On 12 September 2018, the Parliament passed the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (the Bill), which will allow eligible proprietary companies to have access to crowd-sourced funding (CSF). We expect that technology and start-up companies will particularly benefit from the extended CSF regime because they are not permitted to access CSF under the current law.
Currently, only public companies have access to the CSF regime under the Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth). However, the Bill will extend the CSF regime for proprietary companies if they are "eligible" meaning that they must:
- have less than $25 million in gross assets and annual revenue;
- not access CSF for the purposes of investment; and
- have its principal place of business in Australia.
Summary of the Bill
The broad amendments proposed by the draft Bill extend the CSF regime to proprietary companies by:
- expanding the eligibility for the CSF regime in section 738H of the Corporations Act 2001 (Cth) (the Corporations Act) to proprietary companies that meet eligibility requirements as mentioned above;
- adding special investor protection provisions for proprietary companies accessing the CSF regime; and
- removing the temporary corporate governance concessions in the CSF Act for proprietary companies that convert to or register as public companies to access the CSF regime.
Impact on proprietary companies
It is expected that proprietary companies will have access to the new funding model one month after the Bill is given royal assent.
As mentioned above, it is expected that the Bill will particularly benefit small to medium sized companies especially technological companies and start-ups to become more competitive by using CSF as a means of funding a business. Previously, the requirement for a proprietary company to transition to an unlisted public company was a significant impost for start-up companies.
Further, companies (particularly companies that operate online) should consider this as an opportunity to drive both product sales and capital raising by allowing key customers and product users to participate in the equity of the company.
Proprietary companies using CSF should also consider how they will operate with a significantly wider shareholder base - some of whom may want to have significant involvement with key staff. Management processes should be put in place prior to the commencement of the CSF regime to manage shareholder expectations. Otherwise it could lead to internal conflict and ultimately hinder the company's growth and longevity.
What eligible proprietary companies need to do to access CSF
If a proprietary company has chosen to adopt this CSF regime, they would need to make some changes to their existing structure as outlined in the table below.
|Two directors||The proprietary company must have at least two directors and a majority of the directors must reside in Australia.|
|Financial reporting||The proprietary company would have to prepare and provide ASIC with copies of annual financial and directors’ reports (in accordance with accounting standards).|
|Audit requirement||A proprietary company that raises more than $1 million must audit their financial statements (even if it is a "small" proprietary company).|
|Related party rules||Proprietary companies would have to comply with the related party transaction rules under Chapter 2E of the Corporations Act. A 'related party transaction' is any transaction through which a company provides a financial benefit to a related party (such as a director, their spouse and certain other relatives).|
|Shareholder limit exception||The existing 50 shareholder cap for proprietary companies would be amended so that the CSF shareholders would not be counted as part of thT cap.|
|Records of CSF shareholders||Proprietary company registers must include additional information such as the date of each issue of shares as part of a CSF offer, the number of such shares issued and the date on which a shareholder ceases to be a CSF shareholder. A proprietary company must also notify ASIC of the dates on which it starts and ceases to have CSF shareholders.|
|Takeover exemptions||Proprietary companies would be exempted from the takeover rules in Chapter 6 of the Corporations Act, as long as it provides a minimum level of protection for investors to participate in an exit event.|
Want to find out more?
If you would like further advice on how you can take advantage of this Bill or for further information, the Financial Services and Funds team is happy to assist.