Crowd funding: no joy for start-ups?

• Consultation on an Australian crowd funding framework begins

• Framework based on public companies

The likely framework for crowd funding by Australian public companies has been released by Treasury, with yesterday’s consultation paper setting out the key elements.

In focusing on crowd funding by public companies, the paper leaves open a key question on how proprietary (or private) Australian companies (representing approximately 99% of Australian companies) are to approach crowd funding, and capital raising more generally, with the Government seeking further comments from industry stakeholders on potential changes to private company arrangements.

Public company framework

Following on from our earlier posts (Treasury invites feedback on crowd funding and Budget focus on crowd funding), some of the key concepts for the new public company framework, which generally reflect prior consultations and developments internationally, include:

• issuers must be registered as a public company in Australia, with relief being granted from certain compliance requirements for up to 5 years (e.g. to allow online annual reporting and alleviate the company from holding an AGM), provided the company has not raised funds under existing public offer arrangements and the company’s gross assets are below certain specified thresholds
• a cap of $5 million on the amount on issuer can raise using crowd funding each year (which excludes funds raised under existing exemptions for sophisticated and professional investors)
• ‘self-assessed’ investment caps for individual investors of $10,000 per offer each year and an aggregate investment cap of $25,000 for the year
• securities offered must be within one class of fully paid ordinary shares per offer at the same price, and subject to the same terms and conditions
• intermediary platforms, holding an Australian financial services license, will be responsible for undertaking prescribed checks on the issuer and monitoring compliance
• prohibiting the intermediary from offering investment advice or lending to investors, and
• reduced disclosure requirements through standardised documentation, which includes mandatory risk warnings and an acknowledgement statement to be given by investors.

Some key points of difference from previous consultation papers are:

• dropping the concept of a new form of Australian company, the ‘exempt public company’, and instead relying on specific reporting relief (as noted above) for existing public companies, and
• providing flexibility for intermediaries to negotiate their fee structures and invest in issuers via the intermediary platform, provided such arrangements are appropriately disclosed.

Next steps for private companies

With the framework for public companies made clear, a number of questions are now put forward in the consultation paper on potential arrangements for private companies, including:

• if the restriction on the number of shareholders, currently set at no more than 50 non-employee shareholders, should be raised
• 2 if private companies should also be given access to a crowd funding framework (tailored to reflect the differences between a private and public company), noting a requirement to convert to a public company to access crowd funding would likely pose a significant barrier to many, and
• 3 identifying ways in which the existing compliance costs for private companies can be reduced.

While it is good to see Australia is moving in the right direction for public companies, the questions in relation to private companies are important ones to be answered.  In our view, the fact that the vast majority of Australian start-ups and small businesses will take the form of a private, rather than public, company means that a potential crowd funding framework for such companies needs to be carefully considered.  The model may also reduce Australia’s competitive position relative to other jurisdictions, especially for relatively mobile ‘start-up’ companies.

Draft legislation for the public company framework is anticipated later in 2015, with the new laws anticipated to be introduced at the Spring sitting of parliament.  It is hoped the current momentum will be maintained for an appropriate framework for private companies.

Reece Walker (Partner) and Ben Wood (Senior Associate), will seek to engage in the consultation process on behalf of McCullough Robertson and our clients.  We welcome any comments that readers of the blog may want to contribute, with the consultation process scheduled to close on Monday, 31 August 2015.