ASIC publishes crowdsourced funding regime guidance

The Australian financial regulator has finalised its guidance for crowdfunding platform operators and unlisted public companies looking to raise capital under the new CSF regime.

The Australian Securities and Investments Commission (ASIC) has released guidance for unlisted public companies and crowdfunding platform operators (intermediaries) on how to comply with the new crowdsourced funding (CSF) regime coming into effect on September 29, 2017.

Under the Corporations Amendment (Crowd-Sourced Funding) Act 2017, unlisted public companies with less than AU$25 million in assets and annual revenue can make offers of ordinary shares to retail investors through an intermediary's platform using a CSF offer document containing a reduced level of disclosure compared to a prospectus.

Eligible companies can raise up to AU$5 million in any 12-month period through licensed crowdfunding platforms under the new CSF regime.

Where previous legislation limited the scope of equity crowdfunding to wholesale or sophisticated investors who earn at least AU$250,000 a year or have AU$2.5 million in assets, under the new CSF regime, retail investors will be able invest up to AU$10,000 per company per year once they have completed the prescribed risk acknowledgement, and will have a five-day cooling-off period.

To raise capital via CSF, unlisted public companies must enter into a hosting arrangement with a licensed CSF intermediary, prepare a CSF offer document, obtain consents required for the CSF offer document such as from all company directors, publish the CSF offer document on the intermediary's platform, close the offer as soon as possible, declare the offer complete, and issue shares to retail investors, according ASIC's regulatory guide [PDF] for public companies.

The CSF offer document [DOC] must be presented in a "clear, concise, and effective" manner, and contain information such as: The nature of the company's business, including its business model and strategy; the backgrounds of the company's directors and senior managers; the main risks facing the company's business; the capital structure of the company; the financial information of the company; the use of funds raised under the CSF offer; the rights associated with the shares; and details of previous CSF offers.

Crowdfunding platform operators are required to play a "gatekeeper" role to ensure investors are only offered investments in public companies that are eligible to raise funds and are seeking to do so "for legitimate purposes", ASIC has previously said.

In order to sustain investor confidence, intermediaries must ensure that it provides an "application facility" that enables people to make applications in response to open CSF offers; prescribed checks are carried out regarding the identity of the offering company and its eligibility under the new CSF regime, as well as information on the company's directors, including whether they have "knowingly engaged in misleading or deceptive conduct"; and adequate arrangements are in place for the management of conflicts of interest, according to ASIC's guide [PDF] for CSF intermediaries.

Additionally, the guide advises that important information such as the prescribed general risk warning be published prominently and is easily accessible on the crowdfunding platform, and the CSF offer is closed or suspended when appropriate, such as when the offer is fully subscribed.

A communication facility must also be available for investors to communicate in relation to the CSF offer and make inquiries of the offering company and the CSF intermediary. While the communication facility does not need to be open to the general public, it does need to be monitored and quality-controlled, ASIC's regulatory guide for intermediaries states.

Crowdfunding platform operators are additionally advised to deal with client money in accordance with the Corporations Act.

Last week, ASIC announced that it would begin accepting licence applications from intermediaries on September 29, 2017 via its "eLicensing" portal, and will assess them as a matter of priority to accelerate the implementation of the CSF regime.

In addition to the standard documentation ASIC requires for all licence applications, the financial regulator advised intermediaries to address CSF-specific requirements [PDF] in its application to speed up the assessment process.

The Australian federal government also announced last week that it is introducing legislation to Parliament to extend the CSF regime to proprietary companies, after the regime was heavily criticised for locking out startups and small businesses. The reform would mean proprietary companies wanting to access equity crowdfunding will no longer have to convert to a public company entity to take advantage of the new CSF regime.

However, proprietary companies will have to comply with additional obligations to protect investors, including: A minimum of two directors; financial reporting in accordance with accounting standards; audited financial statements once the company raises more than AU$3 million from crowdfunding offers; and restrictions on related party transactions.

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