Is crowd funding an alternative means for raising capital?

Crowd funding is a concept that has existed for some time in various jurisdictions, but has only received attention relatively recently from potential stakeholders and regulators in Australia.

It has been identified as an alternative means for raising capital, in particular as a source of ‘scarce’ capital for early stage and start-up companies, from a large number of small investors.  It has been used successfully and most commonly for creative projects such as music, film and mobile apps. 

However, the next stage of crowd funding’s evolution, involving the issue of securities in return for funds and the accompanying regulatory framework, is still in its infancy in Australia.

What is it?

In its guidance released in August 2012, Australian Securities and Investments Commission (ASIC) defined crowd funding as ‘the use of the internet and social media to raise funds in support of a specific project or business idea. Project sponsors or pledgers typically receive some reward in return for their funds. In some cases, the reward expected may be of minor value and is merely incidental rather than the purpose of the contribution’.

Essentially, it involves advertising an idea online through an intermediary crowd funding platform (usually a website) to allow for the dissemination of the idea to a wide audience.  This can result in significant funds being raised, typically in small individual quantities from a large number of participants.

The most common forms of crowd funding in Australia have been donation funding for charitable causes or pre-payment funding (an investment in return for the promise of a product or service that is produced / provided if sufficient funding is raised).

A more complex area now being considered, including in a Corporations and Markets Advisory Committee (CAMAC) paper in September 2013, is the concept of crowd sourced equity funding (CSEF).  As with other means of capital raising, this would involve the issue of securities in return for funds.  It is this that has caused the most concern for ASIC and other regulators.

Regulator concerns

ASIC has indicated that crowd funding is an area that is to come under increased surveillance, having regard to its consumer protection mandate (with concerns that persons may make an investment or payment based on limited or potentially misleading information, or possibly even fraud).

ASIC has also made it clear that various crowd funding arrangements, particularly CSEF, will be caught by the fundraising and/or financial service licensing provisions of the Corporations Act 2001 (Cth), which could give rise to penalties for persons seeking to raise the funds and/or the operators of the crowd funding websites.  Another potential consideration is whether the crowd funding amounts to a pre-purchase arrangement of a product or service (under the Competition and Consumer Act 2010 (Cth)).  

These concerns are potentially exaggerated by the borderless nature of crowd funding, often making it available to investors in any country, so the number of affected persons can be significantly greater than with other means of fundraising.  Retail investors are the most likely target, emphasising the need for proper legal protections.  That said, CAMAC acknowledges that, with modest investments across a range of opportunities, the perceived risk to such investors is likely to be reduced. 

This has been acknowledged in other jurisdictions, such as New Zealand, where new legislation has been introduced to facilitate CSEF, as an initiative to support early-stage and growth companies.

Next steps as an alternative means of raising capital

At this stage, there have been no indications for a change to applicable Australian law (e.g. to modify the relevant fundraising exemptions) to allow for CSEF.

Some other practical considerations in seeking funds through crowd funding include ensuring compliance with the laws of applicable foreign jurisdictions (where the website is accessible) and that a bona fide website operator is used. 

If CSEF does arise as a means of raising funds, a company issuing securities would also need to consider the practical implications of a potentially large shareholder base with unmarketable parcels of shares and the relevant regulatory and administrative costs which may arise.

It may take some time for more varied forms of crowd funding, particularly CSEF, to emerge in Australia, but it is certainly something to continue to watch.

ASX releases new Corporate Governance Principles

Yesterday, the ASX Corporate Governance Council released the third edition of its Corporate Governance Principles and Recommendations.  The new principles will take effect for a listed entity's first full financial year commencing on or after 1 July 2014.

The release marks the first major revision of key Australian corporate governance principles since the GFC and follows the issuing of draft principles and a consultation process examined in an earlier post last August.

The Corporate Governance Principles and Recommendations are available to view at:
http://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf.

