The Government recently passed legislation extending the crowd sourced funding regime to proprietary companies (announced in an earlier blog post here).
The Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 (the Proprietary CSF Act) is awaiting Royal Assent, but is expected to commence in mid-October 2018.
Companies making CSF offers
Under the CSF regime, eligible public companies and proprietary companies will be able to make offers of their shares, via an intermediary CSF service (such as Birchal), using an offer document.
Unlisted public companies with less than $25 million in assets and annual turnover will be eligible to raise funds under the CSF regime. Eligible companies will be able to make offers of ordinary shares to raise up to $5 million in any 12-month period.
Companies that registered as or converted to public after the commencement of the CSF regime (i.e. 29 September 2017) and before the CSF regime was extended to proprietary companies (i.e. 19 October 2018) will not have to comply with certain reporting, audit and AGM obligations that would usually apply to public companies for up to five years as long as they continue to meet the eligibility requirements.
Public companies that register or convert after 19 October 2018 and make a CSF offer will not have the benefit of the temporary corporate governance concessions as they are able to become or remain a proprietary company and make CSF offers.
Below are some issues anyone interested in using the CSF regime as a proprietary company should be aware of:
- Proprietary companies can now use the CSF regime
- CSF shareholders will not count towards the 50 non-employee shareholder cap for proprietary companies
- It may not be suitable for all proprietary companies to be widely held
- Proprietary companies with CSF shareholders must have a minimum of two directors
- Companies will need to maintain information about CSF shareholders on their registers
- Proprietary companies using CSF will have additional financial reporting obligations
- No audit requirement for small proprietary companies using CSF until more than $3 million is raised through CSF
- Proprietary companies using CSF will be subject to restrictions on related party transactions
- Proprietary companies that have CSF shareholders will be exempt from takeovers rules
The Proprietary Act includes other amendments to the CSF regime, which:
- Remove the corporate governance concessions for public companies using the CSF regime
- Clarify that companies accessing CSF cannot be listed on overseas exchanges
- Reduce the cooling off period for supplementary or replacement CSF offer documents
Additional information and commentary is below. All section references are to the Corporations Act, unless stated otherwise. And this material is provided for information purposes only. Please consult your lawyer or adviser for advice on your particular circumstances.
Proprietary companies can now use the CSF regime
The Proprietary CSF Act expands the eligibility for the CSF regime to proprietary companies with at least 2 directors that meet certain eligibility requirements (s 738H(1)(a)).
The existing eligibility requirements under the CSF regime (including the $25 million assets and turnover cap) remain largely unchanged, except for an amendment to further clarify that companies (including related parties) listed on overseas markets are ineligible to use the CSF regime (s 738H(1)(e)).
A regulation making power to amend the eligibility requirements has also been included (s 738H(1)(a)).
CSF shareholders will not count towards the 50 non-employee shareholder cap for proprietary companies
The Proprietary CSF Act amends the requirement for proprietary companies to have no more than 50 non-employee shareholders by excluding “CSF shareholders” from the cap.
“CSF shareholder” is a new definition in section 9, meaning an “entity that holds one or more securities of the company due to being issued with the securities pursuant to a CSF offer by the company.”
If a CSF shareholder transfers shares to another entity, the new holder of the securities will generally be excluded from the 50 non-employee shareholder cap. This amendment seeks to ensure that a company is not caused to breach the cap by shareholders transferring CSF securities to third parties, and pleasingly, was included in response to industry feedback on the draft legislation.
It may not be suitable for all proprietary companies to be widely held
Despite that it’s now possible for proprietary companies to use the CSF regime, it may not be suitable for some proprietary companies to be widely held.
For instance, proprietary companies that hold licences or otherwise operate in regulated industries should consider whether having large numbers of shareholders will give rise to issues under any other rules or regulations the proprietary is subject to.
For example, licensing regimes that employ a “good fame and character” eligibility test or reporting obligation for licensees sometimes extend this test to associates of the licensee, which can include shareholders.
If you operated in a licensed/ regulated industry and are considering CSF as a proprietary company, please get in touch — [email protected].
Proprietary companies with CSF shareholders must have a minimum of two directors
Once a proprietary company makes a CSF offer, it will be required to maintain at least 2 directors as long as it has CSF shareholders.
In companies where there are only two directors, at least one of the directors must ordinarily reside in Australia. In companies with more than two directors, a majority of the directors will have to ordinarily reside in Australia (s 201A(1A)).
Companies need to maintain information about CSF shareholders on their registers
A proprietary company that makes a CSF offer will be required to include additional information as part of its company register. This information must be maintained on the company’s register while the company has CSF shareholders (s 169(6AA)).
The additional information to be maintained on the register includes the:
- date of each issue of shares as part of a CSF offer;
- number of shares issued as part of each CSF offer;
- shares issued to each member of the company as part of each CSF offer; and
- date on which each person ceases to be a CSF shareholder of the company for a particular share in the company.
As part of the new notification requirements, a company will have to inform ASIC if it:
- starts to have CSF shareholders; or
- stops having CSF shareholders (s 178C(1)).
