Crowd Sourced Funding
New Law Passed
The Government on n 20 March 2017 enacted legislation allowing companies to raise funds by crowd sourced funding. The law amended the Corporations Act 2001 (Cth).
What is CSF?
Crowd Source Funding (CSF) is the practice of using:
• internet platforms;
• mail-order subscriptions;
• benefit events; or
• other methods;
to find supporters, or investors to raise funds for a project or business.
Types of CSF
There are four main types of CSF. Each type uses a different strategy to attract funding. Each type has different business risks and tax consequences for the parties involved.
Donation CSF is used by:
1. charities to raise funds; or
2. people 'just' looking to try their luck to raise funds without any commitment to the donors.
There is no financial return to the contributor.
In Donation CSF, the contributor makes a donation, without receiving anything in return. All the contributor may get for their 'donation' is a thank you.
Reward CSF is when the business provides a reward (goods, services or rights) to a person in return for their payment. For example, the person pays for a computer game. The game has has not yet developed. It may never be written, or perform as anticipated. The price paid now, is usually at a discount of the expected price when the good is developed. Often, there are different levels or types of reward, according to:
1. the level of contribution and
2. whether the fundraising reaches the prescribed levels.
Equity CSF is when a person makes an investment for an equity interest in the business or venture. Eg, a share in a company will provide the person with certain rights. Usually, the rights attached to shares, including the right to:
• take part in future profits (dividends);
• vote at shareholder meetings; and
• to the return of capital upon winding up.
Debt CSF is where a person lends money to the business, on the promise of receiving interest and repayment of principal on the loan. The form of debt can be either, secured or not secured.
Equity CSF under the new law
The law only applies to equity CSF. The other forms are still permitted. They are not regulated by the Corporations Act fund raising provisions.
Under the Equity CSF regime people can only receive a share in unlisted public company. They can invest up to $10,000 in the company. The CSF must offered on a licensed CSF platform.
Eligible companies will be able to raise up to A$5 million a year this way.
If a proprietary company desires to raise funds through Equity CSF it can convert to a public company. On converting it will be exempt from certain compliance requirements imposed on public companies for a period of five years, such as:
• It is not required to hold an annual members’ general meeting for five years.
• It is only required to provide online financial reports to shareholders for a period of five years. Hard copies do not have to be sent out.
• It is not required to appoint an auditor unless and until the company raised over $1million.
Upon a company raising over $1 million:
1. It must appoint an auditor.
2. It must follow the obligation to make continuous disclosure as it will then be an “unlisted disclosing entity”.
The law contains four safeguards to protect investors.
1) Regulation imposed on companies seeking capital from CSF
Eligible companies are able to raise A$5 million a year through Equity CSF. This is generous compared to other countries that have capped CSF at $2 million.
When raising capital by Equity CSF companies must produce a disclosure document. The form of disclosure document is not as onerous as others are under the Corporations Act.
An eligible company is one that is:
1. A public companies limited by shares;
2. Is not listed on any stock exchange;
3. Has a majority of Australian resident
directors on its board; and
4. Has less than A$25 million in gross assets and annual revenue.
The law a company from being an eligible company if it is:
1. a foreign company; or
2. if the company or any related parties are accessing CSF for the purpose of investment. The company must have a specific project or venture for the funds raised.
2) Regulation imposed on crowd-sourcing platforms
Equity CSF must be through licensed crowd sourcing platforms. The intermediary must have a financial services licence. The platform must adheree to a range of obligations: Such as, vetting the companies seeking capital through Equity CSF. This allows the intermediary to act as a gatekeeper, but compliance will be onerous.
3) Regulation imposed on investors
The law limits the amount investors can invest in each company to $10,000.
The investment is in new allotted shares issued by the company.
4) Cooling Off Period
Investors have a five working day cooling off period. Within the cooling-off period investors can withdraw their offers. Investors can do so without having give the company any reason.
Will the law work?
Critics of the law have said:
"The conditions make 99.7% of Australian companies ineligible and the lowered governance requirements that some companies may qualify for may not outweigh the costs of accessing CSF”.
While the statement is literally correct, it missing the point. Propriety companies that make up 99.7% of Australian companies can easily and with little cost convert to be unlisted public companies that will have access to the Equity CFS regime.
The current legislation is a step to closing the funding gap for small businesses and SMEs.
Going forward, CSF funding will play an increasingly important role in small businesses and SMEs. It will allow them to realise their ideas and ambitions. It is encouraging to see that the government is taking action to help grow small businesses and start-ups this
by Steven Brown