Crowd-Sourced Equity Funding in Australia - a legal reality in 2017
We have all received emails from time to time asking us to support a fundraising campaign. These campaigns are often donation based but can include some type of reward. Businesses have taken on the same idea in recent years. Their interest lies with equity based crowdfunding whereby companies offer shares in their company through an online portal, typically hosted by an intermediary, to raise capital from a large pool of investors. With the expansion of the internet and its ability to reach millions of people, this type of crowdfunding holds tremendous potential for companies but until now Australia has been lagging behind in offering a legislative framework to facilitate a successful and internationally competitive equity crowdfunding regime.
All this is about to change. After several years of lobbying from this industry sector for the Government to introduce appropriate legislative provisions, and preparation by the Corporations and Markets Advisory Committee of a 257- page report on crowd sourced equity funding, the Corporations Amendment (Crowd-sourced Funding) Bill 2016 was passed by the Australian Parliament and received Royal Assent on 28 March 2017. The new law is due to take effect on 28 September 2017.
Under the Corporations Amendment (Crowd-sourced Funding) Act 2017 (CSF Act) Australian companies that meet certain eligibility requirements for Crowd-Sourced Funding (CSF) will be able to issue ordinary shares in their company to the general public in order to raise capital. Offering shares must be done through eligible CSF intermediaries who are responsible for publishing on their platform a CSF offer document that contains appropriate information required by regulations. The processing of applications made in response to the offer must be carried out by the intermediaries. All money in respect of such applications must be paid to the CSF intermediary. Advertising for CSF offers comes with restrictions, but can be made with certain mandatory statements. Companies, individual directors, underwriters and CSF intermediaries may be liable for loss or damage suffered by a person due to a defective CSF offer document. Protection of the investor is given strong emphasis in the Act while at the same time reducing the regulatory requirements for public fundraising.
What are the specific requirements for the issuing company, intermediary and the investor? We summarise these here.
The Australian Securities and Investments Commission (ASIC), as the regulator responsible for fundraising activities and financial services, advises on its website that it will “shortly consult on regulatory guidance for intermediaries seeking to provide CSF services and companies seeking to raise funds on a platform of a CSF intermediary”.
The passing of the CSF Act is an important, albeit overdue, step in tapping into a market that in its totality (including donation, reward, debt and equity sourced crowdfunding) raised more than US$34 billion globally in 2015. Other jurisdictions such as New Zealand, the UK, the US, Italy and Canada already have well-established regulatory regimes that permit crowd sourced equity funding. These countries have attracted Australian companies, such as the successful Ingogo now worth close to AU$100 million. This is one example of past opportunities lost to Australia.
When the CSF Act takes effect in September, Australia will become more internationally competitive and it is expected that ASIC will receive a number of applications from intermediaries requesting financial service licences. Intermediaries seeking to obtain such a license should start preparing their documentation as this process can be time consuming and complicated. While ASIC is considering the relevant guidance material over the next 6 months, it could be advantageous for applicants to voice their concerns and questions now to provide input in the drafting of these materials.
TressCox can assist with navigating the new regulatory framework, advise on all aspects of crowdfunding including preparing Australian Financial Services Licence (AFSL) applications, compliance and product disclosure material. We regularly deal with ASIC and are therefore well positioned to assist.
Philip Mitchell, Partner
Victoria Grimes, Foreign Legal Consultant LL.M.