Corporate March 2017

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Australia's Crowd-Sourced Funding Bill Passes the Senate

In a NutshellThe Corporations Amendment (Crowd-sourced Funding) Bill 2016 passed the Senate on 20 March 2017, signalling theintroduction of a new framework aimed at opening up early-stage capital markets and creating new investmentopportunities.

Background

On Monday, 20 March 2017, after a lengthy 15 monthprocess, the Australian Senate passed the CorporationsAmendment (Crowd-sourced Funding) Bill 2016.

After an initial framework was first released by theCorporations and Markets Advisory Committee (CAMAC) ina September 2013 Discussion Paper, it was not untilDecember 2015 that the Commonwealth Governmentintroduced draft legislation in the form of the CorporationsAmendment (Crowd-sourced Funding) Bill 2015 (2015 Bill).Unfortunately however, the 2015 Bill lapsed at thedissolution of the Parliament in May 2016.

On 24 November 2016, almost one year after theintroduction of the 2015 Bill, Scott Morrison introduced theCorporations Amendment (Crowd-sourced Funding) Bill2016 (2016 Bill). After initially passing the House ofRepresentatives on 8 February 2017, the 2016 Bill has nowpassed the Senate and is awaiting royal assent.

As most provisions of the 2016 Bill are drafted to come intooperation 6 months after royal assent, it is likely that we willsee the introduction of the new CSF framework inSeptember this year.

What is Crowd-sourced Funding (CSF)?

Crowd-sourced Funding or CSF, as the name suggests,allows companies to raise capital through a large group ofinvestors (a ‘crowd’). In practice, this is typically achieved bya large number of investors contributing small amounts of

1 ASIC Consultation Paper 260, “Further measures to facilitate innovation in financial services’,June 2016, p 9.2 S Morrison (Treasurer), ‘Second reading speech: Corporations Amendment (Crowd-sourcedFunding) Bill 2016’, House of Representatives, Debates, 24 November 2016, p. 4305.

capital through an online platform, and in return receivingequity in the company.

CSF has risen to prominence recently as small or start-upcompanies often find it difficult to access traditional sourcesof finance. This ‘access to capital’ issue significantly inhibitsthese companies and has been recognised by ASIC as anissue of great importance.1

CSF provides an alternative source of early-stage capital forthese companies, and as such, could be a significant factorin reducing these current funding constraints for small andstart-ups companies.2

The Current Constraints

The 2016 Bill aims to alleviate a number of the currentrestrictions in the current regulatory regime that arepreventing the widespread adoption of CSF throughoutAustralia.

These current constraints include:

the 50 non-employee shareholder limit placed onproprietary companies;3

the prohibition on public offerings of securities byproprietary companies;4 and

the higher level corporate governance andreporting obligations imposed upon publiccompanies.5

3 Corporations Act 2001 (Cth) s 113(1).4 Ibid s 113(3).5 Ibid s 250N, ch 2M;

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The combination of these factors, amongst others, meansthat without the changes contained in the 2016 Bill, CSF iscurrently not possible in Australia.

The Proposed Regime

The 2016 Bill will implement the new CSF regime byintroducing a number of amendments to the CorporationsAct 2001. These amendments will effectively create threedistinct stakeholders groups, with each having differentobligations, restrictions and protections:

Eligible CSF companies CSF Intermediaries Investors

Eligible CSF Companies

In order for a company to be eligible to raise capital underthe CSF framework, the company must satisfy certaincriteria in order to be an ‘eligible CSF company’:

the company must be a public company with itsprinciple place of business located in Australia;

a majority of directors must ordinarily residein Australia;

the company must have less than $25 millionin consolidated gross assets and less than $25million consolidated annual revenue;

the company, or any related party must not belisted on the ASX or on any exchange; and

the company, or any related party must notoperate as an investment business. 6

A CSF Offer

If a company satisfies all of the above criteria, it is theneligible to conduct a ‘CSF offer’. An offer is eligible underthe 2016 Bill when the company conducting the offer is aneligible CSF company and the offer:

is for the issue of securities in the company; complies with the issuer cap; the funds raised are not intended to be used, to

any extent, for investment in other securitiesor schemes; and

complies with the regulations in terms of theclass of securities offered and any otherrequirement. 7

The Issuer Cap

One of the most important requirements of an eligible CSFOffer is the requirement that it complies with the ‘issuer cap’.For the purposes of the 2016 Bill, an offer complies with theissuer cap when the offer does not exceed $5 million8.

6 Corporations Amendment (Crowd-sourced Funding) Bill 2016 (Cth) sch 1 item 14 (Proposeds 738H).7 Ibid (Proposed s 738G(1)).8 Ibid (Proposed s 738G(2)(d)).9 Ibid (Proposed s 738G(2)(a)-(c)).10 Ibid (Proposed s 738C).11 Ibid sch 1 item 25 (Proposed s 766A(1)(ea)).

Importantly however, in addition to this offer, all amountsraised in the previous 12 months by the company, or arelated party, pursuant to:

a CSF Offer; or an offer for which disclosure was not required

under subsection 708(1) (‘small scaleofferings’ exemption) or (10) (‘financialservices licensee’ exemption),

will also be included in determining whether a companyhas complied with the issuer cap. 9

CSF Intermediaries

Under the framework, a CSF Offer can only be undertakenthrough a ‘CSF Intermediary’. These CSF Intermediarieswill be the parties authorised to “provide the crowd fundingservice”10, most likely by operating the internet baseplatform which will conduct the CSF Offer.

