1. What Is Crowd Sourced Funding? 2. Stage I of the CSF Legislation Journey in Australia 3. Stage II: Corporations Amendment (Crowd Sourced Funding for Proprietary Companies) Bill 2018 4. Understanding Small Proprietary Companies in Australia 5. Who Is a CSF Shareholder? 6. Defining an Eligible CSF Company 7. What Is the Issuer Cap in CSF? 8. Fundraising Beyond a CSF Offer: What You Need to Know 9. Annual Financial Reports and Directors’ Reports for CSF Companies 10. Shareholder Directions for Small Proprietary Companies 11. Understanding the CSF Audit Threshold 12. Primary Issue Only: What It Means for CSF 13. How to Make a CSF Offer: A Step-by-Step Guide 14. Corporate Governance Concessions for CSF Companies 15. CSF Intermediaries: Financial Services Licensing Requirements 16. What Is an Australian Market Licence (AML)? 17. The Obligations of a CSF Intermediary 18. Stages of a CSF Offer: From Start to Finish 19. Who Are CSF Investors? 20. General Investor Protections in CSF 21. Investor Protections for Retail Clients in CSF 22. When Is a CSF Document Defective? 23. Obligations Regarding Defective CSF Documents 24. Investor Rights Concerning Defective CSF Documents 25. Criminal and Civil Liability in CSF 26. The Role of ASIC in CSF 27. When to Seek Professional Advice for CSF
Mih Chowdhury Accounting
Mobile Number 0414495057
Email Address : info@mihcaccounting.com.au
CROWD SOURCED FUNDING
EQUITY RAISING OVERVIEW
Paper 003-055
CONTENTS
Page
1. What Is Crowd Sourced Funding? 3
2. Stage I of the CSF Legislation Journey in Australia 3
3. Stage 2 - Corporations Amendment (Crowd Sourced Funding for Proprietary Companies) Bill 2018 4
4. Small Proprietary Company 4
5. CSF Shareholder 5
6. Eligible CSF Company 5
7. Issuer Cap 5
8. Fundraising in Addition to a CSF Offer 6
9. Annual Financial Reports and Directors’ Report 6
10. Small Proprietary Companies – Shareholder Directions 6
11. CSF Audit Threshold 6
12. Primary Issue Only 6
13. Making a CSF Offer 7
14. Corporate Governance Concessions 7
15. CSF Intermediaries – Financial Services Licensing Requirements 8
16. Australian Market Licence (AML) 8
17. The Obligation of a CSF Intermediary 8
18. Stages of a CSF Offer 9
19. CSF Investors 9
20. General Investor Protections 10
21. Investor Protections For “Retail Clients” Only 10
22. When is a CSF Document Defective? 11
23. Obligations in Relation to Defective Documents 11
24. Investor Rights – Defective Documents 11
25. Criminal and Civil Liability 11
26. ASIC 11
27. Professional Advice 12
CROWD SOURCED FUNDING
EQUITY RAISING OVERVIEW
Paper 003-055
This paper covers the journey from an enquiry to the preparation of the Crowd Sourced Funding Offer Document.
1. What Is Crowd Sourced Funding?
Crowd Sourced Funding (CSF) is a type of corporate capital raising whereby a company seeks funds, in small amounts, from a large number of individual investors in return for securities in the company. CSF involves:
• Companies (issuers) that propose to raise funds;
• Intermediaries that host the platform through which offers are made to crowd investors;
• Crowd investors.
CSF has developed over the last six years in other countries as an online phenomenon, utilised particularly by small start-up companies seeking seed capital, as a complement to more established financing options involving professional investors, such as angel investing and venture capital.
However, the legislative framework in Australia presented barriers to CSF. Proprietary companies have been limited to 50 non-employee shareholders and are prohibited from making public offers of securities, while public companies are subject to governance, reporting and disclosure requirements that may be too onerous for a small business.
2. Stage I of the CSF Legislation Journey in Australia
The legislation known as the Corporations Amendment (Crowd-Sourced Funding) Bill 2017 was passed by the Australian Parliament in March 2017.
The legislation authorised capital raising utilising Crowd Sourced Funding Equity Raising to commence from September 2017.
