Australia: Crowd-sourced funding regime ready to roll for Australian corporate investment

What you need to know

• After months of anticipation, speculation and some controversy, the Turnbull government's crowd-sourced funding (CSF) regime for unlisted public companies came into effect today, 29 September 2017.
• With ASIC now accepting applications for potential CSF intermediary platforms, eligible companies will soon be able to raise up to $5 million in any 12 month period, with retail investors able to invest up to $10,000 per offer per year, in an unlimited number of businesses.
• Those contemplating participation in the new CSF regime should consider the regulatory guidance released by ASIC, offering further detail on a range of issues including eligibility requirements for companies and obligations for CSF platforms.

Key elements of the CSF regime

The Corporations Amendment (Crowd-sourced Funding) Act 2017 enables certain unlisted public companies to raise capital from retail investors. We outlined the key elements of the CSF regime in our previous update following the passage of the legislation through the Senate. In brief:

• Unlisted public companies that have less than $25 million of gross assets and less than $25 million annual turnover, and that are not subsidiaries of or related to a listed entity, will be eligible to raise funds under the CSF regime.
  
  
• To participate in the CSF regime, an eligible company must:
  
  
• • enter into a hosting arrangement with a licensed CSF platform, where CSF platforms undertake due diligence on issuer companies and provide risk warnings to investors
    
    
  • prepare a CSF offer document, which has a reduced level of disclosure compared to a prospectus, intended to reduce the cost and time burdens of traditional equity fundraising.
• A participating company may make offers of ordinary shares to raise up to $5 million in any 12 month period.
• Retail investors can invest up to $10,000 per offer per year, in an unlimited number of eligible companies and have the benefit of a five day cooling-off period.

Considering getting involved in CSF?

For those interested in potentially participating in a CSF offer, ASIC has published the following regulatory guides:

• For companies considering making a CSF offer – Regulatory Guide 261: Crowd sourced funding for public companies,¹ which explains when a public company may make an offer of shares under the CSF regime in the Corporations Act 2001 (Cth) and what obligations, including disclosure obligations, apply to the offer. This guide also explains the temporary concessions available to public companies making CSF offers from certain reporting, audit and corporate governance requirements that would usually apply to public companies. ASIC has also helpfully provided a template offer document to assist companies with their preparation, available here.
  
  
• For CSF intermediary platforms – Regulatory Guide 262: Crowd-sourced funding: Guide for intermediaries,² which explains the ongoing obligations that apply to CSF intermediaries as Australian Financial Service Licence (AFSL) licensees, including the specific obligations that apply under the CSF regime in the Corporations Act. Applications for a licence to operate as a CSF platform can now be made via ASIC's electronic 'e-Licensing' portal. ASIC has also issued an information sheet on the application process, available from the ASIC website.³

On the day before the CSF regime's commencement, ASIC also released guidance on Initial Coin Offerings (ICOs) which have gained popularity as another form of raising capital. In Information Sheet 225 published on 28 September 2017, ASIC notes that although ICOs are sometimes referred to as a form of crowd funding, they are not the same as the CSF regulated by the new regime that commenced on 29 September and care should be taken to ensure the public is not misled about the application of the CSF laws to an ICO.⁴

CSF is an exciting development in Australia's fundraising landscape as it will offer many companies an alternative source of capital, allowing them to tap directly into the retail equity market without the pressures and cost of offering securities under a prospectus. The current regime may be particularly attractive to start-ups or early stage companies in innovative sectors like biotechnology, where they might seek to 'top up' funds raised from other sources on their path to commercialisation. The commencement of the CSF regime in Australia should help to reduce the competitive disadvantage such companies have faced compared to their counterparts in other countries like the United Kingdom, the United States and New Zealand, which have had comparable regimes in place for some time now.

However, going down a CSF path may not be right for everyone. The long-term effects of bringing on board a large number of shareholders may raise challenges for future fundraising rounds and also impact on any future sale, merger or exit plans. Companies contemplating CSF therefore need to consider this option in the context of their longer-term business plan and balance the longer-term risks against the potential short-term rewards.

What next?

ASIC has indicated that it will process licence applications from CSF platforms as a matter of priority, to accelerate the practical commencement of the CSF regime. We can therefore expect to see CSF platforms up and running, as well as CSF offers being made, in the coming weeks and months.

Additionally, the government has introduced a bill to extend the CSF regime to proprietary companies, following heavy criticism from industry players that the new regime would only benefit a small proportion of Australian business (ie 'small', unlisted public companies). The bill was introduced on 14 September 2017 and is intended to extend the CSF regime to proprietary companies, meaning they will no longer have to convert to a public company in order to raise capital via CSF offers.

Footnotes

¹ Available on the ASIC website at http://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-261-crowd-sourced-funding-guide-for-public-companies/.

² Available on the ASIC website at http://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-262-crowd-sourced-funding-guide-for-intermediaries/.

³ Available on the ASIC website at http://asic.gov.au/regulatory-resources/financial-services/crowd-sourced-funding/applying-to-be-a-crowd-sourced-funding-intermediary/.

⁴ Available on the ASIC website at http://asic.gov.au/regulatory-resources/digital-transformation/initial-coin-offerings/#trading.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories