Federal Government's Corporation and Markets Advisory Committee (CAMAC) recently released a discussion paper on crowd sourced equity funding (CSEF) as part of its brief to examine Australian regulation of CSEF. For start-ups and other possible stakeholders in CSEF, CAMAC's discussion paper is a promising sign that Australia is heading for a possible change in its regulation of CSEF, keeping pace with the US and Europe.
Many will already be familiar with crowdfunding: a person with an idea for a project (the Fundraiser) places that idea on a website (or Platform) as a way of seeking financial support from others on the internet (the Investors). In return for parting with their monetary contribution, the Fundraiser offers Investors a reward, usually a product or other expression of gratitude.
CSEF is a specific type of crowdfunding which has gained a significant groundswell of global interest in the past few years. In CSEF, the Fundraiser is usually a company or other business enterprise, and the reward given to Investors for contributing to the Fundraiser's project is an equity stake in the enterprise – e.g. shares in the Fundraiser.
Since the US Jumpstart Our Business Startups Act (JOBS Act) was passed in 2012, CSEF has been a frequently discussed topic on the world stage. This month saw some further developments:
- On 3 October 2013, the European Commission released a consultation document, "Crowdfunding in the EU – Exploring the added value of potential EU action", which, like the CAMAC report, discusses CSEF (among other types of crowdfunding) and invites public input "to identify how to best promote its growth in a safe environment".
- On 23 October 2013, the US Securities and Exchange Commission released its long-awaited proposal for rules under the JOBS Act. The JOBS Act and proposed rules effectively establish a new type of legal entity – the "funding portal" – which acts as an SEC-approved Platform to facilitate CSEF transactions. Under the regime, Fundraisers are required to disclose certain information to Investors and to the SEC, and can raise up to an aggregate of $1 million from any number of qualified Investors in a 12 month period. Funding portals are also required to provide information to Investors and take steps to minimise the risk of fraud.
CAMAC's Discussion Paper
CAMAC's discussion paper outlines the concept of CSEF, its potential risks and advantages, as well as the current legal and regulatory requirements that apply to CSEF participants in Australia.
We wrote an article about the crowdfunding phenomenon about this time last year which talks about the possibility of CSEF under Australian law in some detail, for those who are interested.
However, in summary, as the CAMAC discussion paper explains, the principal obstacles to CSEF in Australia's current regulatory regime include:
- a cap of 50 non-employee shareholders in Fundraisers that are not public companies;
- the so called "20/12 rule", which limits Fundraisers to raising $2 million from no more than 20 Investors in any 12 month period (although there is scope in certain situations for raising up to $5 million); and
- the prohibition for Fundraisers relying on the 20/12 rule to advertise their fundraising efforts.
CSEF is theoretically possible under our existing regime, but it's a tall order. The 20/12 rule means that Fundraisers must be content to raise funds from a modestly-sized rabble rather than a 'crowd', while the advertising prohibition inhibits the ways Fundraisers might broadcast their projects to the on-line masses, as Fundraisers have done with great success under non-CSEF crowdfunding.
Accordingly, CAMAC's discussion paper invites submissions from stakeholders on whether Australia should adopt regulatory arrangements specifically directed at CSEF and, if so, what those arrangements should be. For example:
- Should the Corporations Act 2001 be amended to accommodate or facilitate CSEF in some way?
- How should Australian CSEF Platforms and the Fundraisers using them be regulated?
- Should there be restrictions on who can be a Fundraiser or Investor, or the types of financial instruments that Fundraisers can issue to Investors?
The window for making submissions is open until 29 November 2013. CAMAC will then consider these submissions and, after holding roundtable consultation with respondents, expects to produce its final report in the first quarter of 2014.
A Step in the Right Direction
CSEF is here to stay, and globally looks set to become a significant source of capital raising for start-ups and other early-stage enterprises. In our view, while regulatory safeguards are required, jurisdictions that do not facilitate CSEF are missing an opportunity, doing their home-grown entrepreneurs a disservice, and creating incentives for those entrepreneurs and start-ups to move off-shore.
We therefore welcome the release of the CAMAC discussion paper and look forward to the report and its findings. Given the interest in CSEF worldwide and with other jurisdictions starting to legislate specifically to facilitate it, it is time for Australia to consider CSEF regulation in earnest, and to crowd surf its way into the global discussion.
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