In a Nutshell
The Corporations Amendment (Crowd-sourced Funding) Bill 2016 passed the Senate on 20 March 2017, signalling the introduction of a new framework aimed at opening up early-stage capital markets and creating new investment opportunities.
On Monday, 20 March 2017, after a lengthy 15 month process, the Australian Senate passed the Corporations Amendment (Crowd-sourced Funding) Bill 2016.
After an initial framework was first released by the Corporations and Markets Advisory Committee (CAMAC) in a September 2013 Discussion Paper, it was not until December 2015 that the Commonwealth Government introduced draft legislation in the form of the Corporations Amendment (Crowd-sourced Funding) Bill 2015 (2015 Bill). Unfortunately however, the 2015 Bill lapsed at the dissolution of the Parliament in May 2016.
On 24 November 2016, almost one year after the introduction of the 2015 Bill, Scott Morrison introduced the Corporations Amendment (Crowd-sourced Funding) Bill 2016 (2016 Bill). After initially passing the House of Representatives on 8 February 2017, the 2016 Bill has now passed the Senate and is awaiting royal assent.
As most provisions of the 2016 Bill are drafted to come into operation 6 months after royal assent, it is likely that we will see the introduction of the new CSF framework in September this year.
What is Crowd-sourced Funding (CSF)?
Crowd-sourced Funding or CSF, as the name suggests, allows companies to raise capital through a large group of investors (a ‘crowd’). In practice, this is typically achieved by a large number of investors contributing small amounts of capital through an online platform, and in return receiving equity in the company.
CSF has risen to prominence recently as small or start-up companies often find it difficult to access traditional sources of finance. This ‘access to capital’ issue significantly inhibits these companies and has been recognised by ASIC as an issue of great importance.
CSF provides an alternative source of early-stage capital for these companies, and as such, could be a significant factor in reducing these current funding constraints for small and start-ups companies.
The Current Constraints
The 2016 Bill aims to alleviate a number of the current restrictions in the current regulatory regime that are preventing the widespread adoption of CSF throughout Australia.
These current constraints include:
- the 50 non-employee shareholder limit placed on proprietary companies;
- the prohibition on public offerings of securities by proprietary companies; and
- the higher level corporate governance and reporting obligations imposed upon public companies.
The combination of these factors, amongst others, means that without the changes contained in the 2016 Bill, CSF is currently not possible in Australia.
The Proposed Regime
The 2016 Bill will implement the new CSF regime by introducing a number of amendments to the Corporations Act 2001. These amendments will effectively create three distinct stakeholders groups, with each having different obligations, restrictions and protections:
- Eligible CSF companies
- CSF Intermediaries
Eligible CSF Companies
In order for a company to be eligible to raise capital under the CSF framework, the company must satisfy certain criteria in order to be an ‘eligible CSF company’:
- the company must be a public company with its principle place of business located in Australia;
- a majority of directors must ordinarily reside in Australia;
- the company must have less than $25 million in consolidated gross assets and less than $25 million consolidated annual revenue;
- the company, or any related party must not be listed on the ASX or on any exchange; and
- the company, or any related party must not operate as an investment business. 
A CSF Offer
If a company satisfies all of the above criteria, it is then eligible to conduct a ‘CSF offer’. An offer is eligible under the 2016 Bill when the company conducting the offer is an eligible CSF company and the offer:
- is for the issue of securities in the company;
- complies with the issuer cap;
- the funds raised are not intended to be used, to any extent, for investment in other securities or schemes; and
- complies with the regulations in terms of the class of securities offered and any other requirement. 
The Issuer Cap
One of the most important requirements of an eligible CSF Offer is the requirement that it complies with the ‘issuer cap’. For the purposes of the 2016 Bill, an offer complies with the issuer cap when the offer does not exceed $5 million.
Importantly however, in addition to this offer, all amounts raised in the previous 12 months by the company, or a related party, pursuant to:
- a CSF Offer; or
- an offer for which disclosure was not required under subsection 708(1) (‘small scale offerings’ exemption) or (10) (‘financial services licensee’ exemption),
will also be included in determining whether a company has complied with the issuer cap. 
Under the framework, a CSF Offer can only be undertaken through a ‘CSF Intermediary’. These CSF Intermediaries will be the parties authorised to “provide the crowd funding service”, most likely by operating the internet base platform which will conduct the CSF Offer.
As a result of amendments to Chapter 7 of the Corporations Act 2001 under the 2016 Bill, providing a ‘crowd funding service’ will now constitute the provision of a financial service. As such CSF Intermediaries will be required to hold an Australian Financial Services Licence (AFSL) and comply with the requirements of Chapter 7.
In addition, the new CSF framework will also impose a number of significant obligations on these CSF Intermediaries, including:
- conducting prescribed checks on the issuers (eligible CSF companies);
- providing standard risk warnings to investors, in accordance with the regulations, and also that they obtain risk acknowledgments;
- disclosing all fees and remuneration payable to them with respect to the CSF Offer; and
- that they be prohibited from lending to investors or from giving investment advice.
Most significantly however, the CSF Intermediary will also have an obligation to ensure that the eligible CSF company has a valid ‘CSF offer document’ and that there are no disclosure deficiencies in this document. Further, they will also be responsible for ensuring that the eligible CSF company is only utilising one CSF platform at a time.
The final stakeholder group under the CSF framework are investors. In addition to the benefits that CSF provides to small and start-up companies, it also provides retail investors with the ability to invest in these emerging, high growth companies and diversify their investments.
However, the concern of many has been that these companies are also significantly riskier than their established counterparts. As such, the 2016 Bill implements a number of investor protections aimed at ensuring investors are protected and that investment confidence is maintained under the regime.
The major protections imposed by the CSF framework include:
- the investor cap – investors will only be allowed to invest a maximum of $10,000 per company in any 12 month period;
- risk warnings & acknowledgments – as previously stated, the CSF Intermediary must offer the standard risk warnings to investors and the investor must also acknowledge these risks prior to accepting an offer;
- cooling off rights – investors will have 5 days to consider their decisions, and may during this time, unconditionally withdraw their investment; and
- prohibitions on financial assistance – both eligible CSF companies and CSF Intermediaries will be prohibited from offering financial assistance, protecting investors from potential conflicts of interest.
One of only two significant changes between the 2015 Bill and the 2016 Bill was the reduction in the ‘cooling off rights’ from 5 days down to 48 hours. This change has however now been reversed, with the time period increased back to 5 days after parliamentary debate in the Senate resulted in the amendment.
One of most contentious issues with the proposed framework is the requirement that companies must be a public company in order to access CSF.
In order to reduce the corporate governance and reporting obligations imposed on newly converted public companies, the 2016 Bill provides a number of exemptions which the government hopes will entice more companies to pursue CSF.
These exemptions will apply to newly converted public companies for 5 years after conversion, subject to the company completing a valid CSF Offer within 12 months of their conversion. The exemptions included in the 2016 Bill include:
- an AGM exemption – the requirement to hold an AGM each financial year has been waived for eligible CSF companies;
- an audit exemption – the requirement that public companies appoint an auditor has been waived where the company has raised less than $1million in capital and has not raised capital under other offers requiring disclosure; and
- financial reporting exemptions – the company may supply its financial reports to members by making a copy of the report accessible on a website.
Scott Morrison himself has flagged future amendments to the regime to include proprietary companies and while it has also been reported that FinTech Australia is currently working with the Government towards implementation, these changes are not expected until later in 2017.