The Federal Government has committed itself to implementing a crowd sourced equity funding regime in Australia in the near term and has now provided the blueprint for how the regime will operate in a recent consultation paper " Facilitating crowd sourced equity funding and reducing compliance costs for small businesses" (Consultation Paper). In this Alert, Partner Michelle Eastwell outlines the proposal for the regime and the key matters which the Federal Government is seeking feedback on.
Crowd sourced equity funding enables entrepreneurs to raise funds online from a large number of retail investors (further details were outlined in our previous Alert). Given the popularity of rewards based crowdfunding in Australia and equity based crowdfunding in other jurisdictions, we welcome the introduction of a regime in Australia which facilitates equity based crowdfunding as a mechanism for startups and innovative businesses to raise funds.
The Government's policy for crowd sourced equity funding predominantly takes the approach suggested by CAMAC in its 2014 report. The following are the key elements of the framework:
- the regime will be available to Australian public companies and will enable raisings of up to $5 million during a 12 month period;
- there will be investment caps for investors of $10,000 per offer and $25,000 per annum in aggregate crowd sourced equity funding. Investors will have withdrawal rights in certain circumstances;
- a tailored crowd sourced equity funding disclosure document will need to be issued;
- raisings must be undertaken via intermediaries who hold an Australian Financial Services Licence who must undertake prescribed checks on the issuer and provide risk warnings to investors. The intermediaries will not be permitted to provide investment advice on offerings or lend to crowd sourced equity funding investors; and
- relief from certain public company compliance obligations will be available to newly registered or converted public companies, including in respect of disclosing entity rules, holding an AGM, appointing an auditor and providing hard copy annual reports for an initial period of up to 5 years (subject to annual turnover and gross asset thresholds).
The Consultation Paper does not seek any feedback on the policy for crowd sourced equity funding for public companies. The Government has confirmed that it will move forward with this regime for public companies regardless of the outcome of the Consultation Paper and whether crowd sourced equity funding is made available to proprietary companies (see below). We anticipate that legislation will be introduced to parliament in the Spring session of 2015 to establish this regime for public companies, with draft legislation released for public comment prior to its introduction to parliament.
If the regime can be established so that it operates as effectively as rewards based crowdfunding currently does, this will open up an accessible and low cost mechanism for startups and innovative businesses to raise funds. In this regard, we believe that the draft legislation should:
- facilitate the intention for crowd sourced equity funding to be a low cost mechanism for fundraising;
- recognise that investors in crowd sourced equity funding will make an assessment as to the risks involved with an offer and may well make an investment on the basis that they are willing to risk their investment (the amount will be capped) for the chance to be part of the next possible "big thing" or to support an idea/business/person which they feel connected to, or are passionate about;
- ensure the regime can accommodate changes and developments to social media; and
- allow issuers the ability to continually engage with potential investors as currently occurs with rewards based funding.
The Consultation Paper also seeks feedback on a number of matters which would make fundraising more accessible for proprietary companies such as whether:
- crowd sourced equity funding should be extended to proprietary companies;
- limits on the number of members of a proprietary company should be lifted (currently 50 non-employees); and
- the existing small scale offerings exemption (often referred to as the '20 in 12' exemption) should be expanded.
The Government has also sought to identify ways to reduce compliance costs for small proprietary companies generally so that these companies can focus their attention on operating and growing their businesses. The Consultation Paper seeks feedback on a number of specific areas of regulation which the Government believes may be altered to reduce the regulatory burden on small proprietary companies, which include ways to facilitate the execution of documents, completing and lodging forms and the requirement to maintain a share register.
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