The Australian investment community has welcomed the passing of new laws by the Federal Parliament in late March 2017, which will allow corporations in Australia to undertake crowd-sourced equity funding. Corporate Lawyer Nadia Sabaini provides an update on crowd funding by start-ups in Australia and the effect of the new laws.
Crowd Funding by Startups
Crowd funding has become a popular manner for raising capital by startups worldwide. There are numerous providers locally and abroad that offer platforms for conducting crowd-sourced fund raising. What is on offer in crowd funding campaigns varies greatly. Some are purely charitable, others offer future products and equity.
With respect to offers of equity, or crowd-sourced equity funding (CSF), the current laws created uncertainty as the Corporations Act 2001 did not deal with CSF explicitly. The new laws aim to provide a much needed regulatory framework and facilitate CSF in Australia. However, they are limited in scope.
Crowd Funding by unlisted public companies under the new laws
From commencement of the new laws, expected in late 2017, unlisted public companies will be free to undertake crowd funding under the following conditions:
1. The offer must be an offer of securities in an unlisted public company with consolidated gross assets below $25 million and a consolidated annual revenue below $25 million;
2. There is a maximum subscription amount of $5 million in any 12 month period;
3. Retail clients may invest a maximum of $10,000 per offer within a 12 month period and will be entitled to a cooling off period of 5 business days;
4. The offer must be made via not more than one crowd funding platform managed by a provider (intermediatory) holding an Australian Financial Services Licence that expressly authorises it to conduct CSF;
5. An offer document prepared in accordance with the requirements of the legislation must be published on the platform and all applications and monies must be handled by the intermediatory only; and
6. The offer must be closed within 3 months of the time it is made unless an earlier date is stipulated in the offer or the maximum subscription amount is reached.
There are additional restrictions specified in the legislation that need to be considered. Failure to comply may give rise to civil and/or criminal penalties.
There will be corporate governance and reporting concessions offered for a period of 5 years from incorporation of, or conversion to, a public company that intends to raise funds via CSF. In some cases it may be a viable option for startups to form as public companies. However, one would not expect that a public company structure will be suitable for all startups.
Crowd funding by private companies and for other purposes
Unfortunately, as the new laws do not cater for private companies and other entities, the situation remains unchanged for a large number of startups. Additionally, the laws do not clarify the position in relation to other types of offers, namely those that do not involve the issue of securities.
Startups that are not in position to take advantage of the new laws need to be aware of the current law applicable to the making of public offers of products and services. In particular, the Corporations Act requirements for delivery of what may be regarded as financial products and services and making offers of securities, which in most cases require the compliance with a disclosure process, including the issue of a prospectus.
Whilst it may be possible to crowd fund in compliance with the existing constraints, careful consideration needs to be given to a number of matters including what is proposed to be offered, how it is proposed to be offered, the amount of funding required and the intended audience. Attention needs to be given to the choice of crowd funding provider, as many popular crowd funding websites are not locally operated and cannot be presumed to meet local regulatory requirements and standards, including from a monetary and data security point of view.
As commencement of a business enterprise is often the most crucial, it is recommended for startups to seek the advices of a trusted professional adviser in considering fund raising options available.