The Corporations and Markets Advisory Committee (“CAMAC”) has released its very useful though wordy final report titled “Crowd sourced equity funding”. This is probably its last before being abolished by the 2014-2015 federal budget.
The report follows CAMAC’s discussion paper of September 2013 which received about 40 public submissions.
1. Legal obstacles for crowdfunding
The length of the report reflects the current legal landscape for public equity fundraising in Australia. It involves complexity and significant costs, if not huge hurdles for small enterprises. In the current law there’s:
- a shareholder cap of no more than 50 non-employee shareholders in a proprietary company;
- a prohibition on public offers of equity in these companies, with limited exemptions such as:
- the small-scale personal offers exemption (ie no more than 20 investors in 12 months contributing no more than $2 million, or $5 million in some circumstances); and
- offers to sophisticated, experienced, professional or overseas investors; and
- public fundraising disclosure requirements in Chapter 6D of the Corporations Act 2001 (Cth).
2. CAMAC’s proposed changes
2.1 Proposal for new regulation of business structures
A key CAMAC proposal is that only public companies or exempt public companies be allowed to raise funds by crowd sourced equity funding.
Regulatory requirements vary considerably depending on the nature of a business structure. The bar is much higher for public companies than for private companies. A “Pty Ltd” company is a private company aka proprietary company.
CAMAC’s proposed modification to existing laws as follows:
- an existing private company should be capable of being changed into an exempt public company;
- exempt public companies should be exempt from certain regulatory duties of public companies for a specific period; and
- exemption should lapse in time or on certain events taking place.
2.2 Proposal for minimising disclosure requirements
As regards existing disclosure requirements, CAMAC seems to recommend little change, other than use of a standard template disclosure document.
Shareholder rights it says should be clearly disclosed, especially for clarity regarding voting, dividend and other shareholder rights.
2.3 Additional protections, prohibitions and caps
“It is proposed that an eligible issuer [structured as per item 2.1 above] may seek funds from the crowd by offering its equity through a licensed online intermediary [ie crowd funding platform], provided:
- the offer does not exceed the issuer cap of $2 million in any 12 month period
- the offer disclosure requirements are complied with [note item 2.2 above]
- the controls on advertising are complied with
- the issuer does not lend to crowd investors to acquire its shares
- any material adverse change concerning the issuer is notified.”
Furthermore, CAMAC proposes that issuers and intermediaries be prohibited from being in conflicts of interest, providing investment advice, being involved in lending, and exceeding monetary caps on how much an issuer may issue or the investor may invest.
The prohibition on investment advice would extend says CAMAC to a crowdfunding platform having on its website a section for ‘Staff picks’, ‘What’s hot’, or ‘You might like this…’, or ‘Your friend liked this; check it out’.”
For investor protection CAMAC proposes “a crowd investor be limited to investing $2,500 per issuer (eg a start-up venture proposer), and $10,000 for all issuers, in any 12 month period”. This may prove to be a controversial restraint.
3. Assessment – why not private companies to transition?
CAMAC states that its positions are essentially deregulatory. They are. However, for entrepreneurs starting off on a small scale requiring an exempt public company structure maintains significant start-up expenses and requirements. Less onerous would be a private company, still with some safeguards for investors.
In time such a private company could be changed to a public company. Various requirements proposed by CAMAC could still be applied later, ie when exempt public company status lapses and a company becomes a public company. In that regard, CAMAC proposes that the exempt public company status automatically lapse when any of the following occur:
- the capital of the enterprise reaches a certain stipulated threshold, say, $5 million (for a continuous period of, say, 6 months).
- the turnover of the enterprise meets a predetermined minimum, say, $5 million per annum.
- the company has been incorporated as an exempt public company for a certain period, say, three years, subject to a limited extension period.
In Australia there is no crowdfunding-specific law, nor do we or CAMAC recommend one. Hence CAMAC’s position awaits a response by the Federal Government.
CAMAC notes that New Zealand and the UK have already implemented their approaches to the application of law to equity crowdfunding. The Government’s position may also be shaped by fast moving crowdfunding legal developments in the EU and in state and federal law in the United States where the first flourish of groundbreaking legal reform for crowdfunding began with the JOBS Act 2012.
Crowdfunding was born global on the foundation of maturing online technologies and platforms. From this international competition and cross-fertilisation has developed in multiple ways between crowdfunding issuers, intermediaries and investors. This is useful in post-GFC developed economies in need of investment.
Collectively, these technological, economic, and domestic and international legal forces make it likely that some legal change will take place in Australia for crowdfunding.
Postscript: To get a sense of the economic context and the need for investment, read as a mini photo essay these graphics. The first is credited to economist, Robert Schiller, and illustrates data from the Standard & Poor 500 in the United States.
The next two images featured in recent months in The Australian Financial Review and illustrate data from the Australian Treasury. The forecast is not peaches and cream.
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