Preparations are underway for the launch of Australia’s new equity crowdfunding regime, which has been designed to facilitate access to capital for small companies.
The crowd-sourced funding regime, which kicks off on September 29, reduces the regulatory requirements for eligible companies making public offers, while also ensuring adequate protection for retail investors.
Last week, the Australian Securities and Investments Commission released two consultation papers, outlining proposed guidance for companies and intermediaries under the new regime.
By opening up a new source of finance for small companies, the Government has given greater scope to an emerging market for equity investors – one that tends to be at the high-risk, high-reward end of the spectrum.
A number of crowdfunding intermediaries are lining up to get involved. They include Australian Small Scale Offerings Board (ASSOB), CrowdfundUP and Equitise,
ASSOB chief executive Will Leitch says the new regime has the potential to place the early-stage funding market on a firm foundation. “It will give this critical and under-capitalised sector of the economy the opportunity to raise equity outside the stock exchange,” he says.
ASSOB is Australia’s oldest and most successful equity crowdfunder. It was launched in 2007 and has raised more than $147 million to date.
A review of the Equitise platform shows that some of its recent deals include a “travel wellness” company, a New Zealand variable annuity provider, a hydropower turbine manufacturer, a “career path” software developer, a next-generation magnetic resonance imaging technology developer, an industrial inspection robot maker, the developer of a social media site for shoppers and a debt management software developer.
Equitise says its vetting process means that only one per cent of companies that apply to be on its platform make it.
A crowdfunding intermediary must hold an AFS licence. In addition, there are a number of specific obligations. These include ensuring that investors are only offered investments in companies that are eligible to raise funds under the new regime.
Under the new regime, eligible companies are public companies limited by shares, with their principal place of business and a majority of directors in Australia.
Listed companies are ineligible, as are proprietary companies, foreign companies and public companies that do not have share capital.
After the passage of the legislation in March, the Government responded to criticism of its new equity crowdfunding rules and has introduced a Bill that addresses the main sticking point by extending the new regime to proprietary companies. The great majority of Australian small businesses are proprietary companies.
However, proprietary companies will not come under the new regime when it kicks off in September.
For eligible companies, the new rules provide temporary relief from reporting and corporate governance requirements that would usually apply to public companies. These obligations may be too expensive for small businesses and start-ups.
Relief, which applies for five years, includes an exemption from the requirement to hold an annual general meeting, permission to issue financial reports online only and a waiver of the requirement for audited financial reports until more than $1 million has been raised through crowdfunding offers.
There are restrictions on the size of companies that can access equity crowdfunding. The value of gross assets must be less than $25 million and annual revenue must be less than $25 million.
Only fully paid ordinary shares will be subject to concessional treatment and the money cannot be raised for investment in securities. There is an issuer cap of $5 million in any 12-month period.
There is cap of $10,000 per investor per company in any 12-month period and a cooling-off period allowing investors to withdraw from a funding offer up to five days after making an application.
Companies using the regime will be start-ups and early stage businesses that will not have much experience in raising funds or dealing with investors.
They 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.