Commonwealth highlights risk in new crowdfunding draft

As part of the crowdsourced equity funding framework proposed earlier this month, the federal government has released a new set of draft regulations with a focus on investor risk.

The federal government has released a new set of draft regulations on Australia's proposed crowdsourced equity funding (CSEF) framework.

The Corporations Amendment Crowd-sourced Funding Act was released earlier this month, with the the Bill [PDF] also laying out amendments to the Corporations Act 2001, with consequential amendments to the Australian Securities and Investments Commission Act 2001.

The amendment details how non-listed public companies, including startups, can access CSEF from external investors and allows eligible unlisted public companies to raise up to AU$5 million in funds in a 12-month period from retail investors.

The Exposure Draft released on Tuesday further builds on the proposed legislation, with a focus on the risk an individual is entering into by providing funds via crowdfunding.

The draft regulations [PDF] says that equity crowdfunding is risky.

"Investment in these types of ventures is very speculative and carries high risks," the document says. "You may lose your entire investment, and you must be in a position to bear this risk without undue hardship."

"Even if the company is successful, the value of your investment and any return on the investment could be reduced if the company issues more shares.

"Your investment is unlikely to be liquid. This means you are unlikely to be able to sell your shares quickly or at all if you need the money or decide that this investment is not right for you."

In addition to the risk warning, the draft regulations provide further instruction to crowdsourced equity funding intermediaries.

It was initially proposed that intermediaries, or "gate-keepers", are required to hold an Australian financial services licence that expressly authorises the licensee to provide a crowdfunding service. The draft regulations requests the gate-keeper's obligations extend further to help minimise the risk investors are opening themselves up to.

The draft regulations say that an intermediary must check the company making the offer is a public company limited by shares; has its principal place of business in Australia; a majority of directors who are ordinarily resident in Australia; has less than five million in gross assets, consolidated with its related parties; has less than five million in annual revenue, consolidated with its related parties; is not a listed corporation and none of its related parties is a listed corporation; and does not have a substantial purpose of investing in securities or interests in other entities or schemes, and none of its related parties have such a purpose.

"There are rules for handling your money," the document says. "However, if your money is handled inappropriately or the person operating this platform becomes insolvent, you may have difficulty recovering your money."

Under the proposed CSEF framework, in order for a company to be registered or remain registered as a proprietary company, a company must have no more than 50 non-employee shareholders with any breaches to the guidelines resulting in the possible conversion of the company by the Australian Securities and Investments Commission (ASIC) to a public company.

Publicly registered companies will now have a five-year exemption from standard rules so that it can access crowdsourced funds, providing it completes a crowdsourced funding round of less than AU$1 million.

In August, the government issued a consultation paper that outlined the draft crowdsourcing legislative framework and discussed the issues that would arise in any crowdfunding model for proprietary companies, and the potential democratisation of the venture capital model.

When submitting the proposed CSEF Bill to parliament earlier this month, Assistant Minister to the Treasurer Alex Hawke said that 50-plus public comment submissions were received from the consultation paper.

The latest draft regulations are open to comment until January 29, 2016.

On the same day the government released its proposed crowdfunding legislation, the Labor party called for a parliamentary inquiry after accusing the government of intentionally waiting until the last day of parliament for the year to sneak in legislation.

The opposition said requests were made to the government a fortnight prior to the legislation's release that asked for an urgent briefing regarding the framework. Labor also said the government rescheduled the briefing with Treasury officials, and did not disclose the legislation was slated for introduction hours later.

As part of the National Science and Innovation Agenda that was also released this month, the federal government increased the early investment capital from AU$100 million to AU$200 million. Additionally, it introduced a 20 percent non-refundable investment tax offset capped at AU$200,000 per investor per year; a 10-year capital gains tax exemption; and a reduction in bankruptcy default from three years to one.

The crowdsourced equity funding initiative was originally announced as part of the federal government's 2015-16 budget. Over the next four years, ASIC will receive AU$7.8 million to implement and monitor a regulatory framework to facilitate the use of crowdfunding.

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