Crowd-Sourced Funding extended to Proprietary Companies
On 14 September 2017, the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (the Bill), was introduced and read in parliament for the first time. The Bill follows on from the passing of the Corporations Amendment (Crowd‑sourced Funding) Act 2017 (the Act) in March 2017 and the subsequent release of the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 Exposure Draft (the Exposure Draft) in May 2017.
The Bill aims to build on the framework of the Act and seeks to extend the Act to proprietary companies, granting them access to crowd-sourced funding (CSF) without the need to transition to a public company. In addition, the Bill also seeks to increase the ability of retail investors to access early-stage investment opportunities.
The Act itself will come into force on 29 September 2017, 6 months after it was initially passed by both houses of parliament. For information on the Act, please refer to our previous legal alert from March this year.
What is proposed as part of the Bill?
In order to uphold the necessary investor protections and company accountability, various governance and disclosure requirements are proposed as part of the Bill. This exposes CSF proprietary companies to additional compliance costs compared to those generally imposed on proprietary companies. However, the involved costs remain lower than those associated with the conversion to a public company under the Act.
Given the Bill now extends the CSF regime to proprietary companies, the requirement for proprietary companies to convert to public companies in order to access the CSF regime is no longer required. In addition, the Bill also removes the temporary corporate governance concessions provided under the Act.
In addition, numerous other requirements are proposed and have been set out in the Bill. These proposed requirements include significant issues such as the minimum director requirements, company register and ASIC notification requirements and changes to the auditing requirements for certain CSF companies. Further detail in respect of these requirements is set out below.
The Bill extends the CSF regime to proprietary companies, provided they meet the eligibility requirements prescribed under section 738H of the Act which were previously discussed in our March legal alert.
In addition, the regulations may also prescribe other eligibility requirements so that the Government can quickly intervene to protect investors if required.
Removal of shareholder cap
In order to allow proprietary companies to effectively use the CSF regime, the existing shareholder cap of 50 non-employee shareholders is amended to exclude shareholders that obtain shares pursuant to a CSF offer statement or shareholders that obtain shares which were originally obtained pursuant to a CSF offer statement.
Minimum director requirement
The Bill proposes that, in order to access CSF, proprietary companies will need to appoint a minimum of two directors, thereby ensuring that greater transparency is provided.
Similarly, once a CSF offer has been made, a CSF proprietary company must maintain 2 directors as long as it has CSF shareholders.
Company register and ASIC notification
Proprietary companies seeking to engage in CSF will need to include additional information on their company register, including the date of each issue of CSF shares, the number of CSF shares issued, the CSF shares issued to each member of the company and the date each person ceases to be a CSF shareholder.
This information will also need to be provided to ASIC, allowing it to track the proprietary companies engaging in CSF, so as to ensure they are meeting the additional requirements imposed on them.
Financial reporting in accordance with accounting standards
Unlike regular small proprietary companies, CSF proprietary companies will be required to comply with the financial reporting obligations under the Corporations Act 2001 (Cth) (Corporations Act) in order to keep their investors informed.
These reports must be provided to company members under section 314 of the Corporations Act and to ASIC under section 319 of the Corporations Act.
This is similar to the provisions of the Act, however in this instance, small CSF proprietary companies will only need to provide these annual reports via a website.
Once a proprietary company raises more than $3 million, they will be required to have their financial statements audited. However, if the company raises less than $3 million as part of the CSF Offer, this requirement need not be met.
Restrictions on related party transactions
It is also proposed that the Chapter 2E ‘Related party transaction’ rules be extended to proprietary companies with CSF shareholders, preventing the transfer of funds to related parties, for non-commercial purposes, without shareholder approval.
However, transactions will be permissible if they are on arm’s length commercial terms or if shareholder consent is obtained.
Takeovers of CSF proprietary companies
CSF proprietary companies that have over 50 shareholders would also generally be required to comply with the takeover rules in Chapter 6 of the Corporations Act.
