New laws have recently been passed (and further amendments proposed in the recent Federal Budget) that allow companies to raise capital via the rapidly growing method of crowd funding. For those that are not aware, crowd funding is a process whereby small amounts of capital are injected by a large number of people. The process of designing and implementing the new crowd sourced funding measures began in December 2014 and result in the new measures currently only applying to unlisted public companies with wider application proposed in the recent Federal Budget.
The crowd funding amendments to the Corporations Act 2001 work to disapply various provisions that require prospectuses and other existing disclosure documents to be prepared that are ordinarily required when raising capital. The changes also seek to also disapply to crowd funding, the provisions which deal with prohibitions, liabilities and remedies relating to offers of securities. This in turn will allow it much easier to source capital via crowd sourced funding without the costly, time consuming and complex requirements of information disclosure normally required for corporate capital raising.
However it is not all good news as the changes, at this stage, only apply to capped unlisted public companies. This means the current rules do not apply to the majority of the small to medium enterprise market that are generally private companies – Federal Budget proposals in this regard are most welcome.
The requirements for making a crowd sourced funding offer are:
- the offer must be for shares;
- the company making the offer must be an ‘eligible company’;
- the shares must satisfy the eligibility conditions specified in the regulations;
- the offer cannot raise more than $5 million in any 12 month period; and
- the company must not be an ‘investment company’.
An ‘eligible company’ is:
- an unlisted public company
- the company must have assets and annual revenue of less than $25 million
- neither the company, nor any related party, is a listed corporation
Like everything, documentation will still be required, however, information required to be disclosed will be much less onerous than for mainstream corporate capital raising.
Some good news for the private companies came out of the 2017-18 Federal Budget with the Government releasing draft legislation for public consultation extending the new measures to include private companies. The Budget proposals remove the need for private companies to transition to the public company type, reducing cost and compliance burdens.
Additional requirements are proposed to be introduced to protect investors that will require private companies undertaking crowd funding arrangements to:
- have a minimum of two directors;
- report in accordance with accounting standards;
- meet audit requirements;
- limit related party transactions; and
- have minimum shareholder rights to participate in exit events.
The measures to expand the crowd sourced funding to include private companies is some time away. If you can’t wait for the Budget announcement to become law but are looking to take advantage of the reduced compliance for crowd funding ensure you consider the additional compliance requirements of the unlisted public company structure.
Buyers be warned: the above amendments to the Corporations Act 2001 does not change the ATO’s view of how such arrangements are treated for income tax purposes. In the next instalment I will explore what the ATO view is of such funding arrangements.
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