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    Crowd-Sourced Equity Funding – Is it Actually Going to Work?

    What is Crowd-Sourced Equity Funding (CSEF)?

    CSEF is a fundraising approach for start-ups and innovative companies looking to raise funds from a large number of investors (i.e the Crowd) through online channels.

    On 3 December 2015, the Turnbull government introduced into the House of Representatives as part of its “innovation package”, new CSEF laws under the Corporations Amendment (Crowd-sourced Funding) Bill 2015. These legislative changes are aimed at supporting the growth of the Australian economy by allowing both start-ups and established small businesses to tap into retail investors (often referred to as “mum and dad investors”) for equity financing.

    On 1 March 2016, the Senate Economics Legislation Committee's Report on the Bill was tabled, recommending that the Bill be passed by the Senate. Given the opposition has indicated it will not block the Bill, it is likely to pass quickly and be enacted in the near future. 

    Is your business eligible to seek CSEF?

    To be eligible to seek CSEF, you must satisfy the following:

    1. You must be an unlisted public company

    You must be an unlisted public company limited by shares – the legislation does not apply to private companies.

    2. Australia must be your principal place of business

    Your company must have its principal place of business and the majority of its directors located in Australia.

    3. Your company must meet the gross assets and turnover cap

    The gross assets and consolidated annual revenue of your company (and any related party) must not exceed $5mil respectively.

    How is a CSEF offer made?

    Any CSEF offer must be made through the publishing of a CSEF offer document on a CSEF intermediary platform, which must hold an Australian Financial Services License.

    The offer document must include information about your company and its business, the CSEF offer, and how the proceeds raised will be used.

    Eligible companies may only have one CSEF offer open at any one time.

    So what are the pros and cons?

    The pros:

    1. Regulatory concessions to ease the public company burden

    In recognition of the fact the legislation applies only to unlisted public companies, the reforms include a number of temporary (up to five years) concessions and exemptions for companies that decide to go public to access equity crowdfunding.

    These concessions include the removal of the requirement to hold an annual general meeting,[1] the ability to provide financial reports to shareholders online, [2] and an exemption from having to appoint an auditor or have audited financial reports.[3]

    2. Higher caps than overseas models

    The amount your business can raise through CSEF is capped at $5mil over any 12-month period. Although this does seem like an unnecessary limitation, it must be noted that this is higher than the cap set under equivalent models in the US and New Zealand.

    Each investor is also limited to investing $10,000 per company per year, and will be required to complete a “risk acknowledgement statement” prior to investing. While investors will be able to invest an unlimited sum in CSEF, this cap has been designed as a safeguard against exposing themselves to excessive risks.  

    3. Access to funding that may otherwise be unobtainable

    Traditional funding sources such as banks and venture capital funds may be inaccessible to many start-ups, due to their inherent risk profiles and lack of early-stage revenue. On the other hand, CSEF allows companies to target retail investors directly, widening the pool of funds that may be accessed.

    The cons:

    1. Private companies not eligible

    Under the legislation, only unlisted public companies – a structure that allows companies to sell shares but not to list them on a stock exchange – are eligible to make an offer for CSEF.

    For this reason, many have questioned the efficacy of the legislation, given most start-ups adopt a private company model due to the fewer regulatory restrictions that are imposed under the Corporations Act.

    2. Cannot aggregate investors

    Crowdfunding platforms are also restricted from aggregating individual investments into a single vehicle (such as a unit trust), that then invests in the start-up.

    This means that start-ups may be burdened with a large number of different investors (potentially hundreds), making CSEF an unworkable option for companies lacking the resources required to deal with the administration costs associated with multiple investments.

    So should you be considering CSEF?

    The legislation is by no means perfect and has drawn heavy criticism for requiring companies to be public to be eligible to make an offer for CSEF.

    However, the Bill does recognise the added administrative burden that comes with registering as a public company, which can be seen through the various corporate governance concessions it allows. This will provide some relief to those companies seeking CSEF, making it a more viable option than would otherwise be the case. Moreover, these concessions will likely prove a major value-add to those businesses already leaning towards adopting a public structure.

    For this reason, CSEF may still prove a suitable mechanism for raising capital for your business. If you are interested in finding out whether CSEF is right for you, contact us on (03) 6221 4800.

    Brenton Worth  

    [1] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 2 item 2, ss 250N(5).

    [2] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 2, items 6 & 7, ss 314(1), 314(1AF).

    [3] Corporations Amendment (Crowd-sourced Funding) Bill 2015 sch 2, item 2, ss 301(5).