However, given the complexity and costs associated with these provisions, the Bill does state that CSF proprietary companies may be exempt from the Chapter 6 takeover provisions, provided that they meet the conditions to be prescribed in the regulations.
Additional changes proposed under the Bill
In addition to those set out above, the Bill also proposes changes such as amendments to the eligibility requirements for CSF companies.
Further, the cooling off period for supplementary or replacement CSF offer documents has been proposed to be reduced from one month to 14 days. This means that, where a supplementary or replacement CSF offer document is published, an intermediary must give written notice to all applicants that previously accepted the offer, informing them that they have 14 days to withdraw their acceptance and obtain a full refund for their investment.
How does the Bill affect the remainder of the Act?
Irrespective of these proposed amendments, most of the remaining provisions contained in the Act will remain the same for proprietary companies. These include the various caps imposed on companies seeking funding and investors looking to invest, the regulation of intermediaries, the making of offers and the penalties for non-compliance.
Changes from the Exposure Draft
Finally, the Bill includes a number of significant changes from the Exposure Draft originally released in May. Two of these major changes are the changes to the definition of ‘CSF shareholder’ and the new threshold proposed with respect to the auditing of financial statements. These amendments are positive amendments for companies looking to utilise CSF, and so far have been positively received.
CSF Shareholder definition
Under the Exposure Draft, the definition of CSF shareholder meant that a CSF shareholder was required to purchase the CSF shares as part of a CSF offer. However, this definition was limited in that the Explanatory Memorandum to the Exposure Draft stated that “if the securities are sold or transferred in any other way, the new holders will no longer be CSF shareholders”.
In contrast, the definition of CSF shareholder under the Bill includes shareholders who have come into possession by a transfer or similar. The Explanatory Memorandum states that the definition will extend to shareholders “who own shares that were originally issued as part of a CSF offer” where “the transfer to the shareholder occurred prior to the company’s shares being traded on a financial market in Australia or elsewhere…”.
The exclusion of shareholders that purchase or have been transferred CSF securities through secondary trading from the definition of CSF shareholders was a significant concern to many prospective companies. This definition would have meant that these shareholders would have be included under the proprietary company 50-shareholder cap and subsequently may have forced a proprietary company to convert to a public company.
As a result, the change in the Bill, which permits such on-selling and transferring within the definition of CSF shareholder, better accommodates CSF secondary markets and is a positive amendment.
Finally, the fundraising threshold for the auditing of financial statements has increased from a threshold of $1 million in the Exposure Draft to a threshold of $3 million in the Bill. This is also a positive change and significantly reduces the compliance costs associated with CSF for small scale companies.
Moving forward, the Bill will now require approval by both houses of parliament, most likely followed by a 6 month period following royal assent, before coming into operation. As such, although the Act will come into force on 29 September, the provisions of the Bill will likely not come into force until well into next year.
A copy of the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 and its Explanatory Memorandum can be accessed here.
 Explanatory Memorandum, Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (Cth) 3.
Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 Schedule 1, Part 1, item 41, paragraph 738H(1)(a).
 Ibid Schedule 1, Part 1, item 13, subsection 201A(1A).
 Ibid Schedule 1, Part 1, item 10, subsection 169(6)AA.
 Ibid Schedule 1, Part 1, item 11, paragraph 178A(1)(b).
 Ibid Schedule 1, Part 1, item 18, paragraph 292(2)(c).
 Ibid Schedule 1, Part 1, item 24, subsection 314(1AF) and item 25, subsection 314(2A).
 Ibid Schedule 1, Part 1, items 16 and 17, subsection 285(1) (table item 3, column headed ‘comments’).
 Ibid Schedule 1, Part 1, item 45, section 738ZK.
 Explanatory Memorandum, Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (Cth) 17-18.
 Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 Schedule 1, Part 1, item 40,section 611.
This Alert is intended as an alert only. It does not purport to be comprehensive advice. Readers should seek professional advice before acting in relation to these matters.