Introduction

Crowd-sourced funding (CSF) refers to small start-up public companies that are not listed on any stock exchange raising funds from a large number of small investors. It is very useful where a company might have difficulty with obtaining debt finance due to lack of establishment, but where traditional equity fundraising is too expensive.

You may have heard of American websites such as Kickstarter and Indiegogo that are CSF intermediaries. These intermediaries have facilitated the rise in artists, producers and entrepreneurs funding their projects with the backing of mum-and-dad investors across the country.

Following suit, the Australian federal government has recently passed an amendment to the Corporations Act 2001 (Cth) (Act) which allows for private companies (i.e. a corporation with the suffix ‘Pty Ltd’) to access CSF. Previously, a private company that desired to enter into a CSF scheme was required to convert to a public company. This imposed significant regulatory burden on company directors, even with access to some temporary corporate governance concessions.

The Corporations Amendment (Crowd-sourced Funding) for Proprietary Companies Act 2017 (Amendment) has been designed to balance the protection of investors with reducing compliance costs and unduly burdensome corporate governance requirements.

Effects of the Amendment

For a private company to be eligible to access CSF, they must:

(a) have less than $25 million in gross assets and annual revenue;
(b) not be an investment company (i.e. does not manage shares for clients); and
(c) have its principal place of business in Australia.

The obligations imposed on a private company that accesses the CSF regime include requirements to:

(a) maintain a minimum of two directors for transparency and certainty of succession planning and decision making;
(b) prepare annual and directors’ reports as required by accounting standards (private companies are not generally required to do this);
(c) undertake a compulsory audit once $3 million is raised from CSF sources (not generally required, and increased from $1 million that was applicable to public companies accessing CSF); and
(d) comply with related party transaction rules under Chapter 2E of the Act (not required by private companies otherwise).

The overall effect is that private companies must conform to some of the requirements that apply to public companies. This is because private companies using CSF will be accessing public funding, and this carries associated risks for investors, especially where there is a lack of information about an issuing company.

It is also worth noting that private companies are limited to having 50 shareholders in total per section 113(1) of the Act. However, the new Amendment stipulates that CSF shareholders do not count towards this limit. It will remain to be seen how this would operate if a market for secondary trading of CSF shares develops.

Conclusion

Access to capital is crucial for any young business and finding ways to connect with prospective investors is important. In the internet age, making this connection is significantly easier. However, the new obligations imposed on any private company seeking CSF under the regime should be accounted for and carefully considered by its directors before making any decision.

The new Amendment falls in line with promoting the expansion of small businesses through alternative means of funding. It will be very interesting to see how private Australian companies take advantage of the new CSF rules and kickstart their business.