Australia has regained momentum on a Bill that will enable startups to raise funds through equity crowdfunding. The first attempt to pass the Bill failed in 2015 due to criticism that it was too restrictive. On November 24 2016, it was re-tabled in parliament and has since gone through a second reading. If passed, the Corporations Amendment (Crowd-sourced Funding) Bill 2016 will allow Australia to jump on the equity crowdfunding bandwagon, just as countries such as New Zealand, US and UK have done. It will take six months for the legislation to come into force once it is passed. While the proposed legislation is a big leap forward to motivate crowdfunding for startups, lawyers Asialaw spoke to point out its benefits and limitations.
“Australia has been talking for quite awhile about equity crowdfunding, but the legislation has been a long time coming,” says Jonathan Farrer, partner at Corrs Chambers Westgarth. “Companies need to think carefully about what sort of share register they want before seeking crowdfunding. Usually a small company will only need to deal with a handful of investors on its share register, but with crowdfunding even small companies may end up with a very large number of shareholders. This can have benefits, such as a large pool of potential investors for follow-on capital raisings, but it can also add administrative and reporting complexity.”
“There hasn’t traditionally been a transparent market of investors for startups, so crowdfunding can be attractive because there is a single platform to raise funds from investors. Similarly, it allows investors to access investment opportunities which wouldn’t otherwise be made available to them,” adds Farrer.
“Technology, agriculture and property are the popular sectors for equity crowdfunding in Australia,” says Michelle Eastwell, partner at HopgoodGanim Lawyers.
Restrictions on equity crowdfunding
Proprietary limited companies must have 50 or fewer non-employee shareholders, but this challenges the idea of crowdfunding which is to attract as many investors as possible. Restrictions on making public offers of securities also means that these companies cannot access funding from interested investors.
While going public could be an option, small companies struggle with the corporate governance and disclosure documentation required for equity offers, and the reporting obligations that come with being a public company.
Features of proposed legislation
The Bill aims to target the existing restrictions on equity crowdfunding to facilitate the process. Corporate governance and reporting concessions are available for eligible companies, including an exemption from holding an annual general meeting and to appoint an auditor, and providing financial reports to shareholders online rather than in print.
Investors and companies should be aware of a number of features in the proposed legislation, including
- Unlisted public companies with less than A$25 million ($18.2 million) of gross assets or annual turnover will be able to take advantage of the legislation, for up to five years. Compared to the A$5 million cap that was proposed in the first Bill, more companies will be eligible for crowdfunding.
- In any 12 month period, an entity can raise up to A$5 million.
- Investors can invest up to A$10,000 per company per 12 month period but there is no cap on the number of companies an investor can invest in.
- A 48-hour cooling-off period for investors is available, reduced from the five business day period that was in the first Bill.
- A crowdsourced funding offer can only be open at any one time on one platform and can be available for a maximum of three months.
The proposed legislation aims to balance raising money with protecting retail investors. “There will be some restrictions on using crowdfunding, such as a A$10,000 limit per offer for retail investors and a fundraising cap of A$5 million per company in any 12 month period, both of which make sense from a policy perspective” says Farrer. “However, companies must have both assets and revenue of less than A$25 million to qualify for crowdfunding. It’s hard to see why the opportunity to raise capital through crowdfunding shouldn’t be open to larger companies as well.”
“There is relief provided on corporate governance, reporting, application of takeover and annual shareholder meetings for a five year period,” says Eastwell. “However, a business must be a public company to use it. There is a big gap in the regulation that limits options for proprietary limited companies.”
While the draft legislation includes a number of limitations aimed at protecting investors, the proposed changes to the equity crowdfunding space will allow startups to access more fundraising opportunities. Investors and entrepreneurs should keep their eyes peeled to see whether there is enough support for the Bill to become law in the coming months.