Part V: Proprietary Companies Enter the Crowd-Sourced Funding Realm
Monday, 29 October 2018 | By Grant Holley
This is the fifth part of a blog series about crowd-sourced equity funding and recent legislative changes. This part discusses crowd-sourced funding by proprietary companies. (To read the first part of this blog series, click here; to read the second part, click here; to read the third part, click here; to read the fourth part, click here.)
On 12 September, Parliament passed the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (‘the Bill’). The new provisions commenced on 19 October 2018, extending the availability of crowd-sourced funding (‘CSF’) opportunities to proprietary companies. Until then, CSF had only been available to public companies, following the Corporations Amendment (Crowd-sourced Funding) Act 2017. The Bill’s amendments come as welcome news to proprietary companies, which make up the vast majority of registered companies in Australia.
In brief, CSF allows companies to raise money through multiple funders who each pledge a relatively small amount of funds. This method of fundraising is particularly useful for start-up companies, or in relation to innovative products that remain largely untested in the market. For further information on CSF and public companies, please refer to our previous update.
Eligibility of Proprietary Companies
Proprietary companies must comply with a number of requirements in order to be eligible for CSF schemes. These requirements broadly mirror those for public companies. Amongst other obligations, proprietary companies must:
While proprietary companies typically cannot have more than 50 non-employee shareholders, the Bill carves out an exception for the purposes of CSF offers. Any shareholder connected with a CSF offer will not count as a shareholder for the purpose of calculating the 50 person limit. This amendment is integral in providing CSF access to proprietary companies that would otherwise be forced to restructure. While proprietary companies may be poised to take advantage of the Bill, access to CSF comes with a number of stringent obligations.
- have at least two directors;
- have their principal place of business within Australia; and
- have less than $25 million in gross assets and annual revenue.
In order to gain access to CSF, the Bill requires that proprietary companies comply with a number of onerous obligations. They include amongst them:
Proprietary companies with more than 50 members would typically be subject to the Corporations Act’s takeover rules. However, the Bill specifically exempts proprietary companies from these rules as long as they provide a minimum level of protection for investors in relation to exit events.
- the preparation of annual financial and directors’ reports in accordance with accounting standards;
- additional reporting requirements with regards to the company register;
- obligations to notify ASIC in relation to CSF share issuance or cancellations;
- audit requirements for companies that raises $3 million or more via CSF;
- capping total CSF investment at $5 million per year, and $10,000 per investor; and
- compliance with the Corporations Act’s related party transaction rules.
The Bill has substantial potential for proprietary companies, especially those with innovative products who may otherwise not be able to raise sufficient capital. These companies will be able to take advantage of CSF without restructuring to an unlisted public company. Moreover, from the investor point of view, CSF in proprietary companies will allow passionate laypersons to more easily invest in the causes they love.
Some parties have speculated that CSF poses a greater risk to investors, due to the nature of the companies seeking funding, and the projects being funded. These ventures are often speculative and untested, with greater risks of fraud, insolvency, or volatility of investment value. That being said, the added obligations and requirements on proprietary companies discussed above hope to militate against these risks.
CSF for proprietary companies may be particularly impactful in relation to funding Fintech start-ups, for example, in relation to new cryptocurrencies. However, as this is still a developing area of investment, and the law, be on the lookout for further regulatory changes.
If you would like to know more or have any questions about CSF funding and proprietary companies, please do not hesitate to contact our Financial Services Team.
Authors: Grant Holley (Partner), Jared Mintz (Law Clerk), and Hannah MacPherson (Law Clerk).