The Australian Security Investment Commission (ASIC) finalised the appointment of the initial group of Crowd Sourced Funding Intermediaries in early January 2018 thus enabling Crowd Sourced Funding Equity Raising to commence.
The Bill provided for the addition of a new Part 6D.3A to the fundraising provisions of the Corporations Act. The new Part provided for a disclosure regime that can be used instead of the existing fundraising disclosure requirements for certain offers of securities for issue in small unlisted companies.
In Stage I only unlisted public companies were able to use CSF.
However proprietary limited companies could convert to an unlisted public company so that they were able to utilise this legislation. During 2017 the government announced proposals to introduce amendments relating to crowd sourced funding equity raising which would enable private companies to raise capital from the public without having to convert to an unlisted public company.
3. Stage 2 - Corporations Amendment (Crowd Sourced Funding for Proprietary Companies) Bill 2018
The legislation which was originally introduced into parliament as a 2017 Bill was passed by Parliament on 12 September 2018. The Act commences on the 28th day after the Act receives the Royal Assent. This Paper summarises the ongoing position that applies under the new legislation.
Royal Assent was granted on 21 September 2018 – the amendments operate from 19 October 2018.
4. Small Proprietary Company
1. A small proprietary company needs to be limited by shares or be an unlimited company with a share capital.
2. A small proprietary company needs to:
(a) have no more than fifty shareholders, although employee shareholders and shareholders connected with CSF offers do not count for this purpose; and
(b) not do anything to require disclosure to investors under Chapter 6D – except for:
An offer of its shares to:
(i) existing shareholders of the company; or
(ii) employees of the company or a subsidiary of the company; or
(iii) a section 708 of securities that are of the same class as those offered under the CSF Offer; or
(iii) a CSF Offer.
3. A CSF shareholder (or an entity that has acquired a security of the company that was originally issued to another entity pursuant to a CSF Offer by the company) is not counted as a shareholder of the proprietary company.
4. A proprietary company must not engage in any activity that would require disclosure to investors.
5. Small Proprietary Limited Company
Counted Not Counted
Ordinary shareholders Up to 50
Employee shareholders
s708 Capital Raising (included in 50)
6. CSF Company
Counted Not Counted
Ordinary shareholders Up to 50
s708 Capital Raising (included in 50)
Employee shareholders
CSF shareholders
Shareholders who owns shares originally issued as a CSF shareholder shares
5. CSF Shareholder
CSF shareholder of a proprietary company means an entity that holds one or more securities of the company due to being issued with the securities pursuant to a CSF Offer by the company.
6. Eligible CSF Company
1. At the time of the offer, the company making the offer must be an ‘eligible CSF company’, which is a company that satisfies the following conditions:
• it is a public company limited by shares;
• or the company is a small proprietary company (section 45A(2) that:
- has at least 2 directors
- with its principal place of business and a majority of its directors in Australia;
• the value of the consolidated gross assets of it and its related parties must be less than $25M at the time it is determining its eligibility to crowd fund (the “assets test”) (a related party, for the purpose of the CSF provisions, is a related body corporate or an entity controlled by a person who controls the company or an associate of that person);
• the consolidated annual revenue of it and its related parties must be less than $25M (the “turnover test”);
• neither it nor a related party is a listed corporation (as listed corporations generally have access to other forms of equity raisings such as rights issues and share purchase plans);
• neither the company, nor any related party of the company is included in an official list of a financial market operated outside this jurisdiction;
• neither the company, nor any related party has the intention of utilising the funds sought to be raised by the offer to issue a credit facility to the company or a related party of the company.
• The Explanatory Memorandum tabled in Parliament by the Minister for Small Business and Assistant Treasurer relating to the “Corporations Amendment (Crowd-Sourced Funding) Bill 2015 commented as follows:
“The company must not intend the funds sought under the offer to be used by the company or a related party of the company to any extent to invest in securities or interests in other entities or managed investment schemes.”
2. A CSF company only has to have an audit if it has raised a total of $3M or more.
7. Issuer Cap
The offer must comply with an “issuer cap” of $5M in any twelve month period, calculated taking into account:
• the amount sought to be raised under the current offer;
• all amounts raised from previous CSF Offers made within the twelve month period preceding the current offer;
• all amounts raised from small scale personal offers exempt from disclosure pursuant to s.708(1) within the twelve month period preceding the current offer;
• all amounts raised from certain offers made through the holder of an Australian Financial Services Licence (AFSL) and exempt from disclosure pursuant to s.708(10), within the twelve month period preceding the current offer.
