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
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
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
the offer does not exceed the issuer cap of $2m in any 12 month
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
any material adverse change concerning the issuer is
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
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.
Kemp Strang has received acknowledgements for the quality of
our work in the most recent editions of Chambers & Partners,
Best Lawyers and IFLR1000.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
This part will cover the legal position in relation to promotional materials and misleading and deceptive conduct.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).