Birchal works with several online registry providers (listed on our Partners page) who can assist issuers to manage their share registers after a CSF offer. We are liaising with these providers to ensure they can accomodate these changes.
Proprietary companies using CSF will have additional financial reporting obligations
Proprietary companies using CSF must prepare annual financial and directors’ reports while they have CSF shareholders (s 292(2)(c)).
The financial and directors’ reports that are prepared will have to be provided to members (s 314) and must be provided to ASIC (s 319). There is no requirement for the company to make the reports public but they can elect to do so if they wish.
The obligation to prepare the financial and directors’ reports will apply from the financial year in which the small proprietary company first starts to have a CSF shareholder (which can only occur once the company has completed a CSF offer) and will apply in relation to every future financial year in which the company still has a CSF shareholder. The financial reports prepared must comply with accounting standards.
Small proprietary companies that have CSF shareholders will only need to provide their annual report via a website and do not have to notify shareholders of alternative ways of receiving the report.
No audit requirement for small proprietary companies using CSF until more than $3 million is raised through CSF
Small proprietary companies with CSF shareholders will only be required to audit their financial statements after they have raised $3 million or more from CSF offers (s 301(5)(b)).
Public companies eligible for the corporate governance concessions provided for in the Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) will also only be required to have their financial statements audited and appoint an auditor after raising $3 million or more from CSF (as opposed to the current $1 million threshold) (s 328D). (Discussed further below.)
Proprietary companies using CSF will be subject to restrictions on related party transactions
Since proprietary companies that use CSF are relying on public funding, they will be subject to restrictions on related party transactions to protect investors.
To protect investors against fraud and bias arising as a result of transactions with related parties, proprietary companies that have CSF shareholders will be subject to the existing related party transaction rules and penalties under Chapter 2E (s 738ZK).
The application of Chapter 2E to proprietary companies that have CSF shareholders provides shareholders with protections where funds are transferred to any related parties through uncommercial transactions without shareholder approval.
Proprietary companies that have CSF shareholders will be exempt from takeovers rules
A proprietary company that has CSF shareholders will be exempt from the takeover rules in Chapter 6 as long as they meet any of the conditions prescribed in the regulations (s 611).
Proprietary companies that use CSF would generally be subject to the takeover rules in Chapter 6 as they are likely to have more than 50 shareholders. These provisions are complex and would inhibit funding and other exit opportunities for proprietary companies that use CSF as they apply in relation to the acquisition of control beyond 20 per cent of a company’s voting stock.
The corporate governance concessions for public companies using the CSF regime are being removed
The Act will remove the corporate governance concessions available to newly incorporated or converted companies raising funds under the CSF regime.
These concessions included temporary relief from the public company requirements:
- to hold an annual general meeting;
- to appoint an auditor and have their financial reports audited; and
- to notify shareholders of the different ways to receive the company’s annual reports and distribute hard copies or electronic copies of their annual reports to shareholders who elect to receive them in that way.
On the basis that proprietary companies can now use the CSF regime, the Government considered these concessions were no longer necessary.
Accordingly, section 738ZI of the Corporations Act has been amended so that the corporate governance concessions are not available to public companies that incorporate, or proprietary companies that convert, after the commencement of the Proprietary CSF Act.
However, public companies that incorporate or convert prior to commencement of the Proprietary CSF Act (i.e. expected around mid-October 2018) will still be able to access these concessions as long as they are otherwise eligible for them.
Some important notes about changes to the corporate governance concessions:
- Public companies that use the CSF regime and are entitled to rely on the concessions will not be required to have their financial statements audited until they have raised $3 million or more from CSF (the previous threshold was $1 million).
- If a company was planning to convert to a public company to make a CSF offer and rely on the concessions, given the requirement for notice to appear in the ASIC gazette, it is probably now too late to convert prior to commencement of the Proprietary CSF Act.
- It is possible for a company to incorporate a new public company prior to commencement of the Proprietary CSF Act and rely on the corporate governance concessions. For an existing business, this may involve rolling assets up into the new public company, which could create a range of ancillary issues. So the suitability of this approach will depend on the company’s particular circumstances.
Clarifying that companies using CSF cannot be listed on overseas exchanges
The Proprietary CSF Act amends the meaning of an “eligible CSF company” to clarify that the company cannot be listed on a financial market overseas in addition to not being listed on a financial market in Australia (s 738H(1)(e)).
Reducing the cooling off period for supplementary or replacement CSF offer documents
The CSF regime provides that where a supplementary or replacement CSF offer document is published, an intermediary must give written notice to all applicants that previously accepted the offer to advise them that they have one month (from the date of the notice) to withdraw their acceptance and obtain a refund of application money paid.
The Proprietary CSF Act reduces this cooling-off period from one month to 14 days (ss 738X(7) and (9)).
We’re thrilled this legislation has finally been passed. As discussed above, there are a range of issues for companies to consider in preparing to make a CSF offer.
Birchal has a formidable team of crowdfunding and capital markets experts, drawing on years of experience in the UK and Australia across rewards-based crowdfunding, to equity crowdfunding, to public markets.
If you are interested in crowdfunding, or would like to discuss any of the issues raised above, please get in touch! — [email protected]