8. Fundraising in Addition to a CSF Offer
In addition to the $5M that can be raised under the CSF regime, a company can raise funds from:
• sophisticated investors
• professional investors
Fundraising from these persons does not require a disclosure document under the current fundraising disclosure provisions in Chapter 6D of the Corporations Act (s.708(, 708(11)).
9. Annual Financial Reports and Directors’ Report
A Financial Report and a Directors’ Report must be prepared for each financial year by (section 292):
• all public companies
• a small proprietary company has to prepare the Financial Report and Directors’ Report only if (section 292 (2)):
(i) it is directed to do so under section 293 (refer item 10);
(ii) it has one or more crowd sourced funding shareholders at any time during the financial year (section 292 (2) (c).
10. Small Proprietary Companies – Shareholder Directions
Shareholders with at least 5% of the votes in a small proprietary company may give the company a direction to (section 293):
(a) prepare a Financial Report and Directors’ Report for a financial year; and
(b) send them to all shareholders.
The direction may specify all or any of the following:
(a) that the Financial Report does not have to comply with some or all of the accounting standards;
(b) that a Directors’ Report or a part of that Report need not be prepared;
(c) that the Financial Report is to be audited.
11. CSF Audit Threshold
The Audit Threshold for a Crowd Sourced Funding Company is $3 Million.
12. Primary Issue Only
The offer must be for a primary issue of securities of the company making the offer: it cannot be for secondary sale of those securities.
13. Making a CSF Offer
An issuer must, for each CSF Offer:
• prepare a CSF Offer Document containing clear, concise and effective information, as specified in the regulations (for instance, information about the company and its business, the securities on offer, how the proceeds from the offer will be used);
• in the CSF Offer Document, the following information needs to be shown:
- a description, or a summary, of the key provisions of the offering company’s constitution that deal with any rights and liabilities that attach to the securities in the issuing company (this information will be required from a public company as well as a small proprietary company that are seeking to raise Crowd Sourced Funding Equity Raising Capital);
• small proprietary companies that have one or more CSF shareholders are bound by the related party transactions rules contained in the Corporations Act as if the small proprietary company was a public company: (Section 738ZK);
• the related party transaction rules are designed to protect the interests of a proprietary company with one or more CS F shareholders as a whole, by requiring approval for giving financial benefits to related parties that could endanger those interests.
• obtain the consents of persons associated with the offer document;
• publish the offer document (including, or together with, the offer itself) on the platform of a single CSF Intermediary;
• have only one CSF Offer open at any one time;
• not have a CSF Offer open at the same time as a CSF Offer of a related party (this avoids circumvention of the issuer cap).
An issuer has the power to withdraw a CSF Offer at any time before the Offer is complete by notifying the Intermediary. Other stages of a CSF Offer are mostly under the control of the Intermediary. Refer to Section 15 and 17.
Issuers have particular responsibilities when a CSF Offer Document is found to be defective. Refer to Section 22.
The regulations also clarify that the description of the rights attaching to a company’s securities also covers rights and liabilities arising out of the company Constitution and Shareholders Agreements and there must be disclosure of any restrictions that apply to the company in relation to the off market transfer of shares, including any rights of the directors to refuse to register a transfer of shares in the company including where such a transfer would bridge the fifty shareholder cap.
The requirement to summarise the key terms of a company’s Constitution applies to both public and proprietary companies.
14. Corporate Governance Concessions
These concessions only apply to a public company or a proprietary company that converted to a public company and the required application was lodged before the “eligibility end day”.
“Eligibility end day” means the day, 28 days after the Royal Assent was given to Corporations Amendment (Crowd Sourced Funding for Proprietary Companies) Bill 2018 – 19 October 2018.
The legislation provides a CSF issuer with corporate governance concessions for five years from the date of registration as a public company if it:
• satisfies the CSF eligibility criteria at the time of registration as a new public company and at the end of the relevant financial year; and
• intends to crowd fund at the time it is registered; and
• completes a CSF Offer within twelve months of registration.
