New crowdfunding laws in Australia due to take effect in September aim to make it easier for small firms to raise funds from the public – but what about investor protections?
By James Dunn
Earlier this year, the Australian Parliament passed the Corporations Amendment (Crowd-sourced Funding) Act 2017 to establish a legislative framework to facilitate crowd-sourced funding (CSF) by small, unlisted public companies. The intent of the law is to make it easier and cheaper for companies, especially start-up companies, to source the funding they need.
Under the new regime, which will be implemented in Australia in September 2017, unlisted public companies with less than A$25 million in consolidated assets and annual revenue will be allowed to raise up to A$5 million a year in equity from the public (the crowd) on the condition that they meet certain regulatory requirements.
Those requirements are less than those usually applied to public companies raising equity finance, and exclude certain reporting, audit and corporate governance requirements that would apply to other public companies. After five years, however, the CSF companies will be subject to the same obligations as apply as to all public companies.
Further, investors in such CSF companies won’t be buying their shares through the Australian Securities Exchange (ASX) but via online platforms that have authorisation from the Australian Securities and Investments Commission (ASIC) to provide a CSF service.
The risks of crowd-sourced funding
CPA Australia is guarded in its support of the CSF framework.
“We still have concerns around whether the reduced disclosure requirements are appropriate, as this kind of investment is typically very high-risk,” says Paul Drum, head of policy at CPA Australia.
High-risk products usually have many more disclosures, he says.
“It’s obviously a government decision to reduce the usual public company disclosure requirements to cut the costs for smaller companies, especially start-ups sourcing funds from the crowd.”
“The introduction of CSF in Australia is a positive development as it may assist smaller, innovative companies that may otherwise struggle to access finance, to source that finance, and possibly at a lower cost. However, we are not certain whether the regime has struck the right balance between the funding needs of business and investor protections.’
Drum says those considering investing in a CSF company should first read the information ASIC has published on the topic on its MoneySmart website, and seek licensed financial advice from someone independent of those promoting an investment in such a company.
What do the crowdfunders say?
Alan Crabbe, co-founder of equity crowdfunding platform Pozible, says the CSF regime strikes a good balance between managing the need to protect investors through disclosure, and encouraging this new form of capital raising for small and medium businesses.
“The regime involves a range of disclosure obligations for issuers and intermediaries to disclose the risks of investing in start-ups, information about the issuing company, their team and the offer being made,” he says.
Crabbe believes an investor cap and a cooling-off period are good features.
“We feel these are good safeguards to have in place for companies that are raising funds from the public,” he says.
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Who can invest via crowdfunding?
Anyone will be able to invest in a CSF company, but the amount that investors can put into any one company will be capped at A$10,000 in a 12-month period, and there will be a short five-day cooling off period for each investment.
Companies wanting to raise capital must appoint at least three directors, prepare a capital management strategy, identify potential investors and prepare a CSF offer document.
It is understood that the regulatory guide for public companies on CSF will be released in September 2017. The draft states that a company seeking funding from the crowd should disclose in its offer document:
- its business model and strategy
- its top three to five material risks
- the capital structure, pre- and post-offer, shareholder rights, including special rights under shareholder agreements, and majority shareholder interests
- how the funds raised will be used and whether the funds are sufficient to meet the company’s objectives
- information about current and any proposed directors and senior managers
The financial information to be disclosed in the offer document should include, for the most recent financial year:
- a balance sheet
- a profit and loss statement, showing major revenues and expense items, earnings before interest and tax and net profit after tax
- a cash flow statement showing, at a minimum, operating cash flows
- a statement of changes in equity, showing changes in owner’s equity
The financial statements included in the offer document must be prepared and presented in accordance with the relevant accounting principles under the accounting standards, however these financial statements do not need to be audited or reviewed by an auditor, and there is no requirement to include an auditor’s opinion on the financial statements.
What happens when investors want to sell?
There may be concerns about how investors will get their money out, as there is no liquid secondary market, such as a stock exchange, planned.
“It looks like they’re leaving that up to the platforms to try to develop that secondary market, a platform where people can sell their interest if they so wish,” says Drum.
“That’s something we’ll be following very carefully: we certainly hope that people advising their clients on CSF investments will alert them that it may be difficult for them to sell out of their investment.”
Any advertising for a CSF offer must include a statement directing investors to the general risk warning and offer document.
ASIC is placing the onus on the intermediaries to police whether offer documents comply with the information requirements: they can decide not to publish the CSF offer document or close the offer early, with the ultimate sanction being an ASIC stop order to halt the offer.
Drum says CPA Australia will be watching how the new regime works in coming years and will revisit it where necessary, “maybe in a post-implementation review in three years’ time”.
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