Under the existing Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) (CSF Act 2017), only small unlisted public companies could benefit from the crowd-sourced funding (CSF) regime and make offers of ordinary shares to retail investors using an offer document, through an intermediary’s platform licensed to provide a crowd-funding financial service.
Proprietary companies have not been permitted to raise funds under the CSF regime and have been prohibited from engaging in any activity that required disclosure to investors under Chapter 6D except to existing shareholders and the employees of a company.
On 12 September 2018, the Parliament of Australia has passed the Corporations Amendment (Crowd-Sourced Funding for Proprietary Companies) Act (Cth) (CSF Act 2018).
The CSF Act 2018 amends s 738 of the Corporations Act 2001 (Cth) (Corporations Act) and extends the application of the CSF regime to proprietary companies that have at least two directors and meet the eligibility requirements.
As a result of the amendments, both unlisted public companies and proprietary companies, who satisfy eligibility requirements, are able to raise up to $5 million in any 12-months period.
The CSF Act 2018 will potentially assist new start-up proprietary companies to raise funds from public at the early stages of their development without a need to convert into a public company.
The CSF Act 2018 has been assented to on 21 September 2018 and most of its provisions will take effect on 19 October 2018.
Major benefits of CSF Act 2018
- Possibility to raise funds using CSF regime without converting into a public company
The CSF Act 2018 provides that CSF offer is an exception from the rule in s 113(3) of the Corporations Act, which does not allow proprietary companies to engage in any activity that requires disclosure to investors under Chapter 6D.
As a result of the amendment, proprietary companies will now be allowed to make CSF offers without converting to a public company prior to raising funds under CSF regime.
- Amendments to ‘Shareholder Cap’
To enable proprietary companies to effectively use the CSF regime, the existing restriction of the Corporations Act, which does not allow proprietary company to have more than 50 non-employee shareholders (Shareholder Cap), will be amended.
Pursuant to the amendment, the Shareholder Cap will not include CSF shareholders who own shares issued as a part of CSF offer.
Thus, anyone who is directly issued with a share under a CSF offer will be a CSF shareholder and will not count towards the Shareholder Cap.
As a result of that amendment, a proprietary company will not be required to convert into a public company if they exceed the cap by using CSF regime to raise funds.
- Takeover rule’s exemption
Pursuant to CSF Act 2018, proprietary companies that have CSF shareholders will be exempted from the takeover rules in Chapter 6 of the Corporations Act, which generally apply to an unlisted company with more than 50 shareholders.
Major eligibility requirements
Under the CSF Act 2018, which amends s 738H of the Corporations Act, to be eligible to use the CSF regime, a proprietary company must:
- have at least two directors;
- have principal place of business in Australia;
- comply with the assets and turnover test (i.e., have the value of the consolidated gross assets of the company and of all its related parties of less than $25 million (the assets test); or the consolidated annual revenue of the company and of all its related parties of less than $25 million (the revenue test); and
- not have a substantial purpose of investing in securities or interests in other entities or schemes.
In addition to that, the amended s 738H requires that neither the company nor any of its related parties must be a listed corporation or included in an official list of a financial market operated outside Australia.
Pursuant to the CSF Act, the Regulations may prescribe other requirements which must be met by an eligible CSF company. To date, none of such additional requirements have been prescribed with respect to a proprietary company.
Major obligations of proprietary companies using CSF regime
Proprietary companies that have CSF shareholders will be subject to additional obligations, in particular:
- Two directors
A proprietary company will need to have at least two directors as long as it has CSF shareholders.
In companies where there are only two directors, at least one of them must reside in Australia.
In companies with more than two directors, a majority of them will have to ordinarily reside in Australia.
- Related party transactions
A proprietary company will be subject to related transactions rules in Chapter 2E of the Corporations Act.
It means that certain related party transactions will require prior shareholders’ approval.
This restriction, however, should not prevent the companies to enter into transactions on commercial terms or at arm’s length or if the shareholders consent to the transaction.
- Financial reporting obligations
A proprietary company will be required to prepare annual financial and directors’ reports in according to accounting standards while they have CSF shareholders.
The financial and directors’ reports will have to be provided to members in accordance with s 314 of the Corporations Act and must as well be provided to ASIC under s 319 of the Corporations Act.
The company will not, however, need to make the reports public but may do so under its own initiative.
- Audited financial statements
Proprietary companies that raise $3 million or more from CSF offers will have to have their financial statements audited.
- Additional reporting obligations
Proprietary companies that make a CSF offer will have to include details about the offer and the shareholders as part of their company register.
Solicitors of Pavuk Legal specialize in Commercial and Corporate law and may advise you and provide legal assistance with respect to raising funds under CSF regime by your company.