The Corporations Amendment (Crowd-Sourced Funding) Act 2017 (Cth) (CSF Act) has amended the Corporations Act 2001 (Cth) (Corporations Act) to include a new crowd-sourced funding regime as contained in Pt 6D.3A. The regime allows certain offers of securities for issue, in small unlisted companies, to comply with reduced disclosure obligations instead of those contained within Pt 6D.2 Corporations Act. The purpose of the CSF Act is to facilitate flexible and low cost access to capital for small to medium sized unlisted public companies by reducing the regulatory requirements when making public offers.
The regime provides a structure for companies who can meet eligibility criteria to make eligible offers to multiple investors in return for relatively low cash investments using a registered intermediary. Although there are a several types of crowd-sourced funding, such as non-investment crowd-sourced funding, we will focus on equity-based crowd-sourced funding.
For a company to be able to take advantage of the regime, at a particular time it must:
- be a public company limited by shares, and
- have its principal place of business in Australia, and
- have a majority of its company directors (not counting alternate directors) ordinarily residing in Australia, and
- not be (nor a related party of the company be) a listed company, and
- not have (nor a related party of the company have) a substantial purpose of investing in securities and/or schemes, and
- have consolidated gross assets and consolidated annual revenue not exceeding $25 million in the preceding 12 months before the eligibility assessment takes place.
If a company cannot meet these requirements, it will still be able to offer its securities using a prospectus or other disclosure document or to investors who do not require a prospectus or other disclosure documents under Pt 6D Corporations Act.
The CFS Act permits eligible companies to make eligible offers by entering into a hosting arrangement with an intermediary who holds an Australian Financial Service Licence. The intermediary will require the company to prepare offer documentation (with lodgement with ASIC not required) before opening the offer for shares through publication of the offer on the intermediary’s platform. A platform includes a website or other electronic facility.
Under the CFS Act, intermediaries will perform a number of roles in relation to crowd-sourcing. They will be responsible for reviewing the contents and accuracy of the offer document, conducting identity checks on the company and all directors and senior management and determining whether the intermediary has any reason to believe the company or its directors/senior management have knowingly engaged in misleading or deceptive conduct. Once the intermediary has carried out its required due diligence, it will publish the offer on its platform and manage all communications and subscriptions until the offer closes. The offer closes when the offer is either complete by securing at least the minimum number of subscription required, or it is unsuccessful (because it has failed to reach the minimum number of subscriptions required) and the intermediary refunds the application money to investors.
For an offer to be eligible it must meet the following conditions:
- the offer must be for the issue of securities (primary issues and not transfers or sales of issued shares), and
- the company making the offer must be an eligible company, and
- the offer must be for a prescribed class of shares (currently the shares must be ordinary fully paid), and
- the offer must not result in more than $5 million being raised in any 12-month period through eligible offers or certain other offers, and
- the funds cannot be used for investing in other entities or schemes.
Under the CFS Act, investor protection is paramount. Before publishing an eligible offer, the company and intermediary must include a statement directing potential investors to the offer document and a general risk warning before the potential investors apply for shares under the offer. Failing to include this statement will prohibit the company and intermediary from publishing the offer. The company and intermediary must also ensure that all information and advertising must not be misleading or deceptive.
Other investor protections exist such as:
- investor cap: retail investors will be limited to investing a maximum of $10,000 through this regime to any one company in a 12-month period
- unconditional cooling-off: retail investors will have up to five days after making an application for the shares to withdraw their offer using the prescribed method
- general risk warning: retail investors are to be given a general risk warning statement that is also to be displayed on the platform at all times
- risk acknowledgment: retail investors will also be required to acknowledge that they have read and understood the general risk warning before applying for shares.
Although eligible companies benefit from the reduced regulatory burden, retail investor protection is still considered to be vital and severe penalties apply for breaching certain aspects of the CFS Act.