This article discusses the Corporations Amendment (Crowd-Sourced Funding) Bill 2015 which is currently before the Senate.
Crowd sourcing and crowd funding have been increasing in popularity through websites such as Kickstarter, Ozcrowd and Pozible. Currently, small businesses are limited in what they can offer to crowd sourced funding (CSF) investors as they are not permitted to offer equity in a business in exchange for an investment without meeting burdensome regulatory requirements (notably those restrictions on fundraising contained in Chapter 6D of the Corporations Act 2001).
Innovation has quickly become the theme of Malcolm Turnbull’s prime ministership and this Bill seeks to facilitate small businesses taking up innovative business ideas by minimising the time spent on regulatory compliance. In his second reading speech, Alex Hawke MP said that “for small businesses, time spent on regulatory compliance is time not spent working to ensure the success of their business.” The law will support CSF as a non-traditional source of fundraising by small business.
The Bill seeks to “establish a framework to facilitate crowd-sourced funding offers by small unlisted public companies” and “provide new public companies that are eligible to crowd fund with temporary relief from reporting and corporate governance requirements that would usually apply.”
To be eligible, a business must be a public company limited by shares based in Australia with both consolidated gross assets and consolidated annual revenue of less than $5 million (including any related parties).
If it meets these eligibility requirements, the company can receive concessions from full compliance with the traditional Chapter 6D fundraising requirements for up to 5 years including exemptions from:
- Full disclosure (prospectus) requirements, instead putting in place a less complicated CSF disclosure document.
- The requirement for an AGM.
- Having annual reports audited if less than $1 million is raised.
- Providing annual reports to shareholders (although these still must be available on the company’s website).
This Bill does not simply drive innovation for innovation’s sake and it does build in consumer protection through:
- Disclosure requirements including prominent “CSF risk warnings” for investors.
- Investor’s risk acknowledgements.
- 5 business day cooling off periods, within which investors may change their mind and receive a refund of their investment.
- Caps on investment of $10,000 per 12 month period in order to limit investor exposure to risk.
- Communication facilities to allow discussion about the offer.
While less complex than the current law, the Bill still contains specific provisions that must be precisely complied with. There are numerous strict liability offences and serious penalties that can apply. Additionally, there are numerous other legal considerations such as avoiding misleading and deceptive conduct and ensuring enforceability of contracts.
Here’s an idea: include the cost of your legal and financial advice in your crowd funding target.
There is no commencement date set for the Bill and indeed, it is still before the Senate. I am following progress and updates will be posted as they become available.
Disclaimer: This post is for general information purposes only and is not legal advice. You should obtain specific legal advice as to how the law applies to you in your particular circumstances before undertaking or investing in any CSF business venture. This is a review of the Bill as it is currently proposed as at 16 March 2016.