Whistleblower protection under the Corporations Act

Whistleblower protection has received a lot of media attention recently, following the Senate Inquiry into the performance of the Australian Securities and Investments Commission (ASIC) and its alleged failure to act promptly on information provided by whistleblowers in relation to serious misconduct in Commonwealth Bank’s financial planning arm.

Consistent with ASIC’s commitment to improve communication and handling of information brought to its attention by whistleblowers, it has released a new Information Sheet (Info Sheet 52) which provides guidance on the statutory protections available to those who report misconduct or provide evidence of a breach of the Corporations Act 2001 (Cth) (Corporations Act) to ASIC. 

The whistleblower provisions of the Corporations Act are designed to encourage people associated with a company to alert the company (through its officers) or ASIC, to illegal behaviour.  Information provided by whistleblowers is considered a protected disclosure (provided certain criteria are satisfied), and must be kept confidential.  Both the information provided and the identity of the whistleblower may not be disclosed, unless that disclosure is specifically authorised by law.

Generally speaking, for the purposes of the Corporations Act, a whistleblower is a person who is an employee, contractor or member of an organisation, who reports or ‘discloses’ misconduct or dishonest or illegal activity that has occurred within that same organisation.  The report must be made to either ASIC, the company’s auditor or member of the internal audit team, a director, secretary or senior manager, or a person authorised to receive whistleblower disclosures (such as a Whistleblower Protection Officer).

It is imperative that companies have a whistleblower policy in place to ensure employees know how to report issues, who to report them to, and how they will be dealt with when the company is alerted. 

The policy should also detail the rights of employees to disclose improper conduct on a confidential basis without fear of retaliation.

A whistleblower reporting tool (e.g. a hotline or online portal with analytical capabilities) is also a useful way to detect fraud within an organisation.  

Info Sheet 52 is a useful reference tool, to ensure your policy adequately details the protections available to whistleblowers.  It should, however, be noted that the protections under the Corporations Act only apply to whistleblowers who report breaches of the Act, as opposed to breaches of other laws, or the company’s internal policies.  

To afford the protections under the Corporations Act, the whistleblower must identify their name when making a disclosure, have reasonable grounds to suspect that the information being disclosed indicates that the company, company officer or employee may have breached the Corporations Act and must make the disclosure in good faith. 

Identifying the whistleblower is not typically required under other laws, nor is it under many internal policies.  Therefore, if a matter that would result in a breach of the Corporations Act is reported anonymously through internal channels, the whistleblower would need to be identified before the matter was referred to ASIC to benefit from the protections in the Corporations Act against civil and criminal litigation. 

Further, the provisions of the Corporations Act may be relied on by the whistleblower in their defence if they are the subject of an action for disclosing protected information.  It is important to note that no contractual or other remedy can be enforced against the person on the basis of the disclosure. 

Where a whistleblower’s employment is terminated because of a disclosure made under the Corporations Act, the whistleblower can apply to Court for an order to be reinstated in that position, or in another position at a comparable level. 

The publication of Info Sheet 52 is an important reminder that whistleblowers play a role in detecting serious misconduct within organisations and should be afforded adequate protections. Companies must ensure that procedures are in place so that matters of concern that are raised can be dealt with on a timely basis, either internally or, in the case of a serious breach, by escalating the matter to ASIC or the Australian Federal Police. 

Tiffany McLean, Andrew Poulton, Navina Vijaysegaran

The new Australian Privacy Principles – Is your organisation compliant?

On 12 March 2014, fundamental changes to Australian privacy laws will take effect. The changes introduce new rules about how organisations collect and store personal information.  With penalties up to $1.7 million enforceable for serious breaches, organisations must act now to ensure compliance. 

As part of the privacy law reform process, the Privacy Amendment (Enhancing Privacy Protection) Act 2012 (Privacy Amendment Act) was introduced to Parliament in May 2012  marking significant changes to the Privacy Act 1988 (Cth) (Privacy Act).

The changes to the Privacy Act include a new set of harmonised privacy principles that regulate the collection and handling of personal information called the Australian Privacy Principles (APPs) applying to most organisations who turn over $3 million or more annually, and to Commonwealth Government agencies.  The APPs will replace the National Privacy Principles that apply to businesses and the Information Privacy Principles that apply to Government agencies.