As a result of amendments to Chapter 7 of the CorporationsAct 2001 under the 2016 Bill, providing a ‘crowd fundingservice’ will now constitute the provision of a financialservice.11 As such CSF Intermediaries will be required tohold an Australian Financial Services Licence (AFSL) andcomply with the requirements of Chapter 7.

In addition, the new CSF framework will also impose anumber of significant obligations on these CSFIntermediaries, including:

conducting prescribed checks on the issuers(eligible CSF companies);12

providing standard risk warnings to investors,in accordance with the regulations, and also thatthey obtain risk acknowledgments;13

disclosing all fees and remuneration payable tothem with respect to the CSF Offer;14 and

that they be prohibited from lending toinvestors or from giving investment advice.15

Most significantly however, the CSF Intermediary will alsohave an obligation to ensure that the eligible CSF companyhas a valid ‘CSF offer document’ and that there are nodisclosure deficiencies16 in this document. Further, theywill also be responsible for ensuring that the eligible CSFcompany is only utilising one CSF platform at a time.17

Investors

The final stakeholder group under the CSF framework areinvestors. In addition to the benefits that CSF provides tosmall and start-up companies, it also provides retail

12 Ibid sch 1 item 14 (Proposed s 738Q(1)).13 Ibid (Proposed s 738ZA(1)-(3)).14 Ibid (Proposed s 738ZA(9)).15 Ibid (Proposed s 738ZE).16 Ibid (Proposed ss 738Q, 738V, 738X).17 Ibid (Proposed s 738R).

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investors with the ability to invest in these emerging, highgrowth companies and diversify their investments.18

However, the concern of many has been that thesecompanies are also significantly riskier than theirestablished counterparts. As such, the 2016 Bill implementsa number of investor protections aimed at ensuringinvestors are protected and that investment confidence ismaintained under the regime.

The major protections imposed by the CSF frameworkinclude:

the investor cap – investors will only be allowedto invest a maximum of $10,000 per company inany 12 month period;19

risk warnings & acknowledgments – aspreviously stated, the CSF Intermediary mustoffer the standard risk warnings to investors andthe investor must also acknowledge these risksprior to accepting an offer;20

cooling off rights – investors will have 5 days toconsider their decisions, and may during thistime, unconditionally withdraw their investment;21

and prohibitions on financial assistance – both

eligible CSF companies and CSF Intermediarieswill be prohibited from offering financialassistance, protecting investors from potentialconflicts of interest.22

One of only two significant changes between the 2015 Billand the 2016 Bill was the reduction in the ‘cooling off rights’from 5 days down to 48 hours. This change has howevernow been reversed, with the time period increased back to5 days after parliamentary debate in the Senate resulted inthe amendment.

Proprietary Companies

One of most contentious issues with the proposedframework is the requirement that companies must be apublic company in order to access CSF.

In order to reduce the corporate governance and reportingobligations imposed on newly converted public companies,the 2016 Bill provides a number of exemptions which thegovernment hopes will entice more companies to pursueCSF.

These exemptions will apply to newly converted publiccompanies for 5 years after conversion, subject to thecompany completing a valid CSF Offer within 12 months of

18 S Morrison (Treasurer), ‘Second reading speech: Corporations Amendment (Crowd-sourcedFunding) Bill 2016’, House of Representatives, Debates, 24 November 2016, p. 4305.19 Corporations Amendment (Crowd-sourced Funding) Bill 2016 (Cth) sch 1 item 14 (Proposeds 738ZC).20 Ibid (Proposed s 738ZA(1)-(3))21 Ibid (Proposed s 738ZD).

their conversion.23 The exemptions included in the 2016 Billinclude:

an AGM exemption – the requirement to hold anAGM each financial year has been waived foreligible CSF companies;24

an audit exemption – the requirement that publiccompanies appoint an auditor has been waivedwhere the company has raised less than$1million in capital and has not raised capitalunder other offers requiring disclosure;25 and

financial reporting exemptions – the companymay supply its financial reports to members bymaking a copy of the report accessible on awebsite.26

Scott Morrison himself has flagged future amendments tothe regime to include proprietary companies and while it hasalso been reported that FinTech Australia is currentlyworking with the Government towards implementation,these changes are not expected until later in 2017.

Copies of the Corporations Amendment (Crowd-sourcedFunding) Bill 2016 and its Explanatory Memorandum can beaccessed herein.

Contact details

If you have any queries regarding this alert, please contact:

Jeremy Schultz PartnerJeremy.schultz@finlaysons.com.au+61 8235 7408

Andrew Dyda PartnerAndrew.dyda@finlaysons.com.au+61 8235 7706

Lan Lam PartnerLan.lam@finlaysons.com.au+61 8235 7838

Travis Cordingley LawyerTravis.cordingley@finlaysons.com.au+61 8235 7536

22 Ibid (Proposed s 738ZE).23 Ibid (Proposed s 738ZI).24 Ibid sch 2 item 3 (Proposed s 250N(5)-(6)).25 Ibid sch 2 item 6 (Proposed s 301(5)).26 Ibid sch 2 item 8 (Proposed s 314(1AF)).