Crowd Sourced Funding (CSF) enables an Eligible Company to raise funds through an Intermediary from a large number of Individual Investors.
CSF has developed over the last few years in other countries as an online phenomenon. Particularly start-up companies seeking seed capital, or small to medium enterprises (SMEs) have accessed CSF Intermediaries as an alternative or complementary financing options to professional investors, in respect to Angel investors and Venture Capital.
However, the legislative framework in Australia presented barriers to CSF. Hence the introduction of the Corporations Amendment (Crowd-Sourced Funding) Act 2017 which takes effect on 29 September 2017 (Act).
According to the Australian Securities and Investments Commission (ASIC) the Act aims to facilitate flexible and low cost capital for SMEs who are unlisted companies by reducing the regulatory requirements for making public offers, while ensuring adequate protection for Retail Investors.[1] Under the Act, a Retail Investor is an individual investor who is capped at investing a maximum of $10,000 in the same company over a 12 month period.[2]
There are different types of crowd-sourced funding. The Act covers equity-based crowd sourced funding, involving an Eligible Company offering ordinary shares in the Eligible Company to investors for a cash investment of up to $10,000.00 (ten thousand dollars). Other types of CSF are not equity based investments. Such Crowd Sourced Funding may involve a donation to a cause without seeking a benefit in return or a benefit in return involving goods or services.
What follows is an overview of how the new CSF Act works in respect to Eligible Companies seeking to source investments from Retail Investors through an Eligible Intermediary.
Key Features of the CSF Legislation
The CSF Legislation will enable that are unlisted companies with less than $25 million in assets and annual revenue (CSF Eligible Companies) to make offers of ordinary shares to Retail Investors, through a Licensed CSF Intermediary’s platform using a CSF Offer Document.
Pursuant to Regulation 6D.3A.02,[3] the minimum content requirements for a CSF Offer Document are:
- a prescribed risk warning;
- details of the CSF Eligible Company;
- details of the CSF Offer; and
- information on the applicable CSF Investor protections.
The CSF Legislation provides a regulatory framework for three parties:
- The CSF Intermediary;
- The CSF Eligible Company; and
- The CSF Investor.
Crowd Sourced Funding Risks
As noted by the International Organization of Securities Commission (IOSCO),[4] CSF comes with risks. Whether you are a CSF Eligible Company, a CSF Intermediary, or CSF Investor you may be exposed to these risks.
The Act aims to mitigate these risks, A few common risks include:
For CSF Intermediaries
- Money laundering and fraud
- Poor checks on Eligible Investors or Defective Eligible Companies
- Platform failure or closure of crowd-sourced funding portals.
For CSF Eligible Companies
- Heightened risk of default or failure associated with start-up businesses.
For CSF Investors
- Illiquidity here there is no secondary market for CSF securities, which may limit investors’ ability to sell or liquidate these securities.
- Investors’ lack of experience with these types of offerings, including a lack of skills and information to carry out sufficient due diligence.
Compliance with the New Legislation
The Licensed CSF Intermediary will need to:
- from 29 September 2017, obtain an Australian Financial Services (AFS) Authorisation from ASIC to provide a crowd funded service;
- perform due diligence and checks on the CSF Eligible Company, its directors and the CSF Offer Document;
- perform checks on investors, including assessing whether an investor is a Retail Investor, and holds money on Trust;
- operate a suitable platform for CSF and provide the appropriate CSF disclosure to prospective CSF Investors including directing investors to the CSF general risk warning; and
- have the ability to suspend or close a CSF offer in circumstances where the CSF Offer Document is defective, such as if it contains a misleading or deceptive statement. Criminal sanctions and actions for recovery of loss or damage may apply if company offers securities though a defective Offer Document.
Eligible Companies will be able to raise up to $5,000,000.00 (five million dollars) in any 12 month period under the CSF Legislation. This is referred to as the “Issuer Cap”.
Eligible Companies that intend to make CSF Offers must:
- meet the relevant criteria of being a unlisted public companies with the CSF Eligible Activity. For example, excluding being an investment company;
- prepare a CSF Offer Document that that includes prescribed minimum information;
- provide in the CSF Offer Document a general risk statement warning;
- advertise the CSF Offer appropriately by directing investors to the general risk warning in the CSF Offer Document; and
- ensure that they make CSF Offers only through the CSF Intermediary Platform.
The CSF Investor has:
- an Investor cap of $10,000.00 per CSF Eligible Company Offer in any 12 month period. This is known as the CSF Investor Cap;
- a cooling off period up to five days after making an application to withdraw their application;
- acknowledge that they have read and understood the general warning before applying for CSF shares; and
- accept CSF offers only through a CSF Intermediary.
The Role of the CSF Intermediary
A CSF Intermediary must hold a valid Australian Financial Services Licence (AFSL) and plays a significant role under the CSF regime. They operate the platform through which investors invest and the Eligible Companies offer their shares. They effectively function as a ‘gatekeeper’ who are expressly authorised by the CSF Eligible Company to provide this service.
This role includes managing some of the risks identified in relation to CSF by checking the Offer Document and other documentation that is to be published, and to ensure that investors and offering companies can be confident in using the CSF regime. The onus is on the CSF Intermediary to ensure that they do not publish an Offer Document that does not comply with the regulation.
Additionally, a number of obligations exist under the Corporations Act in relation to AFSLs. These will apply under the new legislation, and include:
- acting efficiently, honestly, and fairly;
- having appropriate arrangements to address any conflicts of interest; and
- having an external dispute resolution system.
The Role of ASIC
Unlike other disclosure documents, a CSF Offer Document will not need to be lodged with ASIC. However, ASIC will have stop order powers where a company offers securities under a defective CSF Offer Document.
ASIC has published Consultation Papers 288 and 289 and draft Regulatory Guides. These give guidance on how ASIC interprets the law and provide practical guidance of how entities can meet their obligations.
Our Services
Corporate Lawyers Sydney at Pavuk Legal can assist you with crowd funding solutions for a number of services including ensuring a CSF Intermediary has obtained the appropriate licence, drafting CSF Offer Documents, ensuring compliance to Offer Document regulations, undertaking due diligence on a CSF Eligible Company, establishing a CSF Eligible Company, as well as providing ancillary advice in respect of any of the above.
To purchase your own copy of Nobody Else’s Business please follow the link http://www.nobodyelsesbusiness.com.au/
For the full range of Legal Services that Pavuk Legal offers please go to: www.pavuklegal.com/services/
[1] See http://download.asic.gov.au/media/4302050/attachment-1-to-cp288-published-22-june-2017.pdf page 5.
[2] Corporations Amendment (Crowd Sourced Funding) Act 2017 (Cth) s 738ZC.
[3] https://www.legislation.gov.au/Details/F2017L00710/Explanatory%20Statement/Text
[4] https://www.iosco.org/library/pubdocs/pdf/IOSCOPD520.pdf