To some extent, the APPs are based on the existing privacy principles but now impose additional obligations on organisations when dealing with personal information.  In particular, the APPs require organisations to provide additional discloses in their privacy documentation and internal procedures and policies ensuring the protection and ongoing quality of personal information that they use and store. 

APPs are legally binding principles and aim to be the cornerstone of the privacy protection framework in the Privacy Act, by setting out uniform standards for dealing with personal information.  The APPs are structured to reflect the personal information life cycle and are grouped into five parts, including:

• the consideration of personal information
• collection of personal information
• dealing with personal information
• integrity of personal information, and
• access to, and correction of personal information. 

Under the Privacy Amendment Act, the Information Commissioner receives new powers to seek civil penalties of up to $1.7 million from organisations who commit serious or repeated breaches of privacy. The Information Commissioner may also conduct ‘own motion’ privacy investigations on organisations without first receiving a privacy complaint from a member of the public.  

The Privacy Amendment Act also implements changes to credit reporting laws, including the introduction of more comprehensive reporting about an individual’s current credit commitments and repayment history information.  The credit reporting changes are also supplemented by a new credit reporting code. 

While the Office of the Australian Information Commissioner has released APP guidelines to assist organisations with the transition to the APPs (which must occur on or before 12 March 2014), it will be interesting to see how and when the Information Commissioner exercises its new powers in relation to privacy compliance.  Under the APPs, it will therefore be important for relevant organisations to consider their existing information policies, review and update their privacy documents and develop internal procedures to ensure compliance by 12 March 2014.

Alex Hutchens, Stephanie Parkin

ASIC takes ‘no further action’ on David Jones’ alleged insider trading

Whilst some commentators have intimated the buying of shares by two company directors just three days before the release of price sensitive sales results was on the limits of insider trading laws, ASIC has decided to issue David Jones with a ‘no further action’ letter.  Despite ASIC’s decision to not take further action, the share trading has still resulted in the resignation of the relevant directors.

On 10 January 2014, less than two weeks after ASIC announced its conclusion of the two month investigation, accused directors, Steve Vamos and Leigh Clapham, and David Jones Chairman, Peter Mason, have announced their decision to resign from David Jones as part of a ‘board renewal process’.  This news comes after significant pressure from shareholders to remove the directors, despite the fact ASIC’s investigation yielded no evidence to prove that the trades were made in violation of the insider trading laws. 

The investigation was sparked after criticism emerged following the alleged approval of share trading by two non-executive directors, just three days prior to the release of unexpected positive sales results, and one day following David Jones receiving a scrip merger proposal from industry rival Myer.  The directors, who bought a total of 32,500 shares were said to have made the trades to illustrate their long-term commitment to the company.  This was said to be because CEO, Paul Zahra, had announced his intention to resign earlier that month under suggestion there were disagreements between various board members.

Peter Mason, who allegedly approved the trading, claimed the directors were not privy to any price sensitive information.  Yet his defence became unhinged after both announcements caused share prices to spike significantly, despite the merger announcement also stating the proposal was rejected.  Mason allegedly still claimed the directors did not previously obtain the quarterly sales data and that the merger was not materially price sensitive.  If it was found the directors did not have the quarterly sales information and the merger proposal did not satisfy the definition of materially price sensitive information, the directors would not have violated the insider trading laws (amongst other possible defences).

For ASIC to successfully prosecute an instance of insider trading, investigators must be able to satisfy four key tests, proving: the directors actually possessed the information at the time of trades; the information was inside information that was not generally available; the information was price sensitive; and the suspected directors knew, or ought to have known, the information was material and not publicly available.

