The Corporations and Markets Advisory Committee (CAMAC) recently released a report on crowd sourced equity funding (CSEF) in Australia, in which small investors are offered a shareholding in a company in return for providing cash to the company.
CAMAC is of the view that CSEF should be facilitated in Australia as it has the potential to 'encourage the Australian start-up entrepreneurial sector, especially in the crucial early stages of project and product development'. CAMAC has suggested a specific regulatory structure to introduce CSEF in Australia.
What is crowd sourced equity funding?
CSEF is just one form of crowdfunding. Crowdfunding is a means of
raising money for a project or business venture through small
contributions from a number of persons. These contributions are
usually sought through an online crowdfunding platform and the
offer may be promoted via social media. Examples of crowdfunding
websites include Kickstarter and Pozible.
In essence, CSEF involves the sale of equity in companies through online websites to potentially numerous individuals or entities. CSEF is generally aimed at early stage capital raisings.
Current legal obstacles for CSEF
There are currently a number of legal obstacles to proprietary
companies in Australia raising capital through CSEF.
The principle restrictions are:
- the shareholder cap: a proprietary company may have no more than 50 non-employee shareholders;
- the prohibition on public offers: a proprietary company is generally prohibited from engaging in any public offers of its securities; and
- disclosure requirements: an obligation to provide a prospectus or offer information statement when seeking funding through public offers of securities in the company.
There are various exceptions from the disclosure requirements for making a public offer of securities including the small scale personal offers exemption and the exemption for offers that are made to sophisticated, experienced or professional investors. However, these exemptions are unlikely to apply to the type of fundraising contemplated by CSEF, which usually involves a large number of retail investors.
CAMAC's proposed changes
Given that companies seeking funding by way of CSEF will be making
offers to the public, CAMAC is of the view that these companies
should be required to be public companies. However, CAMAC has
recommended that a new classification of 'exempt public
company' be created for this purpose.
Exempt public companies would be exempt from certain regulatory duties of public companies for a specific period and exemption would lapse in time or certain events taking place. Existing proprietary and public companies would be able to convert to an exempt public company in certain circumstances.
It is proposed that an exempt public company will be able to seek funds from individuals or entities by offering its securities through a licensed online intermediary (i.e. a crowdfunding platform), provided:
- the offer does not exceed the issuer cap of $2m in any 12 month period;
- the offer disclosure requirements are complied with, which will generally be met via a standard offer disclosure template;
- the controls on advertising are complied with;
- the issuer does not lend to crowd investors to acquire it securities; and
- any material adverse change concerning the issuer is notified.
Investors will not be allowed to invest more than $2,500 in any particular CSEF issuer in any 12 month period, and may not invest more than $10,000 in total in all CSEF issuers in that period. Investors will also be given cooling off and other withdrawal rights after entering into an acquisition agreement.
Where to from here?
This is most likely the last review for CAMAC, after the Federal
Government abolished the body in last month's federal budget.
The Treasury will now take on CAMAC's work.
The Federal Government is expected to respond to the review when it releases a review of investment schemes later this year. It is hoped that the Federal Government's position will be influenced by the fact that New Zealand and the UK have already implemented approaches to accommodate crowdfunding and there are currently fast moving crowdfunding developments afoot in the EU and the United States.
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.
