The Crowdfunding Bill: changing equity financing for start-ups

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On 3 December 2015, the Corporations Amendment (Crowd-sourced Funding) Bill 2015 was introduced into Parliament. The Bill aims to promote crowd-sourced funding or CSF for emerging small, unlisted public companies and provide increased investment opportunities for small-scale retail investors. 

The Bill attempts to achieve this by implementing a two-pronged approach – removing existing barriers to CSF under the Corporations Act and promoting investment by increasing investor protections.

Removing existing barriers to CSF 
Currently, the Corporations Act restricts the ability of small businesses and start-ups to raise equity via CSF as section 45A prohibits proprietary companies from exceeding 50 non-employee shareholders. Whilst such prescriptive limits are not imposed on public companies, they are also limited due to strict corporate governance and reporting requirements. This means that small emerging businesses often choose to remain proprietary despite the shareholder limitations.

However, the Bill attempts to remedy this and encourage businesses to become public by restricting the regulatory burden. By inserting the new Part 6D.3A—Crowd-sourced Funding into the existing Chapter 6D, the Bill makes eligible businesses largely exempt from the disclosure document requirements under Part 6D.2 and the prohibitions, liabilities and remedies relating to offers of security as set out in Part 6D.3.

Furthermore, eligible companies will also be exempt from obligations to hold an Annual General Meeting, may exercise an option to only provide financial reports to shareholders online and will not be required to appoint an auditor until more than $1 million has been raised from CSF offers. 

Criteria for “eligible CSF companies” 
In order to qualify for the exemptions granted under the Bill, the company must meet all of the following criteria:

the principal place of business must be in Australia;
the majority of the company’s directors must originally reside in Australia;
the consolidated gross assets must not exceed $5 million;
the annual revenue must not exceed $5 million;
it must not be listed; and
it must not be an investment company.

Increasing investor protections 
While there are general protections that apply to all investors which aim to prevent excessive risk and promote informed decision making, the Bill also introduces additional protection mechanisms for retail investors. These protections include requirements such as:

all retail investors are limited to investing $10,000 per issuer per year;
there is a compulsory and unconditional five day cooling-off period in which an individual may withdraw their offer;
the issuer company and any related intermediaries are prohibited from offering financial assistance to an investor; and
a CSF application can only be accepted if it is accompanied by a signed risk acknowledgement statement.

By implementing these protections, the Bill aims to shelter small retail-investors from the high risks associated with investing in start-ups whilst also providing businesses with an alternative means of obtaining affordable finance. 

Bill status 
On 3 December 2015, the Bill was referred to the Senate Economics Legislation Committee for inquiry and review. The Committee is due to release a report by 22 February 2016.

Authors: Darren Pereira & Georgia Appleby

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