While ASIC has not publicly released any information as to why the investigation was dismissed, it is potentially relevant that investigators may not have formed the view that the directors knew the information concerning the quarterly sales and that the merger offer was price sensitive.  While the announcement of the merger did result in an increased share price, the definitions given in the Corporations Act states that, ‘for information to be material, a reasonable person would be taken to expect that the information would, or would be likely to, influence persons decisions in deciding whether or not to acquire shares’.  As this was a ‘merger of equals’ where David Jones would not have received any premium on their share price, the value of the company  and shares arguably would not have increased, making it difficult to prove the information of the merger was, by definition, material.

Regardless of the findings of the ASIC investigation, the resignations of the directors highlights the ever increasing need for appropriate corporate governance and security trading policies.  Particular care should be taken whenever a company is ‘in play’ or pending release of formal results, if management information is available.

ASX to introduce online processing for certain corporate actions

In an effort to streamline the announcement process for certain corporate actions, for listed entities, the ASX is proposing the introduction of an online straight-through processing (STP) facility, replacing the current practice of requiring corporate actions to be completed on ASX forms and uploaded as PDF documents.  The initiative will require a change in process for listed entities for the announcement of certain events such as the announcement of a dividend/distribution or a reorganisation of capital. 

Once a corporate action is submitted, the system will automatically generate a PDF and release the announcement to the market.  With more than 110,000 corporate actions announced each year, it is hoped the STP facility will improve the efficiency and timely release of the relevant company data.

The proposed implementation date for the STP is 14 April 2014 (with a six-month grace period in which ASX will encourage, but not enforce, use of the online forms).  ASX will also offer listed entities a facility to test the new system in January and February 2014.

For further details, please refer to the ASX website.

Foreign investment decisions lack consistency

Two controversial decisions were made regarding foreign investment in the lead up to the holidays – one was highly publicised by Treasurer Joe Hockey, including through a televised press conference.  The other was announced quietly via an emailed media release to a selected audience.

You may have missed the announcement on 11 December that China’s state-owned Yanzhou Coal Mining Company doesn’t need to cut its stake in local unit Yancoal Australia Ltd to below 70% and instead can move to 100% ownership.

By contrast the decision that “Australia’s national interest” will be protected by rejecting Archer Daniels Midland Company’s (ADM) proposed acquisition of GrainCorp Limited was highly publicised.

It could be assumed that public perception rather than issues of competition was the significant factor in the Treasurer’s decision.  The Graincorp acquisition had already obtained ACCC approval (indicating competition concerns were not determining factors), while the Yanzhou decision basically overturns restrictions on ownership and conditions set by the Foreign Investment Review Board (FIRB) four years ago.

The Government has continued to express its encouragement of foreign investment, but the GrainCorp decision is hard to understand in that context.  Interestingly, the issue of food security was not mentioned as a factor, while it was one of the main focuses of the recent Senate enquiry into foreign investment in the agribusiness sector.

In explaining his decision, the Treasurer referred to concerns expressed by grain growers in eastern Australia that the proposed acquisition by ADM could reduce competition, while acknowledging that a “more competitive network” is currently emerging.  The Government’s significant consideration was the “high level of concern from stakeholders and the broader community.”  It is unclear who these other stakeholders are but Hockey went on to say: “I therefore judged that allowing it to proceed could risk undermining public support for the foreign investment regime and ongoing foreign investment more generally.  This would not be in our national interest.”

The Yanzhou decision raised a difficult problem for the Government.  In allowing this acquisition, there is a risk that the Government is seen as weak by not enforcing its own conditions.  The perception that foreign investors are dictating terms to the government could also undermine public support for the foreign investment regime and ongoing foreign investment more generally.  However, as the Treasurer points out, since the original conditions were imposed on Yanzhou, significant challenges have emerged for the Australian coal industry – changing the nature of play completely.

Changing circumstances require revision and flexible decision making.  In the case of the Yancoal takeover, it is now not so clear that allowing 100% holding is contrary to the national interest.

It will be interesting to observe the Government’s position evolve in 2014.

Media release: Foreign investment application: Archer Daniels Midland Company’s proposed acquisition of GrainCorp Limited
Media release: Foreign investment decision

Duncan Bedford
Duncan is a Partner at McCullough Robertson and an expert in business and transaction structuring and taxation.