16 August 2019
Earlier this year, the first report on Australia’s crowd-sourced funding (CSF) sector was released by the Australian Securities and Investment Commission (ASIC). The release of the report follows the expansion of Australia’s CSF regime to include eligible proprietary companies in late 2018.
CSF involves companies raising small amounts of capital from the public using an authorised platform. Anyone considering engaging in CSF should seek advice early, be aware of how the regime can assist with simpler equity financing and understand its limits.
The current CSF market in Australia has a large number of authorised CSF intermediaries compared to the number and value of CSF offers that have been made to date. As capital-driven businesses and funders become more familiar with CSF as a viable funding source, this may change.
Further, whether or not an increase in CSF activity occurs in the coming years may also depend on any action that ASIC proactively takes to facilitate a more engaging environment for CSF proponents and investors.
The current CSF regime was introduced in Australia in 2017 through changes to the Corporations Act 2001 (Cth) (Corporations Act). The purpose of the regime is to provide an alternative, lower cost fundraising option for start-ups and small-to-medium-sized companies.
The CSF regime in Australia was originally only available to unlisted public companies who met certain eligibility requirements (e.g. companies with less than A$25 million in gross assets and annual revenue). However, the CSF regime was expanded in late 2018 by the amendments to the Corporations Act to include proprietary companies.
Proprietary companies are the most common form of company in Australia and have lower levels of regulation than public companies (e.g. number of directors, financial reporting) but also limitations on public fundraising and the number of shareholders.
Given the extension of the regime to proprietary companies, the amendments removed the temporary corporate governance concessions in the Corporations Act for proprietary companies that convert to or register as public companies to access the CSF regime.
In order for a proprietary company to be eligible to access the CSF regime, it must have:
If a proprietary company satisfies the above, it may use the CSF regime to raise up to A$10,000 from each private investor, and A$5 million in total, over any 12-month period.
The corporate governance and reporting obligations under the CSF regime
In order to protect small investors, the CSF regime imposes additional rules applicable only to proprietary companies that have one or more CSF shareholders:
Further, the company will have additional obligations to notify ASIC of certain changes to its share register and structure. For example, this includes a change to the share structure of the company where the cancellation of shares has resulted in the company ceasing to have any CSF shareholders.
Because CSF is recognised as a financial service under the Corporations Act, an eligible CSF company must use an authorised CSF intermediary in order to raise funds under the CSF regime.
During the 2017–2018 financial year, ASIC authorised eight CSF intermediaries via either new or amended Australian financial services (AFS) licenses. A further eight CSF intermediaries were authorised in the 2018–2019 financial year.
A CSF intermediary operates an online platform through which a company offers CSF shares to investors. CSF platforms have additional features such as a communication facility for investors to ask questions about the CSF offer.
In addition to the general obligations the intermediary has as an AFS licensee, there are specific ‘gatekeeper obligations’, which include performing checks on a prospective offering company, the CSF offer and the CSF offer document.
In a survey conducted by ASIC which focused on the period between 11 January to 30 June 2018 (noting that this period does not include CSF used by proprietary companies), the key findings included:
ASIC has noted its concerns about the large number of CSF intermediaries in comparison to the number of CSF offers and the amount of capital actually raised, in particular that New Zealand experienced greater participation in the first year of their CSF regime (1 August 2014 to 31 July 2015) than the first year of Australia’s CSF regime.
However, the New Zealand regime has a significantly wider scope and does not impose a cap on the size of company that can access the regime. Despite these concerns, it is expected that the expansion of the CSF regime to proprietary companies will support existing intermediaries and new entrants.
ASIC has also said it will continue to monitor activity and assess any risk indicators that emerge in the CSF industry and, where appropriate, will provide advice to the Government about any necessary changes.
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The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.