In August 2015, we prepared a note on Treasury’s proposed crowd-sourced equity funding model: BRIEFING NOTE: Crowdfunding – consultation paper.
Yesterday, the Australian Federal Government passed a bill to permit crowd sourced funding (CSF). This new funding model is expected to provide a “low documentation” route to raise equity capital for start-up companies seeking seed capital and companies with gross assets and annual revenue of less than $25 million to raise additional funding. In reliance of the CSF exception (and the other small scale exceptions to a prospectus under the Corporations Act), issuers will be able to raise up to $5 million, in aggregate, any 12-month period.
The CSF bill (which is yet to be assented) can be found here: Corporations Amendment (Crowd-sourced Funding Bill 2016. This note outlines the features of the CSF regime which is expected to come into effect in September 2017 (6 months after assent). In the interim, regulations regarding the disclosure requirements and ASIC guidance on the AFS licensing requirements are anticipated. We will keep you updated of further developments.
CSF offers will take place online
CSF offers will operate online via a funding platform operated by an intermediary holding a specific CSF authorisation under an Australian financial services licence (AFSL). Participants will be able to obtain a short-form disclosure document from the platform and to apply online for equity securities under the relevant offer.
A company will be eligible to issue equity securities under a CSF offer if they satisfy the following conditions:
- the company is a public company limited by shares (this will require conversion if the company is a proprietary company);
- the majority of the company’s directors are Australian;
- the company’s principal place of business is in Australia;
- the company has consolidated gross assets of less than $25 million in value;
- the company’s annual revenue is less than $25 million;
- the company is not a listed entity, or related in any way to a listed entity; and
- the company does not operate with a substantial purpose of investing securities or interest in other entities or schemes, nor does any related party.
Additionally, in any 12-month period, an issuer will be limited to raising $5 million, in aggregate, under the CSF exemption and any other small-scale offering exemption contained in the Corporations Act.
Under the CSF regime, an issuer will not be required to prepare a prospectus. Instead, an issuer will need to prepare a CSF offer document which complies with specific regulations (that are yet to be issued). We expect these regulations to be available prior to September 2017. At this stage, it is unclear what the content requirements of a CSF offer document will be but we speculate that the level of disclosure required will be more than a wholesale information memorandum but less than a prospectus for an IPO. It is noted that the CSF regime contains defences against criminal liability for defective disclosure. As such, issuers will need to conduct a due diligence process to avail themselves of these defences. However, we note that the thresholds to establish the defences are lower than the corresponding thresholds that must be satisfied to obtain the equivalent prospectus defences. This should made the CSF due diligence process more simpler than a traditional prospectus due diligence process.
The CSF regime requires an ASFL holder to act as an intermediary. The CSF intermediary’s role is to host the CSF offer document on an online platform and to manage and process applications for equity securities under the offer. A CSF intermediary will be required to hold a specific CSF authorisation under their AFSL.
ASIC is expected to release guidance on how an existing ASFL holder can vary their licence to obtain a CSF authorisation. Noting that retail investors can participate in a CSF offer by acquiring up to $10,000 of securities, we speculate that CSF intermediaries will be required to hold a retail AFSL.
For further information, please contact please contact Anand Sundaraj or Alison Mackey.
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