Proposed Legislation to Enable Crowd-sourced Funding for Proprietary Companies

The Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (the draft Bill) was released on 9 May 2017 for public consultation (consultation closed on 6 June 2017). The draft Bill, if enacted, would allow "proprietary companies" which meet certain eligibility requirements to have access to crowd-sourced funding (CSF).

Background

Under the already enacted Corporations Amendment (Crowd‑sourced Funding) Act 2017 (Cth - No 17 of 2017) CSF will be available to Australian companies on 29 September 2017 - the date on which the Act commences. However, that Act limits the availability of CSF to "public unlisted companies". The draft Bill proposes to extend the CSF regime to proprietary companies and also proposes to remove the need for proprietary companies to transition to the "public company" type of company to be able to access CSF.

The extension of the CFS legislation was foreshadowed by the Federal Government in the May 2017 Budget with the draft Bill being being circulated on behalf of the Treasurer, Scott Morrison. The Budget committed to extending the reach of the CSF framework, by providing for $4.5 million to be made available to the Australian Securities and Investments Commission (ASIC) to implement the program. 

The extension of the CSF regime is said by the Federal Government to be expected to be of particular benefit to technology companies and start-ups as these companies are not typically "public companies" which would not allow these companies to engage in CSF under the law as it currently stands.

Details of Changes Proposed by Draft Bill 

The broad amendments proposed by the draft Bill extend the CSF regime to proprietary companies by:

• expanding the eligibility for the CSF regime in section 738H of the Corporations Act 2001 (Cth) to proprietary companies that meet eligibility requirements;
• adding special investor protection provisions for proprietary companies accessing the CSF regime; and
• removing the temporary corporate governance concessions in the Corporations Amendment (Crowd-sourced Funding) Act 2017 for proprietary companies that convert to or register as public companies to access the CSF regime.

More specifically the draft Bill proposes that:

• a private company must have at least two directors before it can engage in CSF;
• a private company must include additional information in its company register. Information including the date of each issue of shares as part of a CSF offer, the number of such shares issued and the date on which a shareholder ceases to be a CSF shareholder;
• ASIC is notified of the dates on which a private company starts and then ceases to have CSF shareholders;
• a private company engaged in CSF must prepare and provide ASIC with copies of annual financial and directors’ reports, an additional obligation to ensure that CSF shareholders have access to adequate information about their investments;
• a private company that raises more than $1 million from CSF must audit their annual financial reports;
• to protect investors against fraud and bias arising from related party transactions, private companies engaged in CSF will be subject to existing related party transaction rules under the Corporations Act 2001 (Cth);
• a private company having CSF shareholders be exempt from the takeover rules in Chapter 6 of the Corporations Act 2001 (Cth) under certain circumstances; and
• the existing 50 shareholder cap for private companies be amended under the draft Bill so as to allow private companies to effectively use CSF as a means of fundraising, CSF shareholders are not counted as part of the cap.

Next Steps

The consultation having concluded the next step is for the actual Bill to be presented in Federal parliament which it is expected will happen as the Budget measures find their way into legislation. When enacted, the  amendments proposed by the draft Bill are intended to commence the day after the end of the period of six months after Royal Assent to the Bill - if and when it is enacted. 

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Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017  draft Bill and  EM - as reported in the TimeBase LawOne Service

Proprietary companies to be able to access crowd sourced funding (FinTech Law Watch)

The one Budget 2017 policy startups are really excited about: Crowd sourced equity for proprietary companies (SmartCompany)