Australia: Crowd sourced funding soon to become a reality

Last Updated: 20 March 2017
Article by Marianne Robinson

Help is nearly here for public company start-ups and small to medium-sized businesses in need of capital, as the crowd sourced funding (CSF) regime edges closer to becoming law in 2017. The Corporations Amendment (Crowd Sourced Funding) Bill 2016 (Cth) has passed the House of Representatives and entered the Senate. The Senate Economics Legislation Committee Report was tabled for consideration on 13 February 2017 and the Committee recommended the Bill be enacted. A dissenting report was tabled by the Labor Senators who support the concept but who wanted the Bill amended to broaden the range of businesses able to access the CSG regime.

Once passed the CSF regime will bring a new form of investment for businesses—allowing companies to reach a broader group of potential investors more quickly and accumulate capital from individuals that they traditionally wouldn't be able to reach—as well as a new Australian financial services (AFS) licence for licensees acting as CSF intermediaries.

What is CSF?

CSF (also known as equity crowd funding or investment-based crowd funding) is a new form of corporate capital raising that is popular with start-up companies in need of funds. The concept is not new—a company in need of capital offers equity in the company in exchange for cash.

The main difference between CSF and traditional methods of capital raising (such as IPOs and bank loans), is that the investment opportunity offer is made and managed via an online funding website. The idea is that a larger number of retail investors (the crowd) with small amounts will take advantage of the opportunity to invest in such offers.

This form of investment has the potential to provide finance for innovative business ideas and additional investment opportunities for retail investors, while ensuring disclosure protections are in place so investors are sufficiently informed to make sound decisions.

Key components of the reforms

Schedule 1 of the Bill amends the Corporations Act 2001 (Cth) (the Act) and establishes a regulatory framework to facilitate CSF by small, unlisted public companies.

The reforms will create crowd sourced funding services as an entirely new form of financial services, which will require a new form of AFS licence with specific authorisations and some unique regulatory obligations, which will be imposed on such AFS licensees (CSF intermediary).

While similar to an earlier bill that lapsed with the dissolution of Parliament in 2016, the most significant difference between the lapsed bill and new law is the increase of the company eligibility cap from $5 million to $25 million. This creates opportunities for a much larger group of companies to benefit from the reforms, as it will facilitate the raising of funds from retail investors without the barriers of costly disclosure documents, such as a prospectus.

The proposed CSF regime is principles-based and includes:

  • eligibility requirements for a company to fundraise via CSF, including disclosure requirements for CSF offers (Chapter 2)
  • obligations of a CSF intermediary in facilitating CSF offers (Chapter 3)
  • the process for making CSF offers (Chapter 4)
  • rules relating to defective disclosure as part of a CSF offer (Chapter 5), and
  • investor protection provisions (Chapter 6).

Eligible CSF company

To be eligible to use the CSF reforms, there must be an offer for an issue of securities made by an eligible company. To be classed as a CSF company, a business must:

  • be a public company limited by shares
  • have a majority of Australian directors
  • have its principal place of business in Australia
  • be compliant with the assets and turnover test
  • have consolidated gross assets (of company and related entities) of less than $25 million in value
  • have a consolidated annual revenue of less than $25 million
  • not be a listed corporation or related to any company that is a listed corporation, and
  • not have investment in securities or interests in other entities or schemes as a "substantial purpose" of the company.

Capital raising issuer cap

Before making a CSF offer of securities (new offer) the company must ensure it meets the preconditions of the issuer cap, which is $5 million in any 12-month period (issuer cap). The issuer cap will be calculated by looking at the offer being made and funds raised from other CSF offers as well as small-scale personal offers in the preceding 12 months.

The legislation outlines what does or does not apply to the issuer cap. A distinction is made between offers made and funds raised.

CSF offers and disclosure documents

Part 6D.2 provides that disclosure requirements for investors will be waived and replaced by new requirements. It also covers how CSF offers can be made, who can make them and the retail investor protection mechanisms that will operate. Retail client investor caps of $10,000 in a 12-month period will apply for each CSF issue and there will be an unconditional 48-hour cooling off period.

Under the legislation, requirements around disclosure include:

  • all offers of securities (CSF offer) must be made on the platform (hosting arrangement) of a single CFS intermediary and must be clear, concise and effective
  • a hosting arrangement between the CSF and the CSF intermediary (an AFS licensee with a specific CSF authorisation)
  • advertising restrictions will apply to CSF offers, including restrictions on statements that refer to an intended CSF offer, and
  • the CSF company must obtain the consent of certain persons, such as directors associated with the CSF offer document, before it can be published on the offer platform.

Critical role of CSF intermediary

Central to the new CSR regime is the role of the AFS licensee, which will act as the CSF intermediary. The CSF intermediary must be an AFS licensee with specific CSF authorisations. The reforms make it clear that the CSF intermediary will act for both the CSF company and the investors seeking CSF securities.

This role will involve:

  • all CSF offers on behalf of the CSF Company being made on the CSF Intermediary's platform
  • before publishing the CSF offer, determining that there is no reason to believe that the officers of the CFS company are "not of good fame or character"
  • before agreeing to host the CSF issue, having no reason to believe that the director's representations in the CSF offer are misleading, deceptive or dishonest, and
  • handling all applications received in response to the CSF offer and all applications monies as part of the hosting arrangements.

CSF intermediaries will have a number of unique gatekeeper roles. Depending on the nature of the business, a CSF intermediary may also require an Australian Market Licence as it may be considered to be operating a market.

How will CSF change the game?

While the CSF reforms are primarily intended to assist start-up and FinTech companies in need of seed capital, the expansion of eligibility to companies with up to $25 million in gross assets and annual revenue also creates opportunities for a number of more established small to medium-sized businesses wanting to expand their operations. It will similarly open up greater possibilities for retail investors who now have a wider range of investments to choose from. It is likely that the IT sector will also benefit from the reforms, with platform providers needing to review hosting facilities and address the CSF intermediary's role.

Companies should be aware that, until the Australian Securities and Investments Commission (ASIC) issues its guidance on AFS licence requirements (including how an existing AFS licensee can vary their licence), there are a number of unknowns around CSF. We expect these to be addressed by ASIC during the year.

If you would like assistance with understanding how the proposed CSF reforms will impact your business or how to take advantage of the new opportunities under the proposed reforms, get in touch.

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.

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.

Authors
Marianne Robinson
Similar Articles
Relevancy Powered by MondaqAI
Holley Nethercote commercial & financial services lawyers
 
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”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Holley Nethercote commercial & financial services lawyers
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
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).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions