Crowd Sourced Equity Funding- Soon to become a reality for Australia
Australia’s government has devised a Bill relating to crowdsourced funding that is aimed at addressing the above issues by establishing a CSF regime to encourage investment in innovative ideas, while providing a level of protection for retail investors.
By Victoria Dryden, Lawyer at Sophie Grace Legal, Sydney, Australia
After a slow, start crowd sourced equity funding (“crowd sourced funding”) in Australia is set to become a reality. The Corporations Amendment (Crowd-Sourced Funding) Bill 2016 (“the Bill”) was introduced into Australian Parliament in November 2016.
On 8 February 2017 the Bill, having passed through the House of Representatives, was introduced to the Senate. The Bill has now had its first and second readings in the Senate.
On 1 December 2016 the Bill was referred to the Senate Economics Legislation Committee (“the Committee”) for further investigation. The Senate adjourned further consideration of the Bill until the Committee tabled its report; this was scheduled to occur on 13 February 2017. The Committee did not table their report on this date and further debate or consideration of the Bill has not taken place.
Parliament has risen and will not be in session again until 20 March 2017. When the Senate sits in March we expect the Committee’s report to be tabled and the Bill to be considered in further detail.
What is crowd sourced funding?
Crowd-sourced funding (“CSF”) is a way of raising funds from a large number of investors. It is emerging as a popular way to fund innovative business ideas. The attractiveness of CSF arises in part because it addresses two financial investment issues. The first issue being that the current regulatory regime makes it difficult for small businesses and start-ups to access affordable finance options.
The second issue is that retail investors don’t often have access to early-stage investment opportunities.
CSF addresses these issues because it generally involves a large number of investors making small financial contributions. The fact that small sums can be invested into different projects opens the door for retail investors.
However as start-up businesses and small businesses tend to be largely illiquid, there is a concern that this type of investment is risky for retail investors. A lack of liquidity makes it difficult for investors to exit their investment.
The Bill is aimed at addressing the above issues by establishing a CSF regime to encourage investment in innovative ideas, while providing a level of protection for retail investors.
What businesses will be eligible for crowd sourced funding under the Bill?
The basic requirements to use a CSF scheme are:
• The company must be an unlisted public company limited by shares with Australia as its principal place of business;
• a company can only raise $5 million through crowd-sourced equity funding per year;
• an intermediary must hold an AFSL expressly authorising them to provide crowd-sourced equity funding; and
• an investor may only invest $10,000 per “issuer” per year, being the legal entity that develops registers and sells securities to finance its operations.
How does the current Bill differ from the 2015 version?
During 2016 the Treasury consulted with the financial services industry on the Bill and made the following changes:
• Gross Assets and Revenue
The 2015 version of the Bill only allowed companies that had less than $5m in both gross assets and consolidated annual revenue to be eligible for a CSF Scheme. The new Bill has increased this limit to $25m. This widens the classes of business that will be eligible to utilise the scheme.
• Cooling Off Period
To increase certainty for issuers about the funds raised using crowd sourced funding the cooling off period has been reduced from 5 days to 48 hours.
• Public company
A company must be a public company to use a CSF scheme. This has been criticised as prohibitively costly for small start-ups. In response to this, the current Bill allows some exemptions from governance and reporting requirements for 5 years for companies that convert to a public company in order to access crowd sourced funding. Commentators still see this as being a too complicated and costly for many small start-ups. It remains to be seen how this will affect the take-up of the regime by small businesses.
Where to from here?
The Treasury has been instructed by the Government to develop a framework that extends CSF to proprietary companies in the near future. This is likely to be by the introduction of subsequent legislation. The Treasurer noted this would be effected through the introduction of further legislation.
We expect the Senate Economics Legislation Committee to table their report when Parliament is in session in late March. This is likely to be followed by further debate and consideration by the Senate before the Bill is voted into law.
We will continue to update you as the Bill moves through the Senate.