Amidst heated parliamentary debate and opposition, if the government’s crowd-sourced equity funding (CSEF) legislation is enacted this year, as expected, it remains unclear whether it will herald in any meaningful changes for small innovative businesses.
We examine these amendments, the controversies surrounding these and the likely ramifications for startups raising capital in Australia.
Background: The Long Journey Thus Far
A long four-year journey towards the now-expected enactment of the proposed Corporations Amendment (Crowd-Sourced Funding) Bill 2016 (Bill) has involved the following twists and turns:
- In 2013, the then-Labor government tasked the Corporations and Markets Advisory Committee to investigate CSEF. The Committee then reported to the Abbott government in May 2014.
- In December 2015, the Turnbull government brought forward legislation, which was widely criticised and was rejected by the Opposition for being too complex and cumbersome for most startups. Revisions then led to the current Bill.
- The Bill passed the lower house in late 2016. However, Labor withdrew its support and referred the Bill to a Senate inquiry, determining that it was ‘self-defeating’ and failing in its underlying objective of democratising fundraising for small businesses.
- A Senate committee recently recommended that the Bill be passed. Greens Treasury spokesperson Peter Whish-Wilson has stated that the party would support the Bill.
- It is now expected that the Bill will pass through Senate in the next sitting in March.
Primary Objectives: The Target
The new laws were intended to enable startups to raise money from a broader category of investors through CSEF by removing current barriers to such investments (and so address the ‘capital gap’ that can prevent startups or other early stage enterprises from launching innovative businesses).
Current barriers include, for private companies, limitations on the small scale personal offers exemption that make CSEF impossible to any significant degree and, for public companies, the compliance and formal disclosure requirements.
The Controversies: Missing the Mark
It’s been dubbed a ‘dodo’ by the Opposition and following Labor’s withdrawal of its support, the Bill has continued to be criticised.
The overriding concern is that the proposed changes to CSEF, instead of making such funding more accessible to Australia’s innovative early-stage businesses, has limited access for these businesses by restricting the application of the new laws to unlisted public companies.
This has been criticised as being restrictive and making the laws inapplicable to the vast majority of startups, which are almost entirely privately-held small businesses (that cannot afford to convert to a public company or may not wish to operate as such).
A further criticism is that the changes also provide inadequate protection for retail investors (in shortening the cooling-off periods following investment that were initially proposed).
By contrast, the Bill’s supporters claim that the new laws are the end-result of extensive industry consultation, successfully recognise the value of CSEF, and enable businesses to obtain the capital they need to turn ideas into commercial realities.
The Current Capital Raising Landscape: Private versus Public Companies
A proprietary (or private) company can only raise equity finance by offering its shares to:
- existing shareholders;
- employees; or
- certain classes of investor (such as sophisticated investors or through small-scale personal offers made to no more than 20 investors in any 12 month period and raising no more than $2 million).
In other words, private companies cannot issue a prospectus and sell shares to the general public (‘the crowd’ or ‘retail investors’). The vast majority of startups, therefore, due to being established as private companies, are unable to fundraise through CSEF.
By contrast, a public company (usually a company with 50 or more non-employee shareholders) can raise equity funding (by issuing new shares) from all of the above types of investors and the general public (providing that it complies with the obligation to issue a disclosure document to these investors).
For this reason, many expected that the new CSEF laws would herald in some form of carve-outs to legal requirements for small privately-held businesses where they needed to source equity from the public.
Instead, in order for a company to avail itself of CSEF, the new laws require that the company be established as, or convert to, a public company. Unfortunately, this process can be both a complex and expensive process, making it prohibitive for many startups (and thereby excluding these from obtaining any benefit from the new laws).
The Practicalities: How Will this Affect the Average Startup?
Under the proposed new laws, unlisted public companies with an annual turnover or gross assets of up to $25 million will be able to:
- offer equity in return for capital from ‘retail investors’; and
- raise up to $5 million annually using CSEF.
Investors will be able to put up to $10,000 into an unlimited number of campaigns.
A two-day 'cooling off' period will follow all campaigns to protect retail investors (given such investors are less experienced than ‘sophisticated investors’).
Practically, because only public companies are eligible, only a minority of entities will satisfy this criteria and be able to raise finance with the benefit of these new rules.
The Future of Crowdfunding
It remains to be seen whether the changes will be capable of achieving the underlying raison d'etre of helping small businesses achieve their goals and increasing productivity, innovation and job opportunities in Australia.
The news laws are expected to be reviewed in two years, at which point the effects of the amendments ‘on the ground’ for small businesses will undoubtedly inform considerations (and reveal which of the disparate views on these has proven correct with time).
Need advice on capital raising, investment opportunities or corporate structuring when the new crowd-funding laws come into effect this year? Get in touch with us:
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