The newest way for small businesses to raise capital
Everything you need to know about crowd funding for small business.
In 2015, the global crowd funding industry raised a whopping $34.4 billion. These funds – offered willingly by members of the public to back everything from temperature-controlled beer coolers to innovative beehives – has given bold ideas a chance.
But up until now, small and medium-sized Australian businesses have missed out on a piece of the pie due to tough information disclosure requirements.
The great news is, that’s about to change.
From 29 September 2017, some Aussie companies can start offering securities to the general public, sidestepping banks, loans and audits to raise capital, fast.
If that sounds beneficial for your business, you’ll want to read our five facts about the new crowd-sourced funding (CSF) scheme, covering everything from eligibility to implementation.
First up: Is my business eligible?
- To be eligible to make a CSF offer under the scheme, a company must:
- Be an unlisted, public company limited by shares;
- Not be related to a listed company;
- Have its principal place of business in Australia;
- Have a majority of its directors ordinarily reside in Australia;
- When combined with all related companies, have less than $25 million in consolidated gross assets and less than $25 million in consolidated annual revenue in the 12 months prior to seeking eligibility; and
- Not be a business whose purpose is to invest in securities or interests of other companies or entities – or related to a company that is.
But wait! Private companies, don’t lose heart. There are still ways to access the scheme.
1. CSF FOR PRIVATE COMPANIES
The current law means that only unlisted public companies can access the new CSF scheme. However, there are reduced regulatory requirements for any proprietary company that converts to a public structure in order to access the scheme. For instance, the company will not be obliged to hold an AGM, prepare audited financial reports, or provide hardcopy annual finance reports.
And there’s more good news for private companies.
The 2017 Federal Budget shows the Government’s plan to extend the scheme to include private companies, meaning proprietary companies won’t be forced to convert to a public structure in order to use the CSF scheme.
- The eligibility criteria for proprietary companies will be largely the same as for public companies, asking:
- At least two directors, with over half ordinarily residing in Australia;
- Its principal place of business be in Australia;
- When combined with its related companies, have less than $25 million in consolidated gross assets and less than $25 million in consolidated annual revenue in the 12 months prior to seeking eligibility; and
- Not be a business whose purpose is to invest in securities or interests of other companies or entities.
2. WE’RE ELIGIBLE! SO HOW DO WE DO IT?
First, you must register a public company with ASIC or convert to a public company effective 29 September 2017. A company registered as – or converted to – a public company before that date will not have the benefit of the corporate governance concessions, and will be subject to the same requirements as other public companies.
Second, the CSF offer must:
- State that it’s made under Part 6D.3A of the Corporations Act;
- Be an offer for the issue of securities in the company;
- Be for fully-paid ordinary shares;
- Not be for the purpose of:
- Investing in securities or interests in other companies, entities or schemes; or
- The Company issuing a credit facility to a related company or a related company issuing a credit facility to the Company or a related company;
- Be for funding of $5 million or less in a 12-month period;
- Only be made available on one crowd-sourcing platform.
Third, every CSF offer requires a CSF offer document, which must include:
- A prescribed risk warning about the investment;
- Information about the Company including ACN and contact details; description of the Company’s business, capital and organisational structure; details about the directors and senior managers; the main risks facing the Company’s business, and a copy of financial statements;
- Information about the offer including a description of the securities on offer and the rights attached to them; how long the offer is open for; minimum and maximum subscription amounts; a description of the intended use of the proceeds – including payments to directors and service providers; a description of previous CSF offers; and
- Information about investor rights including; that retail investors have a cooling off period of five business days after the application is made; that there will be open communication channels throughout the offer period to enable people who access the CSF offer document to make and see posts relating to the offer, and to ask questions and receive responses to questions about the offer.
Fourth, every director (or proposed director) of the Company must consent to the offer document being published on the crowd-sourcing platform. If you intend to use personal statements in the offer document, you also need written consent from that person to use their statements.
Finally, find a crowd-sourcing platform to publish your offer to the public.
Fail to follow the above requirements? ASIC may consider it an ordinary – rather than a CSF – offer of securities. If that happens and you haven’t disclosed the offer as required under the Corporations Act 2001 (Cth) you could be fined up to $36,000 and/or receive five years imprisonment. Ouch.
3. WHAT IS A CSF “INTERMEDIARY” – AND WHY DO I NEED ONE?
Your CSF offer must be published by a CSF intermediary on a CSF platform. (It sounds like a mouthful, but it’s really quite simple.)
A CSF intermediary is a person or company holding a CSF financial services licence. They’re responsible for posting your company’s CSF offer, facilitating investors making applications for securities, and handling the investor’s money during the transaction. It’s also their job to publish a prescribed risk warning alongside all offers.
Need help finding an intermediary? Get in touch. We’ll point you in the right direction.
4. WHAT’S THE CATCH?
So, there’s a few.
For companies – the Company (and any related parties) can only have one CSF offer open at any one time.
The Company (and its related parties, CSF intermediary, and associates) must not provide financial assistance or arrange financial assistance for a retail investor in the offering. There are also strict rules around advertising the CSF offer. Generally, the CSF offer can only be advertised on the crowd sourcing platform.
For investors – an investor can only invest $10,000 per company per 12-month period via the same crowd sourcing platform. Now you know the technical mumbo jumbo, you can return to the happy fact: raising capital as a small or medium-sized business just got easier, and decidedly more fun.
Stick to the rules and requirements we’ve outlined, and the power of the crowd could see your venture gaining support – and traction – at an astonishing rate.
As always, ask your friendly legal brains (that’s us) if you need help navigating the new CSF scheme.