In brief
Written by Associate Katherine-Anne Waldron & Lawyer Simone Kaser
The Government has finally begun the process of implementing its policy on crowd-sourced equity funding (CSEF) by introducing a Bill and releasing draft exposure regulations late last year, which envisage the establishment of a CSEF regime in Australia. The Bill has been referred to the Senate Economics Legislation Committee who are expected to report later this month.
Who will be eligible to make a CSEF offer?
Only unlisted public companies whose primary place of business and the majority of whose directors reside in Australia will be able to make offers under the CSEF regime. Proprietary companies wishing to make a CSEF offer will need to become public companies. Most startups and emerging businesses have traditionally avoided becoming public companies because of the additional governance and reporting requirements that such companies are required to comply with.
Companies that successfully complete a CSEF offer within 12 months of becoming a public company may be eligible for exemptions from some of these requirements for up to five years, making the regime somewhat less onerous.
Companies wishing to make a CSEF offer will also need to satisfy an assets and turnover test, which requires them to have less than $5 million in gross assets and less than $5 million in consolidated annual revenue.
CSEF fundraising caps
Under the proposed CSEF framework, eligible companies will be able to raise up to $5 million through CSEF in a 12-month period, subject to the following limitation: 'Mum and Dad' investors will be limited to investing up to $10,000 per offer in a 12-month period. (In the case of start ups, it very well might in fact be the mums and dads providing the capital.) The $5 million cap does not include any funds raised from sophisticated or professional investors.
Reducing compliance costs and disclosure requirements
CSEF offers will require the preparation of a specific CSEF offer document. The contents of a CSEF offer document will be prescribed by the regulations and, in line with disclosure documents prepared under Chapter 6D of the Corporations Act and product disclosure statements in Chapter 7, must be clear, concise and effective. And like the PDS regime in Chapter 7, the content requirements are prescriptive. A CSEF offer document will have to contain:
- the prescribed risk warning – up front;
- information about the offering company;
- information about the offer itself; and
- information about investor rights.
A CSEF offer document will be defective if it contains a misleading or deceptive statement, omits any item which is required to be included under the regulations, or where new circumstances have arisen since the publication of the document and which would have required disclosure if they had occurred prior to publication.
While there are parallels between the information to be included in specific CSEF offer documents and the information to be included in prospectuses, the CSEF regime will reduce some of the barriers to fundraising faced by startups and emerging businesses. Eligible companies raising capital through CSEF will have lower compliance costs than other public companies, such as exemptions from disclosing entity rules and the requirement to hold an annual general meeting. These exemptions will be available for up to five years, provided that the company has not raised more than $1 million through a CSEF offer.
Gatekeepers – CSEF intermediary obligations in relation to CSEF offer documents
Each CSEF offer must be made through a single investment platform operated by a CSEF intermediary. CSEF intermediaries must hold an Australian financial services licence that authorises the provision of a 'crowd-funding service'. There is currently no such authorisation available from ASIC.
A CSEF intermediary will have significant 'gatekeeper' obligations under the proposed framework. For example, CSEF intermediaries are required to conduct prescribed checks on a company making a CSEF offer which include confirming:
- the identity of the company, its directors (current and proposed) and other officers and managers;
- the company's eligibility to make an offer under the CSEF regime; and
- the CSEF offer document satisfies the minimum content requirements set out in the regulations and is worded in a clear, concise and effective manner.
These checks are not intended to be a simple tick-box exercise and CSEF intermediaries must ensure that their checks are done to a reasonable standard. To be considered a reasonable standard, the CSEF intermediary must use reliable, independent documentation to satisfy itself in respect of the various items. If such information is not available, the CSEF intermediary is entitled to rely on information provided by the company itself.
In addition to their diligence obligations, CSEF intermediaries must:
- notify the company if they become aware that the CSEF offer document is defective;
- not publish (or continue to publish) a CSEF offer document where the CSEF offer document is defective and the CSEF intermediary is aware that it is defective; and
- suspend or close an offer where the CSEF intermediary is aware that the CSEF offer document is defective.
CSEF intermediaries can also be liable for loss or damage caused by an offer of securities under a defective CSEF offer document where the CSEF intermediary knew that it was defective.
Given these obligations and the consequences for failing to comply – a failure by the CSEF intermediary to comply with its obligations will be an offence punishable by fines and up to five years' jail, licensees putting their hands up to become a CSEF intermediary might prove hard to find.
Watch this space
Under the proposed regime, CSEF offers are only for the issue, and not the sale, of shares and therefore the regime will only help to establish a primary market for CSEF securities. The Bill envisages that the Minister will have the power to reduce the requirements on financial markets and settlement facility operators in connection with CSEF securities in order to enable the licensing of secondary trading markets for CSEF securities. At this point there is no information about how this might be done – so watch this space!
The Government has previously considered permitting private companies to utilise CSEF to raise capital, provided that their total number of shareholders remained below the 50 shareholder limit; however, it appears that this is no longer on the table and private companies will continue to be required to raise capital under the existing regime.
Submissions in relation to the Bill and the draft exposure regulations have recently closed, and the Senate Economics Legislation Committee is due to report later this month.