Prepared by Julia Winzar
As part of the 2017-2018 Budget, the Government has released draft legislation seeking to extend the existing crowd-sourced equity funding model for public companies (set to commence in September this year) to proprietary companies.
Crowd-sourced equity funding is a fundraising method that is generally offered online and allows a company to raise funds from a large number of individual investors who make small financial contributions in exchange for equity. Proprietary companies are currently not able to rely on this type of funding due to a cap of 50 non-employee shareholders. Under the proposed changes, shareholders that receive shares as part of a crowd-sourced equity funding offer (CSEF shareholder) will not be included in the 50 non-employee shareholder cap. However, proprietary companies need to be aware that if shares are later transferred from a CSEF shareholder to another person, the person to whom these shares have been transferred will need to be included in the 50 non-employee shareholder cap.
The key points to note are the proposed additional obligations that will apply to proprietary companies that want to make crowd-sourced equity funding offers. These include:
– Having a minimum of two directors at the time of making an offer and while the company still has CSEF shareholders.
– Maintaining additional information in the company’s register regarding the CSEF shares and shareholders.
– Preparing annual financial and directors’ reports in accordance with accounting standards. This obligation will apply in any financial year that the company has any CSEF shareholders.
– If the company raises more than $1M from crowd-sourced equity funding, the company will be required to have its financial statements audited.
– Being subject to existing restrictions on related party transactions which will prohibit the company from entering into related party transactions unless they are on “arm’s length” terms or with shareholder approval.
– Being required to include in its constitution minimum shareholder rights to participate in exit events.
These additional obligations will lead to additional costs for proprietary companies. However, these costs will hopefully be less significant than the costs involved in transitioning to a public company structure, as would be required under the existing model.
Additional obligations will also apply to intermediaries (such as platform providers) who facilitate CSEF offers, including the requirement to carry out various ‘gate keeper’ duties, and depending on how the intermediary conducts its platform, hold an Australian Financial Services Licence and potentially an Australian Market Licence. We will publish more details on these obligations separately.
We should also expect some guidance in this area soon from ASIC who is intending to release a regulatory guide in coming months.