Australian government extends crowdfunding regime to proprietary companies
The Australian federal government has announced that it is introducing legislation to the Parliament on Thursday to extend the crowd-sourced funding (CSF) regime to proprietary companies.
Under the Corporations Amendment (Crowd-Sourced Funding) Act 2017 -- coming into effect on September 29, 2017 -- unlisted public and proprietary 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.
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.
Eligible companies can raise up to AU$5 million in any 12-month period through licensed crowdfunding platforms under the new CSF regime.
The legislative reform introduced into parliament on Thursday means 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.
"Instead founders will be able to crowdfund while retaining the greater flexibility of the proprietary model," Australian Treasurer Scott Morrison said in a statement.
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.
"As our first submission outlined, the former AU$1 million threshold would have potentially made crowdfunding comparatively more expensive than business lending and venture capital raising, and in doing so significantly reduced its appeal as a fundraising option," said FinTech Australia CEO Danielle Szetho, adding that a full audit would cost companies up to AU$20,000.
"The requirement for a full audit to be undertaken for fundraising above $3 million is a more balanced approach which makes audit costs comparatively less expensive to the amount of money raised, while reflecting the need for greater disclosure at this funding level."
The crowdfunding framework re-introduced into Parliament last November had been criticised for locking out startups and small businesses. The government subsequently commenced consultation in May this year to extend the CSF regime.
Dr Marina Nehme, senior lecturer at UNSW Faculty of Law, previously noted that making the CSF regime accessible only to public companies excludes "over 99.7 percent of companies" in Australia.
"Such a reality defeats the purpose for introducing legislation to facilitate CSF as only a very small minority of companies will be able to raise funds through this mode of finance," Nehme said, according a report tabled by the Senate Economics Legislation Committee in February.
Viv Stewart, new CEO of crowdfunding platform VentureCrowd, told ZDNet on Thursday that equity crowdfunding is "an integral part of the funding stack for many successful startups, and the limitations imposed by the initial legislation were ill-considered and unnecessary".
"Allowing proprietary to raise funds in this manner will unlock potential innovation in the Australian economy, as well as giving retail investors the ability to profit from early-stage investment opportunities," Stewart added.
Sunny Yu, COO of VentureCrowd, previously suggested that the CSF regime be broadened to encompass other types of securities beyond ordinary shares, and to contemplate other forms of crowdfunding such as aggregation through managed investment schemes.
"We believe [this] has significant benefits over the proposed regime. VentureCrowd has successfully crowdfunded AU$20 million to date using this model," Yu told ZDNet in February.
Earlier this week, the Australian Securities and Investments Commission (ASIC) announced that it will begin accepting licence applications from crowdfunding platform operators (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.
These requirements include that the CSF offer documents published on the intermediary's platform contain information in a "clear, concise, and effective" manner.
The financial regulator had previously suggested in its proposed guide that the offer documents contain information in five key areas: The nature of the company's business, including its business model and strategy; the main risks facing the company's business; the capital structure of the company; the financial information of the company; and the use of funds raised under the CSF offer.
Additionally, the CSF applicant must demonstrate that it has in place adequate arrangements for the management of conflicts of interest and that it checks the identity of an offering company and its directors, including whether the company's directors have "knowingly engaged in misleading or deceptive conduct".
The CSF intermediary must also ensure a communication facility is available for investors to communicate in relation to the CSF offer and make inquiries of the offering company and the intermediary, and that they deal with client money in accordance with the Corporations Act.
The proposed guidance for intermediaries, to be finalised by September 29, states that crowdfunding platform operators are responsible for administering protection measures and play "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".
Updated 1:55pm AEST September 14, 2017: Added comments from VentureCrowd CEO.