The crowd-sourced funding (CSF) regime has recently been amended to expand its application to proprietary companies. The CSF regime was established to facilitate access to fundraising for small businesses and start-ups which can often have difficulty accessing traditional public fundraising methods. However, the CSF regime was initially only accessible to unlisted public companies, which:
- limited its scope and potential to more mature businesses who would be able to meet the higher governance and reporting requirements for public companies required under the Corporations Act 2001 (Cth); and
- made it difficult for small businesses and start-ups, which are often proprietary companies, to access this method of funding as it would require introducing a public company to their structure either by conversion or top-hatting.
The regime was recently amended to permit eligible proprietary companies to participate, with some additional protections for investors being introduced over the ordinary regime for proprietary companies by the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 (Cth). In line with this change, ASIC has released its new Regulatory Guide 261 “Crowd-sourced funding: Guide for companies” and Regulatory Guide 262 “Crowd-sourced funding: Guide for intermediaries” setting out ASIC’s expectations for companies seeking to crowd source capital and the platforms which facilitate those raisings respectively.
A high-level snapshot of the features of the CSF regime before and after the extension to proprietary companies to date is summarised in the table below.
|Company type and additional obligations||Only unlisted public companies had access to the CSF regime (proprietary companies had to convert to public companies or top-hat with a public company if they wanted to access the regime).||Proprietary companies who meet certain eligibility criteria (including at least two directors) have access to the CSF regime. At least one of the Company’s directors must ordinarily reside in Australia. CSF shareholders will not count towards the 50-member proprietary company limit.|
|Company size||Unlisted public companies with less than $25 million in consolidated gross assets and annual revenue may seek access to the regime.||$25 million assets/revenue threshold is now extended to proprietary companies.|
|Capital raising||Companies can raise up to $5 million in any 12-month period through an AFS licensed intermediary by offering fully paid ordinary shares.||$5 million capital raising limit is now extended to proprietary companies.|
|Additional obligations to retail investors||Companies must ensure that retail clients only invest up to $10,000 (which is a “per company” limit) in any 12-month period and are provided with a 5-day cooling-off period within which to withdraw an application.||The obligations to retail investors are extended to proprietary companies.|
|Offer disclosure requirements||A CSF offer document must contain certain risk warnings and information about the offeror, the offer and investor rights, be presented in a clear, concise and effective manner and not be misleading or deceptive. It must be displayed on the platform (such as a website) of the CSF intermediary who holds an Australian financial services (AFS) licence authorising the intermediary to provide a CSF service.||The offer document disclosure requirements extend to proprietary companies, with the addition of extra content requirements such as the inclusion of a description of the key provisions of any shareholders agreement and any right of directors to refuse to register a transfer of shares.|
|Reporting obligations||Companies had to have their financial reports audited where more than $1 million was raised from CSF offers.||Companies now require audited financial reports where more than $3 million is raised from CSF offers. Proprietary companies which raise capital under the CSF regime are required to prepare annual financial and directors’ reports.|
|Interaction with takeover and related party transaction provisions of the Corporations Act||Public companies are subject to the Corporations Act Chapter 2E related party provisions and the takeovers rules in Chapter 6.||Proprietary and public companies which raise capital under the CSF regime are subject to the Corporations Act Chapter 2E related party provisions. Proprietary companies with CSF shareholders are exempt from the takeovers rules in Chapter 6 of the Corporations Act if conditions prescribed in the Corporations Regulations (namely that the company’s constitution includes exit mechanics which protect those CSF shareholders) are satisfied. Public companies remain subject to the Chapter 6 takeover rules.|
The expansion of the CSF regime to proprietary companies should be a welcome addition for small business and start-ups who either find it difficult to access capital through loans, angel or venture capital investors and other traditional means, or who just prefer to raise capital from the public without the need for a full-blown prospectus.