Is crowdfunding the solution to your funding problems?
Crowdfunding is a relatively new source of equity funding that is showing significant results for both issuers, and investors the world over. Many small Australian businesses have been anticipating the long-awaited amendments to the Corporations Act. These changes will remove the current barriers prohibiting SMEs from issuing shares to the public or engaging in any fundraising that would require them to issue a prospectus.
We have some good news, some bad news and some almost good news.
First, the good news..
The good news is that late last year the government enacted the Corporations Amendment (Crowd Sourced Funding) Act 2017 (“CSF”). The CSF enables an “eligible CSF company” to raise up to $5 million in equity funding in a 12-month period.
But the bad news is..
An ‘eligible CSF company’ is defined as an unlisted public company limited by shares. To facilitate companies wanting to go public and take advantage of the new CSF provisions, a five-year exemption period from some of the more onerous requirements of public companies has been introduced. These include exemptions from the need to hold an annual AGM, produce audited financial reports or provide an annual report to shareholders.
The need to reduce the regulatory burdens is being balanced against shareholder interests, with some of the obligations designed to protect investors remaining in place. These include a maximum investment amount by a retail, or non-sophisticated investor, of up to $10,000 per year.
Other eligibility requirements for public companies include:
- The company must be registered in Australia and have its primary place of business in Australia;
- It, and its related entities, are not an investment vehicle;
- It, together with its related entities, have less than $25 million worth of gross assets; and
- it, together with its related entities, must have less than $25 million gross annual turnover.
The process to raise equity through crowdfunding requires the company to engage a registered CSF intermediary. The intermediary will assist with the preparation and publication of the Offer documents, vet and match investors with companies and facilitate the transfer of funds and share certificates.
While companies are not required to issue a full prospectus, they will still be required to issue Offer documents. In addition to investor risks and warnings, the Offer document must contain:
- Information about the company such as its name, ACN and registered business address.
- The activities and nature of the business
- The structure of the company, including the debt/equity structure
- Financial records and consolidated financial statements
- Information about the directors of the company, including their skills, experience, criminal and solvency history.
- What shares are on offer and what rights will be attached to them
- The minimum and maximum amount the company seeks to raise; and
- How the company intends to use the funds, including whether they will be paid to any director, shareholder or related entity with more than 20% shares in the offering company;
- Details of investor rights, such as the cooling off period.
So what about the ‘almost good’ news?
The almost good news is that another Bill has been introduced to parliament to enable proprietary companies to Crowdfund. This is a step in the right direction because the passage of the Corporations Amendment (Crowd Sourced Funding) Act 2017 took well over 12 months.
The question for proprietary companies who are waiting to crowdfund is whether to take advantage of the reduced regulatory burdens and convert to a public company now, or wait for the passage of the new legislation through parliament?
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.