Crowd Funding: Business Breakfast Club February Summary

This month at Business Breakfast Club, we discussed the crowd funding regime including the current legislation that applies to public companies and the proposed bill to extend that regime to proprietary companies. BAL Director, Katie Innes shared some of her insights on the topic. Katie touched on:

Funding Businesses

Raising funds to kick start a business is a central concern of all business entrepreneurs. Traditionally, the two methods used to raise those funds include taking out a loan or raising capital through selling shares.

Amendments to the Corporations Act in 2017 were designed to support innovation and entrepreneurship (by simplifying the capital raising provisions of the Act and reducing compliance costs) while balancing and protecting the interests of retail investors.

Current Legislation

Currently only public companies can access crowd sourced funding but they must only do so through an approved intermediary who holds a specific type of AFSL. Only seven entities are currently approved for these types of AFSLs. Like the previous capital raising provisions, there are a number of similar disclosures that must be made by a public company in its offer document, so whether the legislation actually delivers a practical reduction in compliance costs is yet to be seen.

Proprietary companies cannot access the crowd sourced funding regime as they were intended to be “closely-held”, i.e. shareholders who have a direct connection to (or rights to appoint) management. Under the Corporations Act there are currently two restrictions on proprietary companies which hinders their ability to raise funds:

  1. proprietary companies must not have more than 50 non-employee shareholders; and
  2. proprietary companies cannot make public offers of equity to retail investors.

A bill is before Parliament to amend the legislation and extend the regime to propriety companies.

If the Bill is approved

If the Bill is passed, proprietary companies would be able to access crowd sourced funding but their structure and reporting obligations will change. Such changes would include:

  1. a minimum of two directors with a majority of directors residing in Australia;
  2. preparation of financial reports in accordance with accounting standards;
  3. requirement that financial reports be audited if the company raises more than $3 million from crowd funding offers; and
  4. restrictions on the financial benefits that may be given to related parties including directors.

Who benefits the most under the crowd funding regime?

Generally, the crowd funding regime is going to benefit established companies whose products have already been tested and where there is a desire to expand those businesses.

The regime will also benefit retail investors by providing them with access to new types of share offerings that were previously off limits under the Corporations Act, allowing them to diversify their investments in equity other than in ASX listed shares.

Early-stage companies could access the crowd funding regime and there is the potential for higher returns for investors but with that is the potential for higher risk. Investors may be reluctant to invest where the financial statements or business plan in the offer document is lacking.

The Business Breakfast Club is held on the second Friday of each month. If you would like to attend, please contact us to be added to the invite list.