With Australian law (particularly the Corporations Act) not yet accommodating crowd funding, it remains to be seen whether Australia can keep pace with the new regulatory regimes being implemented internationally to accommodate this new and evolving concept of raising capital.
The CAMAC report set out a blueprint for the new regulatory structure required to overcome current legal impediments for issuers and implement regulations required for intermediaries of crowd funding websites, at the same time as maintaining necessary protections for retail investors.
The report considered four options for implementing CSEF in Australia:
- adjusting the regulatory structure for proprietary companies
- confine CSEF offers to a limited class of investors
- amending the fundraising provisions for public companies, and
- introducing a regulatory regime specifically designed for CSEF.
Some of the key aspects of the new regime proposed by CAMAC are as follows:
- The introduction of a new corporate entity – an exempt public company – with the status of a public company, but with reduced compliance requirements (e.g. no AGM, no audited financial reports if within certain financial thresholds), together with an ability for a pre-existing entity to convert to ‘exempt’ status.
- A standard disclosure template – to include details on the entity, offer, terms of shares, related party shareholdings, business plan and proposed use of funds – but which is not required to be lodged with ASIC.
- Issuer cap – no more than $2 million in any 12 month period (but no cap on the number of investors).
- Offer limited to one class of share at any particular time (but does not prevent having alternative classes – e.g. founder shares).
- Share re-sale restrictions only apply to directors / other associates of the issuer.
- Requirement to have a CSEF licence (issued by ASIC).
- Requirement to undertake limited due diligence on the issuer and its management.
- Requirement to issue standard form risk disclosure statement.
- Need to implement appropriate dispute resolution processes.
- Offer may only be made via one licensed intermediary.
- No financial advice - e.g. ‘staff picks’ or ‘what’s hot’.
- No lending to investor.
- No participation in offer – need to avoid conflicts of interest.
- Disclosure of fees required.
- Non-binding investment caps for any twelve month period, of no more than $2,500 per CSEF issuer and no more than $10,000 for all issuers, with requirement for investor to self-certify that they are in compliance with the caps.
- Requirement for investor to sign acknowledgement of risk prior to investing.
- Cooling-off period – e.g. right to withdraw within 5 business days of investment.
Progress by international peers
The CAMAC report also considered initiatives in other overseas jurisdictions in some detail. In doing so, CAMAC recognised that there is likely to be a benefit of having a level of international harmonisation in managing CSEF, given the cross jurisdictional nature of CSEF offers being made online.
The key international comparisons were as follows:
New ZealandNew Zealand implemented its crowd funding regime in April 2014 via the Financial Markets Conduct Act 2013 and Financial Markets Conduct (Phase 1) Regulations 2014. The new regime allows for applications to be made to the Financial Markets Authority to be licensed as a ‘crowd funding service’. Issuers through this service are exempt from the requirement to register a disclosure document for the offer. A major distinction from CAMAC’s recommendations is that there are no investment caps (although the issuer cap of $2 million in 12 months applies). At this stage New Zealand CSEF offers do not qualify for mutual recognition in Australia.
UKSince April 2012, the UK has allowed for CSEF offers to be made to restricted classes of investors (e.g. sophisticated investors, investors receiving qualifying investment advice, and investors that certify they will not invest more than 10% of their portfolio in CSEF type investments).
CanadaAlthough still at the proposals stage, and with different regimes likely to be implemented in each region of Canada, it is anticipated that a similar approach will be taken to CAMAC’s proposal for Australia.
USAThe introduction of Jumpstart our Business Startups (JOBS) Act 2012, allows issuers to raise $1 million in 12 months through an online intermediary with a maximum individual investment of $100,000. However, CSEF in the USA will not begin until the SEC has settled its rules on CSEF.
As can be seen, there is much common ground between New Zealand, Canada and the USA, and CAMAC’s proposals for Australia.
No time to waste
With two crowd funding platforms in New Zealand (PledgeMe and Snowball Effect) now fully licensed under the NZ Financial Markets Conducts Act 2013 (since 31 July 2014), Australia should be mindful not to fall behind international peers in determining its approach to CSEF.
Inhibiting CSEF in Australia, while others move to implement it, may result in Australian crowd funders moving offshore, with New Zealand in particular appearing to have the first mover advantage.
Though certainly not without risks for retail investors, CSEF could emerge as an important alternative means of raising capital. It therefore needs to be managed and implemented appropriately by a legal framework specifically designed for the task, balancing the interests of retail investors at the same time as assisting to address the ‘capital gap’ for many start-up and smaller companies in Australia.
A response is expected from Treasury later this year.