Crowd-Sourced Equity Funding Bill: Senate Committee Report Tabled

Thursday 3 March 2016 @ 10.19 a.m. | Corporate & Regulatory | IP & Media | Trade & Commerce

On Tuesday (1 March 2016) the Senate Economics Legislation Committee's Report (the SELCR) into the Federal government's Corporations Amendment (Crowd-sourced Funding) Bill 2015 (the Bill) which proposes a new framework for crowd-sourced equity funding was tabled in the Senate. Chapter 3 of the SELCR is  the key part of the report and reports on the areas of:

  • eligibility requirements,
  • making an offer and offer documents,
  • responsibilities of intermediaries,
  • investor protection such as a cooling off period, and
  • penalities

and concludes at 3.97 that:

"The committee recommends that the government monitor carefully the implementation of the legislation and undertake a review of the legislation two years after its enactment with special attention to the matters detailed in this report."

The SELCR also then recommends at 3.103 that the Senate pass the Bill, however, this is with a Dissenting Report by the Opposition  being attached, stating that the Opposition  did not totally agree with the Bill but that it would not block the Bill:

"The Opposition believes it is important to usher in a new equity crowdfunding framework in Australia. We do not intend to block the Bill. However we do need to remove a major barrier to small firms accessing the equity crowdfunding system."

Background and Key Provisions - Recap

As we have previously reported  the Bill, which was introduced by the government on 3 December 2015 into the House of Representatives, allows unlisted public companies with less than $5 million in assets or turnover to raise up to $5 million from crowd-sourced equity funding (CSF), while gaining concessions from some reporting obligations. Investors in such schemes will be limited to investing an amount of $10,000 per year. The Bill is said by the Government to be part of its innovation innovation package.

The key provisions of the Bill as outlined by the SELCR are:

Three schedules setting out amendments to the Corporations Act 2001  and consequential amendments to the Australian Securities and Investments Commission Act 2001, (the ASIC Act) with the objective of facilitating crowd-sourced equity funding.

Schedule 1 of the Bill amends the Corporations Act 2001 and establishes a regulatory framework to facilitate crowd-sourced funding by small, unlisted public companies. The proposed scheme would include:

  • eligibility requirements for a company to fundraise via CSF, including disclosure requirements for CSF offers;
  • obligations of a CSF intermediary in facilitating CSF offers;
  • the process for making CSF offers;
  • rules relating to defective disclosure as part of a CSF offer; and
  • investor protection provisions.

Schedule 1 of the Bill also makes consequential amendments to the ASIC Act to expand the range of financial services covered by the ASIC Act to include a crowd-funding service, as defined by the Corporations Act.

Schedule 2 of the Bill would provide eligible new public companies with temporary relief from reporting and corporate governance requirements. This would reduce potential barriers to adopting the required public company structure.

Schedule 3 of the Bill introduces provisions aimed at providing greater flexibility in the Australian Market Licence (AML) and clearing and settlement facility licencing regimes.

Matters Arising from Submissions to the Committee

In an article for website FinTech Business it is reported that a key issue among start-up business with respect to the proposed Bill coming from the submissions to the Committee of such start-ups and their representatives is that the legislation is "too onerous" for start-ups. This being so especially with respect to ". . . the requirement for crowdfunders to become unlisted public companies".

One of the companies referred to in the article VentureCrowd was one of a number who argued against requiring equity crowdfunding recipients be public listed companies and is reported as saying in its submission:

"This Bill’s requirement that an equity crowdfunding start-up first becomes a public company imposes a significant (and unnecessary) regulatory, administrative and compliance burden on those start-ups, . . . "

As VenturCrowd  points out  becoming a public company requires expenditure of ". .  .  thousands of dollars on lawyers and accountants" and a litany of other compliance measures, said to be tasks and expenses ". . . well beyond the capacity and limited resources of a start-up, . . ."

Another interesting submission quoted in the article is that of law firm King & Wood Mallesons, in whose view the public company regime is "not suitable" for equity crowdfunding, which instead requires a ". . . more flexible, graduated regulatory framework [an approach that] would make more sense". A point supported by the observation that most start-ups do not have $5 million in existing assets and revenue, are unlisted at a very early stage of development and further will only convert to a public company status just before issuing an IPO.

On this issue The Conversation, in a recent article, points to the example of Italy where similar legislation had imposed strict restrictions on the types of companies that could access crowd-sourced funding, and where such resulted in less than 20 projects being able to rely on crowd-sourced funding to raise the capital necessary for them to get off the ground and further, the total amount raised through the crowd-sourced funding being less than €1.5 million prior to the legislation being amended to be made more workable.

The Australian legislation does provide some exemptions and incentives intended to overcome the above described Italian problems but the view is that:

"Despite this effort, the bill exemptions are unlikely to encourage a proprietary company to convert into a public company as the current concessions are really minimal."

Next Steps for the Bill

The legislation is intended to be an important part of the government's innovation package and given that the opposition has indicated it will not block the Bill, it is likely to pass quickly and be enacted in the near future.

TimeBase is an independent, privately owned Australian legal publisher specialising in the online delivery of accurate, comprehensive and innovative legislation research tools including LawOne and unique Point-in-Time Products.

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