David Tink and Dillon Fuzi discuss the proposed extension of the Crowd-Sourced Equity Funding (CSEF) model for public companies to proprietary companies.
On 14 September 2017, the Corporations Amendment (Crowd-Sourced Funding for Proprietary Companies) Bill 2017 (Bill) was introduced to the House of Representatives.
The introduction of the Bill follows on from the Government’s announcement in the 2017 Federal Budget that it planned to extend the application of the Crowd-Sourced Equity Funding (CSEF) model for public companies, to also include proprietary companies. The CSEF model for public companies recently came into play on 29 September 2017.
Similar to the provisions applicable under the public company CSEF model, eligible proprietary companies will be able to raise up to $5 million in any 12 month period through CSEF. Both unlisted public companies and proprietary companies with consolidated gross assets and consolidated annual revenue of less than $25 million, whose principal place of business is in Australia, have a majority of directors ordinarily residing in Australia and which do not have a substantial purpose of investing in securities or schemes will be eligible to make CSEF offers.
An important change to the public company CSEF framework is that CSEF shareholders will not count towards the 50 non-employee shareholder cap applicable to proprietary companies. This is an important modification of the existing Corporations Law as without the exclusion of CSEF shareholders from the cap, the utility of CSEF for a proprietary company would be severely limited.
Additionally, in recognition of the diversification of ownership of proprietary companies that utilise CSEF, the Bill imposes additional corporate governance requirements on proprietary companies that have CSEF shareholders. Proprietary companies that have CSEF shareholders will be required to have a minimum of two directors, must include comprehensive details about CSEF offers and shareholders as part of the company’s registers, the company must prepare annual directors’ and financial reports in accordance with accounting standards and must have its financial statements audited once it has raised at least $3 million from CSEF offers.
With the extension of the CSEF regime to proprietary companies, the corporate governance concessions granted to companies who convert to an unlisted public company under the public company CSEF regime will be removed and grandfathered. All companies operating under the corporate governance concessions will be allowed to continue to rely on the concessions so long as they continue to meet the eligibility criteria, however companies converting to an unlisted public company following the commencement of the proprietary company CSEF regime will no longer be granted these concessions.
By expanding the CSEF regime to proprietary companies the Government is making CSEF more accessible to both investors and companies. The extension of the CSEF model will allow proprietary companies, who are not ready to go public, to bridge a funding gap encountered by early stage and developing companies, where they have been unable to access more traditional methods of seed fundraising.