United States: 10 Things Private Companies Need To Know About Equity Crowd-Sourced Funding

Last Updated: May 21 2019
Article by Esteban Gomez and Andrew Chan

In late 2018 amendments to the Corporations Act expanded the operation of the crowd-sourced funding (CSF) regime to private (proprietary) companies. This is an exciting development to Australia's regulated fundraising regime, as private companies (particularly start-ups and those looking to scale up) no longer need to convert to an unlisted public company to access CSF capital.

Recent publicised CSF raisings such as Black Hops Brewery, which raised AU$400,000 in just 6 days across almost 500 investors able to invest as little as AU$50, and ORDER, one of the first crowdfunded esports teams, shows the potential of the new regime and how it can facilitate access to capital in a manner which would have otherwise been difficult using traditional capital raising methods.

A growing number of AFS-licensed CSF intermediaries, such as Birchal, Equitise, Billfolda and OnMarket, now provide private companies with an online platform to make CSF offers.

The CSF regime seeks to strike a balance between flexible and low cost access to capital while ensuring adequate protection for retail investors. Here are 10 things that private companies need to know about how the CSF regime works.

1.Eligibility

Any private company (excluding investment companies) with less than $25 million in consolidated gross assets and annual revenue is eligible to make CSF offers. Private companies must have their principal place of business in Australia and at least 2 directors, at least one of whom must ordinarily reside in Australia. If the company has more than 2 directors, then a majority must ordinarily reside in Australia.

2.How much capital can be raised?

Eligible CSF companies can raise up to AU$5 million in any 12 month period through CSF offers (although only one CSF offer can be open at any time). Companies must include in the cap any amounts received in the last 12 months via other small scale personal offers and offers made via an AFS licensee. However, the company is not precluded from making separate, but concurrent, offers to sophisticated or professional investors and funds raised in this manner do not count towards the cap. Note also that a CSF offer cannot be used to raise funds to invest in other companies, entities or schemes or to make loans to related parties (other than wholly-owned subsidiaries).

3.How much capital can be applied for?

Retail investors are limited to a AU$10,000 investment per CSF company in any 12 month period. 

4.What kinds of shares can be offered?

A CSF offer must be for the issue of new fully paid ordinary shares, not for the sale of existing issued shares. Note importantly that issued shares cannot be traded easily and are typically restricted from on-sale within the first 12 months unless, for example, a buyer can be found who is a sophisticated or professional investor. 

5.Why do you need a CSF intermediary?

CSF companies must use an AFS-licensed CSF intermediary to host the CSF offer on their online platform and will need to enter into a hosting arrangement with them. The hosting arrangement, among other things, requires the intermediary to provide an application and communication facility for the CSF offer and requires that investor applications and money to be dealt with by the CSF intermediary. The CSF intermediary will also perform checks on the company, its directors and the CSF offer document, and will publish the offer and close it in certain circumstances, including where the maximum subscription is reached or on the closing date. 

6.What is required in a CSF offer document?

CSF companies must prepare an offer document that includes prescribed minimum information, including risk warnings and information about the company, the offer and investor rights (including cooling-off rights). The offer document must be readily accessible online, must not be misleading or deceptive and must be worded and presented in a clear, concise and effective manner.

7.What happens once the CSF offer is made?

A CSF offer can be open for a maximum of 3 months. Typically, the CSF offer is 'complete' where the minimum subscription is reached and the offer is closed because the offer period has ended or the maximum subscription is reached. It is 'unsuccessful' where the minimum subscription is not reached. If the offer is complete, the company issues shares to investors. If the offer is unsuccessful (or is withdrawn by the company or by the intermediary under its gatekeeper obligations), then the intermediary must refund application money to investors.

8.Can I advertise my CSF offer?

Advertising can play an important role in CSF offers, and regulatory guidance makes direct reference to contemporary advertising methods such as Twitter, YouTube and Facebook, and encourages the use of digital media such as video or audio presentations. However, certain requirements must be met. Advertisements must include a prescribed statement with a general risk warning and must direct potential investors to the CSF offer document. In addition, advertising and information on the CSF intermediary platform must not be misleading or deceptive. The CSF intermediary must provide a communication facility for the offer, such as a forum where potential investors can post comments and ask questions. Comments by officers and employees of a CSF company on these forums must be made in good faith. 

If a breach of the advertising rules occurs, ASIC may request that advertisements be amended or removed or issue a stop order. In certain cases the CSF intermediary may close the offer. 

9.Are there additional governance or reporting obligations?

All CSF companies must prepare an annual financial and directors' reports in accordance with accounting standards and lodge them with ASIC (this requirement usually applies only to large proprietary companies). CSF companies that raise AU$3 million or more from all CSF offers made must also have their annual financial reports audited. CSF companies must also comply with the rules for related party transactions in the Corporations Act, which usually apply only to public companies.

10.Does the private company 50 shareholder limit apply to CSF companies?

Private companies that successfully complete a CSF offer may have more than 50 non-employee shareholders, comprised of shareholders who bought shares under the CSF offer and shareholders who subsequently buy those shares off-market. This means that CSF companies could potentially have hundreds or even thousands of CSF shareholders. It is imperative that CSF companies consider shareholder management techniques if planning to make CSF offers.

How can we help?

The extension of the CSF regime is an exciting development for private companies, in particular those whose traditional access to capital, both equity and debt, may be limited. At present the CSF regime remains relatively unchartered waters for the majority of Australian private companies. Our corporate team at Dentons can help to construct a CSF offer and offer document which complies with the regime, as well as assist with engagement of the chosen CSF intermediary, understanding the intricacies of the hosting arrangement and meeting ongoing governance and reporting obligations and advertising rules. 

Please note the above constitutes a general summary only and legal advice should be obtained for particular factual circumstances.

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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.

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