Last month (September 2018), new legislation was introduced in Australia to provide a framework for equity crowdfunding for private companies. Previous legislation passed in 2017 only allowed unlisted public companies to raise capital via equity crowdfunding, which deterred many businesses from considering this option.
Although Australia has been relatively late to catch onto this international phenomenon of equity crowdfunding for private companies, the change has been better late than never for startups looking for alternative investment options to fund their business growth.
What is equity crowdfunding?
Equity crowdfunding (called crowd-sourced funding or CSF in the legislation), can be an ideal investment method for startups that wish to gain some capital and business momentum. It takes away the pressure of finding and persuading angel investors or venture capitalists to invest. Rather, this method gives startups the opportunity to raise a substantial amount of capital through reaching out to large ‘crowds’ of retail investors. In exchange for their financial contribution, the investors gain equity in the company and become shareholders.
What were the CSF laws before, and what has changed?
The CSF regime limits the regulatory requirements for startups and companies that want to raise capital through public fundraising. When this legislative framework was first introduced, private companies that wished to raise equity via the CSF regime were required to convert to a unlisted public company before proceeding. With the new amendments, which are expected to take effect mid-October, this is no longer the case. The CSF regime will extend to eligible private companies that wish to access equity crowdfunding methods for their business. This means your startup may no longer be burdened with the cost and compliance of converting to an unlisted public company. You can just get on your way to crowdfund your business!
To be eligible for CSF for your private company, you need to make sure your:
- Principal place of business is in Australia
- Company is not a listed company
- Company has at least 2 directors
- Gross assets put together AND your annual revenue are less than $25 million
- Primary purpose is not only investing in securities
*Note that these requirements and some other reporting provisions are distinct to the normal rules governing private companies.
How do I crowdfund my startup’s capital?
In Australia, crowdfunding occurs on online platforms that act as intermediaries to assist in your interaction with potential investors. You may have heard of some ASIC-licensed crowdfunding portals such as Birchal, Equitise, Big Start and OnMarket.
To utilise these online platforms with compliance, the CSF regime requires your private company to put out an offer document to potential investors/shareholders that explains:
- Any particular details of what they’ll be investing in,
- A prescribed risk warning and,
- A 5 day cooling-off period for investors.
These requirements are often a lot less burdensome than the disclosure requirements for public capital raising. If you would like to read the guide for public companies to crowdfund, or need a template of an offer document, see here.
What does the new CSF regime mean for your startup?
Some benefits of these amendments for private companies include:
- No need to change structure: You no longer need to go through the hoops of converting your private company to an unlisted public company structure
- Use of crowdfunding portals: Your company is now allowed to advertise your business plans on ASIC-licensed crowdfunding portals. From these portals, you are capable of raising up to $5 million a year through crowdfunding.
- No cap on non-employee shareholders: There is no longer a cap on the maximum amount of non-employee shareholders your company can have (it used to be 50 non-employees). Investors acquiring shares through the above mentioned ASIC portals are excluded from this cap. This means your private company can potentially raise funds from hundreds or thousands of investors.
Some things to be aware of include:
- Additional reporting requirements: If your private company has acquired crowdfunded shareholders, you will have to prepare annual financial reports & director’s reports in accordance with accounting standards that you must send to the shareholders and lodge with ASIC.
- Financial audits: In the event your private company has raised $3 million or more from equity crowdfunding offers, you will be required to have your financial statements audited.
- Related party and takeover rules: Your company may also be subject to related party transaction rules and takeover rules, and you will have to include certain details about what you’re offering your shareholders.
- Cap on retail investor’s capacity to invest: A retail investor’s capacity to invest in your crowdfunding is capped at $10,000 per year, per company.
- Misleading and deceptive conduct: You may run into potential risk areas concerning Misleading and Deceptive Conduct, and compliance with Consumer Guarantees when you are putting together the language that encourages your investors to participate in your CSF. Your company needs to ensure no representations you make to your investors contravene the relevant legislation.
What to take away…
CSF is an excellent alternative method of raising capital for your startup in Australia, particularly if you don’t have access to the traditional methods. Recent amendments to the legislative framework of the CSF regime has made it easier to access tools to help you get on the way to crowdfunding your private company’s capital. It is important to make sure you meet the key requirements of a private company if you are thinking about utilising the CSF regime, and comply with the regulations while taking advantage of any ASIC-licensed crowdfunding portals.
There is a lot to take in before embarking on a equity crowdfunding journey, and that’s why we’re here to help! If you want to talk about any of the steps associated with your CSF campaign or complying with a CSF platform, don’t hesitate to contact us here.
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