Proprietary companies wanting to access equity crowdfunding will no longer have to convert to public company status. Legislation extending Australia’s crowd-sourced funding regime to proprietary companies has passed the House of Representatives and is expected to pass the Senate.
The CSF regime was launched in September last year, providing a funding opportunity for public companies. The extension of the regime to cover proprietary companies, which is a much larger class of businesses, will take effect later this year.
In return for being able to have an unlimited number of crowdfunding shareholders, participating proprietary companies will have higher governance reporting obligations to protect investors.
Many of the features of the existing public company framework, such as obligations on intermediaries and the process of making crowdfunding offers will be the same for proprietary companies.
To ensure that proprietary companies can access the framework without breaching the 50 shareholder cap that currently applies, investors who acquire shares through crowdfunding offers will not be counted towards the cap.
Proprietary companies with shareholders who acquire shares through a crowdfunding offer will not be subject to the takeover rules.
Proprietary companies with crowdfunding shareholders will be required to prepare financial reports in accordance with accouting standards, with financial statements to be audited once the company raises at least $3 million from crowdfunding offers.
Crowdfunding proprietary companies will be required to have a minimum of two directors, rather than the usual one director. There will be restrictions on related party transactions.
Proprietary companies that make CSF offers will have to include details of share issues as part of its company register and report details of the CSF offers to ASIC. This is to enable the regulator to supervise the regime.
In January, the Australian Securities and Investments Commission announced that it had licensed seven companies to operate as intermediaries under new crowd-sourced funding rules.
The seven companies are Equitise, Birchal Financial Services, Big Start, Billfolda, Global Funding Partners (operating as Enable), IQX Investment Services (operating as Capital Labs) and on-Market Bookbuilds.
Under the new rules, small investors are able to invest up to $10,000 per company per year via an intermediary platform.
Platforms can only be operated by licensed intermediaries that have specific authorisation to provide a crowdfunding service.
Companies can use crowdfunding platforms to raise up to $5 million a year by issuing ordinary shares. To be eligible they must have less than $25 million in assets and annual revenue.
Investor protections include a cooling-off period, a prohibition on offers of financial assistance to enable investments in offers, and a requirement to obtain a risk acknowledgment prior to accepting an application.
Platform providers must act as “gatekeepers” – checking company details and investment information before placing the offer on the platform.
Companies seeking funds will have to prepare an offer document. To provide investor protection that document will include details of any “adverse history” of the company or its directors, such as criminal or civil offences, disqualifications, bannings, court orders or insolvency.One of the jobs of the intermediaries will be to vet offer documents to make sure they are of “a reasonable standard”, which means they can be relied upon by investors to provide a true picture of the business. Intermediaries must also check that the company is eligible to make an offer.