From 28 September 2017, a new source of capital will become available to unlisted businesses – funding by the ‘crowd’. That’s you and me, mums and dads, and of course, the usual suspects – high net worth and institutional investors, who have previously had these investment opportunities pretty much to themselves.
How’s it happened?
Essentially, a ‘lite’ capital market has been established by creating a new category of financial service – a ‘crowd-sourced funding service’.
It’s pretty simple; ASIC will now administer a new type of financial services licence which needs to be held by companies who operate a ‘platform’ on which crowd-source funding offers are made. They’re called a crowd-sourced funding intermediary.
If you’re thinking of operating a crowd-sourced funding platform, don’t rush out and apply for a licence just yet – ASIC’s not accepting applications until after 28 September 2017. It is however, preparing guidance in preparation for the new regime.
Who can raise funds?
Australian based, public unlisted companies who are limited by shares and have a majority of their directors residing in Australia and annual consolidated revenue or gross assets of less than $25 million will be able to raise up to $5 million each year.
Politics permitting, the regime will shortly be extended to 2 director proprietary companies – by not counting crowd-sourced shareholders in the non-employee 50 shareholder limit. They’ll be exempt from the takeover rules if their constitution includes exit protection requiring anyone who acquires more than 40% of the company to offer to buy out all the remaining shareholders.
NB: Pure investment companies can’t use the regime – they’ll need to either list on a stock exchange or operate as a managed investment scheme.
Who can invest?
Both retail and wholesale clients can invest through the crowd sourced funding regime – but retail investors are limited to $10,000 per annum in each company and have the protection of a 5 day cooling off period.
How it’s done
The process is broadly similar to other types of fundraising, just simplified somewhat. Let’s run through the process . . .
Offer document – Companies who want to raise capital prepare an ‘offer document’. Although the regulations establishing the content requirements for these are not in final form, it’s likely that they will need to contain information about the company raising capital (including its capital structure and financial position), the nature of the offer (including the types of shares and the min and max amount sought) and how the funds will be used.
To protect investors, the offer document will contain information about any adverse history of the company or its directors (such as criminal or civil offences, disqualifications, banning or court orders and insolvency). It will also contain a risk warning and information about investor’s rights, including the 5 business day cooling off period, obligations to audit accounts, hold annual general meeting and the like.
Consents – All the existing and proposed directors and anyone who has provided information contained in the offer document (or on whose information the document relies) must consent to its publication.
Vetting – The crowd-sourced funding intermediary responsible for the platform on which the offer document is to be published must vet the document to a ‘reasonable standard’ (i.e. using reliable and independent documentation).
This requires them to ensure that the company is eligible to offer funds to the crowd (see above) and that the offer document contains all the required
information. They’ll also need to check the name, ACN and addresses of the company (and any individual associated with the company who has an adverse
Publication – Once all the checks are complete, the offer document can be published on one crowd-sourced funding platform. The platform must prominently display information about applicants’ rights to withdraw their applications, the responsible intermediary’s fees and information about any interest the intermediary has or expects to acquire in the company.
Offer period – Crowd-sourced funding offers must be open for the lesser of 3 months, the time specified in the offer or when they are fully subscribed. The company can request the offer to be withdrawn any time.
The responsible intermediary is required to ensure that the offer opens and closes at the right times. They must suspend or close the offer if they become aware that the offer document is defective, e.g. because required information is omitted or changes have occurred that need to be included in it. If changes do occur, a supplementary offer document can be provided.
Transparency – Once of the key attributes of the crowd-sourced funding regime is its transparency; achieved by requiring the responsible intermediary to provide a communication facility on the platform. This enables information and questions (and answers) relating to the offer to be posted by applicants and the company during the offer period for all applicants to see.
Applications – Applicants must acknowledge that equity crowd funding is risky and that they may not be able to sell their shares, the value of their investment could dilute or be lost entirely and that they can bear that loss without undue hardship.
Managing applications – The responsible intermediary receives all applications and application money which is kept in a trust account pending finalisation of the offer.
Closing the offer – If the minimum subscription amount is achieved, the responsible intermediary must pay the funds raised to the company (after deduction of its fees) as soon as practicable.
If the minimum is not raised, the application money must be repaid to applicants.
Sounds simple. And it is, but as always, the requirements are quite detailed and there are traps for the unwary. So until the regime is better established, it will be wise to get legal signoff on offer documents.
Reporting and governance
Both public and proprietary companies who crowd-source funding will need to adhere to changed reporting requirements and governance standards. The requirements will be different for each. Companies will be well advised to compare the pros and cons of a public v proprietary structure – but that’s a subject for another blog!
To apply for a crowd-sourced funding licence, or to get ready to crowd source some capital, contact The Fold Legal. We’ll be happy to help.
*See the Corporations Amendment (Crowd-sourced Funding) Act 2017 which amends the Corporations Act 2001 (Cth)