Proprietary Company Crowd-sourced Equity Funding goes live today
The Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 (the Act) comes into operation today, amending the Corporations Act to enable proprietary companies to access Crowd-sourced Equity Funding (CSF) without the requirement to transition to a public company.
On Wednesday, 12 September 2018, the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (the Bill) passed both Houses of Parliament, with the Bill then receiving Royal Assent on 21 September 2018.
The Act extends the CSF legislative regime introduced by the Corporations Amendment (Crowd-sourcing Funding) Act 2017 (which we discuss in a previous Legal Alert from March 2017 here) and addresses many of the issues raised with respect to the existing public company regime. Whilst we have previously discussed the amendments to the Corporations Act that were proposed by the Bill (see our previous Legal Alert from September 2017 here), this Client Alert provides a summary of the major changes that will take effect from today when the Act becomes effective.
Additional reporting obligations
Under the Act, a proprietary company that makes a CSF offer will be required to maintain additional information on their company register while the company has CSF shareholders. This additional information includes:
- the date of each issue of shares as part of a CSF offer;
- the number of shares issued as part of each CSF offer; and
- the date on which each person ceases to be a CSF shareholder of the company.
These obligations will ensure that companies keep an appropriate record of the securities that have been issued pursuant to CSF offers and that companies are aware of the number of CSF shareholders at any given point in time. It has been deemed essential that a proprietary company be able to identify if they have CSF shareholders as they will be subject to additional reporting and governance obligations whilst this is the case.
Companies will also need to notify ASIC in the following circumstances:
- when the company starts having CSF shareholders;
- when the company stops having CSF shareholders;
- when the company issues new shares; and
- when the company cancels any of its shares and the cancellation results in the company ceasing to have CSF shareholders.
Financial reporting obligations for small proprietary companies that make CSF offers
Under the Act, small proprietary companies with CSF shareholders will no longer be exempt from preparing a directors’ report. These companies will instead be required to prepare annual financial statements and directors’ reports that comply with appropriate accounting standards, and will subsequently need to provide these to both members and ASIC in accordance with section 314 of the Corporations Act. This obligation will apply from the financial year in which the company first starts to have CSF shareholders, and will continue to apply to every future financial year in which the company retains CSF shareholders, but will only arise once the company has completed a CSF offer.
Small proprietary companies will only need to provide their annual report via a website and there is no requirement to notify shareholders of alternative ways of receiving such information or to make these reports public.
Where a small proprietary company raises an amount equal to or greater than the CSF audit threshold of $3 million, they will be required to have their annual financial reports audited. An auditor must be appointed from one month after the threshold is met until the company stops having CSF shareholders.
Directors that fail to do everything reasonable to comply with this requirement will be liable for penalties under the Corporations Act. Where a small proprietary company reaches or exceeds the threshold but does not appoint an auditor, they must notify ASIC within seven days after the one month period has ended. ASIC must then appoint an auditor as soon as practicable. The existing requirements for interdependence between company and auditor, as well as rules preventing an auditor from becoming a director of an entity they audited for a two year period will also be extended to include auditors appointed for small proprietary companies reaching or exceeding the threshold.
50 non-employee shareholder cap
Under the previous legislation, the shareholder cap for proprietary companies was 50 non-employee shareholders. Under the Act, the amendments will create an exemption to this rule, allowing proprietary companies to have in excess of 50 non-employee shareholders where the shareholders either are CSF shareholders, or where the shareholder owns shares that were originally issued as part of a CSF offer and have subsequently been transferred to the shareholder. This exemption is however subject to certain requirements prescribed in the regulations and will not apply if the company’s shares are traded on a financial market whether in Australia or elsewhere.
A proprietary company must have at least two directors when the company makes the CSF offer and must maintain this minimum number of directors whilst the company has one or more CSF shareholders. If there are only two directors, at least one of those two must ordinarily reside in Australia, otherwise, if there are more than two, the majority must ordinarily reside in Australia.
Restrictions on related party transactions
Proprietary companies raising funds via a CSF offer will be subject to restrictions on related party transactions, including the existing related party rules and penalties under the Corporations Act, in order to protect investors. The government hopes this will encourage more investors to participate in the CSF regime, with these restrictions aimed at protect investors against fraud and bias arising from transactions with related parties. The Explanatory Memorandum of the Bill notes that these restrictions have been balanced so as to be not overly onerous, as certain transactions will still be permissible provided they are on commercial terms and at arm’s length or if the shareholders provide consent.
Proprietary companies that have CSF shareholders will now be exempt from the Takeover provisions of the Corporations Act provided they meet the requirements prescribed by the regulations. This will hopefully reduce compliance costs and avoid unduly restricting companies from adjusting their capital structure.
Reduced cooling off periods for supplementary or replacement CSF offer documents
Currently, under the public company CSF regime, where a supplementary or replacement CSF offer document is published, an intermediary must provide written notice to all applicants that have previously accepted the CSF offer, in order to advise them of the one month cooling-off period and their rights to withdraw their acceptance and obtain a refund. Under the Act, this cooling-off period has been reduced to 14 days, providing greater certainty for the company making the CSF offer, as well as other applicants, about the outcome of the CSF offer. However as a transitional provision, investors in CSF offers made prior to today’s date will have access to the existing one-month cooling-off period even if supplementary or replacement CSF offer documents are published after commencement of the Act.
Public Companies – Increased audit threshold for eligible public companies using the corporate governance concessions
In addition to the introduction of the proprietary regime, public companies utilising CSF will also face changes beginning today. Given the introduction of the proprietary regime, public companies that are using the existing corporate governance concessions provided for by the Corporations Amendment (Crowd-sourced Funding) Act 2017 will also be required to have their financial statements audited and appoint an auditor when reaching the auditing threshold of $3 million (as opposed to the existing threshold of $1 million).
Public Companies – Removal of the corporate governance concessions
These corporate governance and reporting concessions will also no longer be available to public companies who incorporate or convert to a public company after the end of six months following Royal Assent of the Act (being after 21 March 2019). Public companies that incorporate or convert prior to this time will still be able to access the concessions, provided they are eligible. Further, companies that indicated an intention to use CSF in their application for registration or conversion prior to the amendments taking effect will also be able to continue accessing these concessions provided they meet the eligibility requirements.
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.