The Corporations and Markets Advisory Committee (CAMAC) released its report on crowd sourced equity funding (CSEF) this month following its Discussion Paper released last September and its receipt of approximately 40 submissions from government, industry and legal bodies.
CAMAC's report proposes a regulatory regime specifically designed for and to facilitate CSEF in Australia. Industry has, broadly speaking, welcomed CAMAC's proposals as a step forward in recognising the key role that CSEF may play in the development of innovative start-ups and other small enterprise companies in the Australian economy.
The Federal Budget for 2014-2015 announced the abolition of CAMAC and the transfer of its functions to Treasury. Therefore, it remains to be seen to what extent and how quickly CAMAC's proposals will be taken up in Australia. The implementation of CAMAC's blueprint for a CSEF structure will require legislative amendments to the Corporations Act 2001 (Cth) (the Act) and/or specific Class Order relief, together with the development of template documents and regulatory guidelines overseen by the Australian Securities & Investments Commission (ASIC).
Some of the key features of CAMAC's proposed CSEF regulatory system are:
Cap on Amount Invested by Crowd Investor – a single crowd investor would not be allowed to invest more than AUD2,500 in a particular CSEF issuer over 12 months and overall, would not be able to invest more than AUD10,000 in all CSEF issuers over 12 months. The investor would be required to self-certify to an intermediary that it was under the cap. CAMAC notes that these cap amounts may be relatively arbitrary at the onset, but provide a necessary framework to protect investors. CAMAC did not support any sanction being imposed on an investor who breaches an investor cap. An eligible crowd investor would be a person over the age of 18 years, whether resident in Australia or elsewhere.
Other Highlights of CAMAC's Proposal
Exempt Public Company Form
The 'exempt public company' would be exempt from:
preparing half yearly financial reports unless certain capital (ie AUD5 million for six months) or turnover (ie AUD5 million per annum) thresholds were reached. At the expiry of a period of time, for example three years, the exempt public company would automatically revert to a public company and be subject to all the compliance obligations of a public company.
In order for a company to be eligible to be an 'exempt public company', CAMAC did not believe it would be necessary to impose an 'innovative start-up' test, as required in other countries.
CAMAC also proposed that certain companies would not be eligible, such as:
companies with substantial capital, for example, those with more than AUD10 million.
It is interesting to note that some online portals which, under the current regulatory regime, offer equity to emerging enterprises have commented that the requirement that start-ups become public companies imposes an unnecessary compliance burden that could stifle the new venture. CAMAC did not propose an approach to liberalise the small scale offers exemption for public offers by proprietary companies, as well as increasing the number of permitted shareholders of a proprietary company, currently capped at 50 non-employee shareholders, or dispensing with the cap altogether.
CAMAC did state that ASIC should have the discretion to adjust the requirement that a public company have at least three directors (with two resident in Australia) where an exempt public company applicant has provided good reasons.
Classes of Securities
CAMAC considers that a CSEF issuer may have on issue more than one class of share, but that a CSEF offer must only be in relation to one specific class of share. This would allow an issuer to have a 'founder' or 'preferred' class of share, with voting, dividend and other rights that permit these shareholders to remain in control and to receive a 'premium' return from any profits generated. However, issuers should be obliged to clearly set out the comparative rights (or lack of rights) of shares they are offering the crowd and to warn an investor of the risk of dilution through subsequent capital raisings which may include preferential shareholder rights over crowd investors.
Enforcement of Issuer Cap
CAMAC proposes that enforcement of the AUD2 million issuer cap be the responsibility of the intermediary. For this purpose, intermediaries must maintain adequate systems and procedures to ensure that issuers do not exceed the issuer cap in any 12 month period that the issuer uses the intermediary's service.
Licensing of Intermediary
CAMAC deferred from forming a view as to what specific licence would be required and in what circumstances a market licence may be required. Treasury is presently considering the interrelationship between an AFSL and an Australian Market Licence.
CAMAC suggested that the licence requirements for CSEF intermediaries may include consideration that the intermediary:
have adequate financial resources.
Fees Paid by Issuers
CAMAC proposes that an issuer should be prohibited from paying a commission, finder's fee, referral fee or similar payment to any person in connection with any CSEF offer, other than fees to the intermediary directly referable to conducting the offer on its website. However, this prohibition should not apply to payments by an issuer to persons as compensation for their services to that issuer in preparing materials directly in connection with a CSEF offer, including payment of accounting or legal fees in preparing an offer document.
Please contact us with any questions or if you require advice in relation to capital raising via the internet, licensing or regulatory requirements and any other fundraising or investment advisory services to be conducted in Australia.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of the law firm’s clients.