This article outlines your reporting obligations to ASIC & what happens when managing your new shareholders.
In summary, 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.
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. There is also more information about where to record your new shareholders here.
As part of the notification requirements, a company will have to inform ASIC within 28 days if it:
starts to have CSF shareholders; or
stops having CSF shareholders (s 178C(1)).
Communicating with Your New Shareholders
We believe there is an awesome opportunity to build a network of strong, brand advocates through CSF crowdfunding, and that companies 'lean in' to the exciting network that your shareholders will bring. Great ways to continue engaging with your network are:
Providing ongoing rewards
Being upfront & clear about frequency of communication (ie shareholder updates monthly, quarterly etc)
As per our hosting agreement (which you agree to when you create your EOI & Investment offer campaigns) we recommend communications with your new shareholders at least twice a year.
When your investors approach us for specific information relating to your company after your capital raise, we direct them to the guide below or put them in touch with your preferred investor email address to answer ongoing queries.
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 (however we see it as a great opportunity to engage with your network).
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)).
If you would like to discuss any of the issues raised above, please get in touch! — [email protected]