Crowd-sourced equity funding for unlisted public companies came into effect on 29 September 2017. At the moment, the regime will only be available to public companies. However, in a significant development, the Government has recently introduced a bill which will expand the legislation to private companies that will allow start-ups and other private businesses to participate.
The new rules will allow companies to raise funds by selling their shares to the public, with the idea being that there will be large number of investors that each invest small amounts of money (no more than $10,000 in the same company annually).
The legislation will permit eligible companies to crowd source up to $5 million in equity funding in any 12 month period. (The eligibility requirements are summarised below.)
The major winners from the new legislation are:
- companies that wish to raise money from the public but for whom listing is not a realistic option; and
- investors interested in early stage ventures or other opportunities that are not listed and otherwise not readily available.
The challenge for the legislators is striking the right balance between fueling innovation and investor protection.
For example, the reduced disclosure requirements (compared with listing) will create opportunities for a wide range of companies to raise money from the retail public. Whilst that may be good thing for innovation, these investments will carry a significantly greater degree of risk than other types of investment.
To mitigate the risks, the legislation includes a range of investor protections, such as investment caps, a cooling-off period for investors and increased reporting requirements for companies that participate. Whether the legislation strikes the right balance remains to be seen - but so far, it seems to be heading in the right direction.
Eligibility requirements - public companies
Based on the legislation as it currently stands, a company must meet the following requirements to be eligible:
- it must be registered as a public company in Australia;
- it must not be a listed company, and none of its related parties may be listed;
- a majority of its directors must reside in Australia;
- it must not be a company with a substantial purpose of investing in securities;
- it must have consolidated gross assets of less than $25 million; and
- it must have consolidated annual revenue of less than $25 million.
In May 2017 the Government announced a proposal to expand the legislation to allow private companies to participate. If it proceeds, this would be a major win for start-ups and other private companies. Additional rules would apply to those companies, including the following:
- the company must maintain at least two directors, with a majority of them residing in Australia;
- the company must prepare annual financial and directors' reports according to accounting standards;
- it will be required to prepare audited accounts if it raises over $3 million under the legislation;
- the company will be required to comply with the rules governing related party transactions in Chapter 2E of the Corporations Act. (Currently these rules only apply to public companies); and
- the takeover rules in Chapter 6 of the Corporations Act will not apply, provided the company's constitution contains appropriate protections for its investors in the event of an exit.
These requirements are unlikely to be an impediment for most private companies thinking of participating. Companies will however be mindful of the compliance requirements (and costs) before electing to participate.
The bill was introduced on 14 September 2017. See here for more information on the bill.