The corporate governance concessions are:
• an exemption from holding a physical Annual General Meeting;
• the option to provide financial reports to shareholders online only;
• not being required to have audited Financial Reports until more than $3M has been raised from CSF offers or other fundraising offers requiring disclosure.
15. CSF Intermediaries – Financial Services Licensing Requirements
A CSF Intermediary must hold an AFSL (Australian Financial Services Licence) to provide a crowd-funding service, which is a new category of financial services created under the Bill.
A person provides a crowd-funding service if:
• applications may be made to the person for the issue, by an issuer company, of securities pursuant to the offer;
• a CSF Offer Document relating to securities of a company is published on a platform operated by the person.
The crowd-funding service is provided to:
• the issuer (when the issuer enters into the hosting arrangement for the offer of securities with the Intermediary);
• potential investors who apply for CSF securities through the Intermediary’s platform (when the investors first use the Intermediary’s application facility to apply).
16. Australian Market Licence (AML)
In some circumstances, the operations of a CSF Intermediary may require it to hold an Australian Market Licence (AML).
17. The Obligation of a CSF Intermediary
The obligations of the Intermediary include:
• Gatekeeper obligations, which require the Intermediary to conduct certain checks (which are prescribed in the regulations) to a reasonable standard before publishing an issuer’s Offer Document on its platform and not to publish an offer if the Intermediary:
- is not satisfied about the identity of the company making the offer, or of any of the company’s directors or other officers;
- has reason to believe that any of the company’s directors or other officers are not of good fame or character;
- has reasons to believe that the company, or any of its directors or senior managers or officers, has knowingly engaged in misleading or deceptive conduct in relation to the offer, for instance, by providing misleading information in response to a post on the communications facility;
- has reason to believe that the offer is not eligible to be a CSF Offer (for instance, if it does not comply with the issuer cap);
• to have adequate arrangements, recorded in writing, to ensure that it complies with its gatekeeper obligations;
• to provide an application facility, reject applications not made via that facility (to ensure that applicant investors are aware of, and receive, the various investor protections) and not allow an application to be made while an Offer is suspended or when it has closed;
• to provide a communication facility to allow potential investors, the issuer and the Intermediary to communicate with each other about a particular CSF Offer. This facility should enable:
- investors to make and see posts relating to the offer and ask the issuer or the intermediary questions relating to the offer;
- the company or the Intermediary to make posts responding to questions and other posts (officers, agents and employees of the issuer or the Intermediary must disclose their status when making posts on the facility);
• to display prominently on the offer platform:
- the CSF risk warning (the terms of which, to be specified in the regulations, will include the potential risks associated with, and high failure rates of, start-ups and emerging companies);
- information on investors’ cooling-off rights (including the means by which investors can exercise these rights);
- fees charged to, and interests that the intermediary has or intends to take in, an issuer company;
• to comply with the prohibition on giving financial assistance to a retail client to purchase securities pursuant to the CSF Offer;
• to close or suspend the offer as required;
• to deal with application money appropriately.
The provision of a crowd-funding service includes all these Intermediary’s obligations. This wide meaning of ‘crowd-funding service’ will ensure that all the Intermediary’s activities will be subject to the general obligations of a licensee (s.912A), such as the obligation to provide the service ‘efficiently, honestly and fairly’.
Intermediaries have particular responsibilities when a CSF Offer Document is found to be defective. Refer to Section 22.
18. Stages of a CSF Offer
CSF Intermediaries play a key role in determining when CSF Offers are made, open, closed, suspended and complete.
The maximum duration for a CSF Offer is three months from the time the Offer was made. This maximum offer period ensures that the information contained in the CSF Offer Document remains current and is consistent with the notion of CSF as a simpler, faster way of raising funds with streamlined disclosure.
When an Offer is complete (that is, when the minimum subscription condition is met, disregarding any withdrawn applications), the Intermediary must pay the application money to the issuer following the issue of the securities. If the minimum subscription amount is not raised, the Intermediary must refund the application money to the applicants.
19. CSF Investors
CSF Investors must:
• make their applications in response to a CSF Offer via the Intermediary’s offer platform, to ensure that they have the various protections of the CSF regime (such as the communication facility, the risk warning and cooling-off rights);
• provide the application money via the Intermediary, to ensure that the money is handled according to the client money provisions and is subject to the CSF rules for when money is paid to the issuer and refunded to applicants.
