Joining the Crowd – Crowd Sourced Equity Funding legislation passed

Crowd Sourced Equity Funding legislation passed

David Tink and Dillon Fuzi outline the key features of the new crowd sourced equity funding legislation.

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A large crowd of cheering fans

On 22 March 2017, the Corporations Amendment (Crowd-sourced Funding) Bill 2016 (Bill) was passed by both Houses of Parliament. The measures of the Bill will allow eligible unlisted public companies to raise up to $5 million from investors each year through the use of Crowd-Sourced Equity Funding (CSEF).

CSEF is a funding method which allows eligible companies to source small amounts of funds from a large number of different investors through intermediaries who operate a platform for the facilitation of CSEF offers to investors.

The key features of the Bill are set out below.

Eligible CSEF Companies

In order to satisfy the requirement of being an eligible CSEF Company, a company must be an unlisted public company limited by shares, have its principal place of business in Australia, have a majority of the company’s directors ordinarily residing in Australia, not have a substantial purpose of investing in securities or schemes and must have consolidated gross assets and consolidated annual revenue of less than $25 million.

CSEF Intermediaries (Intermediaries)

Intermediaries operate platforms, which facilitate CSEF investments. Under the CSEF regime, Intermediaries will be required to hold an Australian Financial Services License and may in some situations also be required to obtain an Australian Market License. Intermediaries have a number of roles under the CSEF regime, including the publication of offer documentation, the provision of communication and application facilities, the provision of gatekeeper services and ensuring systems are in place for investor protection.

Eligible Offers

In order to be eligible, a CSEF offer must satisfy the following conditions:

  • The offer must be for the issue of securities;
  • The company making the offer must be an eligible CSEF Company;
  • The offer must be for a prescribed class of securities (current indication is that only fully paid ordinary shares will be prescribed);
  • The offer must not result in more than $5 million being raised in any 12 month period; and
  • The funds raised cannot be used for investing in other entities or schemes.

Investor Protections

While the Bill removes some of the existing regulatory barriers to fundraising, there are a number of protective measures contained in the Bill for the benefit of CSEF investors. These include limiting investment by introducing a $10,000 cap on the amount any CSEF investor can invest in the entity, providing mandatory and unconditional cooling-off rights within 5 days of making CSEF investments, requiring intermediaries to provide risk warnings and to obtain risk acknowledgments from investors before accepting offers and restricting companies from providing financial assistance to CSEF investors.

Following the passage of the Bill through Parliament, Australia’s CSEF framework will take effect on a date to be fixed by proclamation following the Bill obtaining the Royal Assent from the Governor General.

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