A BIG STEP FORWARD FOR CROWD-SOURCED EQUITY FUNDING
Earlier this year, GRT Lawyers reported¹ that the Corporations and Markets Advisory Committee (CAMAC) had released a report on crowd-based equity funding (CSEF). With the abolition of the CAMAC under the recent Federal budget, the responsibilities have now been assumed by the Treasury and on 8 December 2014, the Federal Government released a consultation paper on developing a potential regulatory framework for crowd-sourced equity funding (CSEF) titled Crowd-sourced Equity Funding Discussion Paper (Paper). The Government’s push to make the pioneering funding model viable in Australia is part of a wider driver to promote innovation. The Paper seeks stakeholder feedback on different methods for creating a regulatory framework, based on the CAMAC report released earlier this year that would allow small equity investments into a company from a large number of investors or “crowds”. The consultation process is intended to ensure that the Government strikes the right balance between supporting investment, reducing compliance costs, and maintain an appropriate level of investor protection.
Key details and models proposed by the Paper
The Paper outlines a number of potential policy options but has made it clear that the Government is not limiting itself to any particular model. Feedback will assist the Government in developing its preferred approach to CSEF, in particular as to whether roadblocks to CSEF are driven by legal impediments, investor demand or other issue.
The key options outlined in the Paper include:
a.) a model based on the CAMAC report: the implementation of a CSEF model based on CAMAC’s recommendations which focused on proposed changes to the Corporations Act 2001 (Cth). Amongst other things, CAMAC recommended:
i. CSEF issuers be required to be public companies with relief from compliance costs and disclosure requirements available to exempt public companies (by creating a special class of exempt public companies);
ii. limitation of the regime to certain small enterprises that have not already raised funds under existing public offer arrangements, and only to one class of fully paid ordinary shares;
iii. a cap of $2 million on the amount that can be raised through CSEF in any 12 month period (which would include any funds raised under the small scale offering exemption);
iv. requirements for intermediaries to have an AFSL, to undertake limited due diligence, provide risk warnings to investors, and to prohibit offering investment advice and on lending to CSEF investors;
v. intermediaries prohibited from being remunerated according to the amount of funds raised by the issuer or in the securities or other interest of the issuer; and
vi. investment caps of $2,500 per investor per 12 month period for any particular CSEF issuer and $10,000 per investor per 12 month period in total CSEF investment.
b.) Regulatory framework based on the New Zealand model: the implementation of the New Zealand model that came into force in April 2014. The model has broad similarities to CAMAC’s proposed scheme. However, differences with CAMAC’s recommended framework include:
i. no CSEF specific exemptions from public company compliance costs;
ii. the regime not being specifically limited to small enterprises;
iii. minimum disclosure requirements investment caps being voluntary, with issuers and intermediaries to have arrangements in place to provide greater disclosure where there are no high voluntary investor caps or the issuer is seeking to raise a significant amount of funds; and
iv. no restriction on the intermediaries’ fee structures, although fees paid by the issuer must be disclosed.
c.) Status quo: no change to the current requirements. This would mean:
i. a limit of 50 non-employee shareholders for proprietary companies and prohibitions on making public offers of equity;
ii. financial reporting and corporate governance requirements for public companies that are more onerous than those that apply to proprietary companies;
iii. a requirement to provide a disclosure document when making public offers of equity; and
iv. the need for an intermediary to hold an AFSL.
Submissions on the Paper close on 6 February 2015.
We are pleased to see that CSEF is still high on the Government’s priorities despite the abolition of CAMAC, as we believe it to be an important step forward to ensure that Australia remains a viable jurisdiction for early-stage companies. While the devil is in the detail of the implementation (in particular as to balancing retail investor protection), entrepreneurs and start-ups are a crucial part of economic growth and the additional avenue for raising capital will be welcome.
GRT Lawyers is proposing to make a submission in an effort to influence the Government’s policy on CSEF. If you would like to be part of the submission or would like to contribute your experiences and/or opinions, please do not hesitate to contact us.
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