20. General Investor Protections
Issuers and Intermediaries must comply with the stipulated advertising rules. For instance, an advertisement or publication about a CSF Offer must include a statement that a person should, in deciding whether to make an application under the offer, consider the CSF Offer Document and general CSF risk warning.
There is an exception from the advertising rules for publishers and the publication of certain reports and notices.
There is also an exception for statements made in good faith on the Intermediary’s communication facility. However, the onus is on the person making the statement to show that it is made in good faith.
Persons will be prevented from offering securities for issue or sale through an unsolicited meeting or telephone call (a practice known as “securities hawking”), regardless of whether the offer is identified as a CSF Offer.
ASIC will have “stop order powers” in relation to advertising and publications that are misleading or deceptive or that do not draw attention to the CSF Offer Document or the general CSF risk warning.
21. Investor Protections For “Retail Clients” Only
When providing a crowd-funding service to a person, the Intermediary must determine whether the person is a “retail client” (i.e. not a “sophisticated investor”), as retail clients have additional protection both under the current law (Financial Services Guide, access to dispute resolution and compensation arrangements) and under the CSF provisions.
The tests for determining whether an investor is a retail client are, for the most part, the same as under the current licensing provisions.
Additional protection applicable to retail clients only under the CSF provisions are:
• an investor cap of $10,000 per issuer via a particular Intermediary’s platform within a twelve month period (this amount is to be apportioned equally if there are joint applicants for securities);
• an unconditional ‘cooling off’ right for a retail investor to withdraw from a CSF Offer within five business days of making an application;
• a prohibition on the company and its related parties, and the CSF Intermediary and its associates, providing retail investors with the financial assistance to acquire securities under CSF Offers;
• the requirements for a CSF Intermediary to obtain a risk acknowledgment from a retail investor before accepting a CSF application from the investor.
Investors have particular rights when a CSF Offer Document is found to be defective. Refer to Section 22.
22. When is a CSF Document Defective?
A CSF Offer Document is defective where:
• it contains a misleading or deceptive statement;
• it omits information that is required to be included;
• since the document was published, a new circumstance has arisen that would have been required to be included if it had arisen before the document was published.
23. Obligations in Relation to Defective Documents
The following obligations arise when the relevant person becomes aware, while a CSF Offer is open, that the Offer Document was defective:
• the issuer must notify the Intermediary as soon as practicable;
• the Intermediary must:
- notify the issuer as soon as practicable;
- remove the Offer Document from the platform and either close or suspend the offer
• a person liable on the Offer Document must notify the issuer and the Intermediary as soon as practicable.
The issuer need not do anything other than notify the Intermediary: it has the option of providing a replacement or Supplementary Offer Document, but no obligation. The Intermediary is not obliged to publish a replacement or supplementary document, as the Intermediary’s gatekeeper obligations apply to these types of document in the same way as to the original Offer Document.
24. Investor Rights – Defective Documents
Prospective investors who have already applied for securities under the document will either:
• receive a supplementary or replacement Offer Document that corrects the defect and then have the right, for fourteen days, to withdraw their acceptance; or
• be refunded any application money paid as soon as practicable.
25. Criminal and Civil Liability
An issuer that offers securities under a defective CSF Offer Document is criminally liable if the relevant statement, omission or new circumstance is materially adverse from the point of view of an investor.
An Intermediary that publishes an Offer Document that it knows to be defective is criminally liable.
An investor can recover from various persons associated with a CSF Offer the amount of loss or damage suffered. The investor has six years from the day the cause of action arose to commence recovery proceedings.
26. ASIC
Unlike other disclosure documents, a CSF Offer Document will not need to be lodged with ASIC. However, ASIC will have “stop order powers” where a company offers securities under a defective CSF Offer Document.
27. Professional Advice
Please contact your accountant for further advice if you are interested in raising capital utilising Crowd Funding.
AN IMPORTANT MESSAGE
The forms and commentaries contained in this paper are provided as a guide only and should not form the sole basis for any advice in relation to the particular situation of any person without first obtaining proper professional advice.
Mih Accounting Accounting
Mobile Number 0414495057
Email Address : info@mihcaccounting.com.au