Equity Crowdfunding: A welcome change for Australian businesses
When I moved to Australia in 2013, I was surprised to see a number of companies taking the ASX route while raising as little as $2 million. It did not make much sense to me as the listing costs and compliance burden seemed to far outweigh the benefits of listing for most of these companies.
While an exchange listing may provide an easier investment vehicle for institutional investors that mostly join the party via private placements in subsequent funding rounds, it also creates an unnecessary compliance burden for a growing business that would be better placed in allocating its resources to innovation and business development. The continuous disclosure requirements can also be onerous where a startup would be better placed to keep its cards in hand. For example, GetSwift shares were recently suspended from trading on the ASX for failure to meet continuous disclosure obligation regarding contracts with key customers.
Over time, I’ve been able to attribute the listing aspirations for small businesses to the lack of funding alternatives for seed, venture and private equity capital in Australia. Traditional banks also seem to have little appetite for investing in unsecured small business loans. There was a definite gap in the Australian capital markets that needed a regulatory intervention.
With the first round of retail equity crowdfunding licenses issued by ASIC this year, it may well be the missing link that Australian businesses have been waiting for. Or is it too early to get excited?
Equity Crowdfunding for Eligible Public Companies
Let’s take a look at the key features of the Australian Equity Crowdfunding regime. ASIC’s Regulatory Guide 261 Crowdsourced funding: Guide for public companies, provides the framework for public companies looking to raise crowd-source funding (CSF) in Australia.
The CSF Regime
Under the current CSF regime, eligible public companies will be able to make offers of their shares, via an intermediary CSF service 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. Newly created or converted public companies making CSF offers will not have to comply with certain reporting, audit and AGM obligations that would usually apply to public companies, for up to five years. There are obligations and investor protections that apply to CSF offers, together with corporate governance concessions for companies undertaking CSF offers, including:
- An investor cap of $10,000 per annum per company for retail investors;
- The provision of a CSF offer document containing minimum information and a prescribed risk warning; and
- A five-day cooling-off period.
Reduced Disclosure Requirements
There are temporary concessions, available for up to five years, for eligible public companies making offers under the CSF regime. A public company adopting the CSF model does not have to comply with the requirement for a public company to:
- Hold an annual general meeting;
- Appoint an auditor and have its financial report audited until the company has cumulatively raised more than $1 million through CSF offers; and
- Distribute hard copies or electronic copies of its annual reports to shareholders.
Under the CSF regime, intermediaries are required to hold an Australian Financial Services Licence (AFSL) with an authorisation to provide a crowdfunding service. Seven platforms were issued equity crowdfunding licences in January 2018. These included Big Start, Billfolda, Birchal Financial Services, Equitise, Global Funding Partners, IQX Investment Services and On-Market Bookbuilds.
Legislation for Proprietary Companies
The Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 was introduced to the House of Representatives in September 2017. The Bill sets out the following key amendments to the Corporations Act 2001 that will enable proprietary companies in Australia to access crowdsourced equity funding:
- Investors who acquire shares through crowdfunding offers will not be counted towards the 50 shareholders cap for private companies;
- Subsequent transfers by crowdfunding investors who on sell their shares will also be exempt if the company is not listed on a financial market;
- Withdrawal period after a company issues a supplementary or replacement offer document from one month to 14 days; and
- Proprietary companies with shareholders who acquire shares through a crowdfunding offer will not be subject to the takeovers rules.
The legislation, however, also places new reporting and compliance obligations on a startup or small business looking to raise crowdfunded equity, including:
- A minimum of two directors instead of one usually required for a proprietary company;
- Preparation of financial reports in accordance with accounting standards with financial statements to be audited once the company raises more than $3 million; and
- Restrictions on related party transactions under part 2E of the Corporations Act 2001.
The concessions for public companies under the CSF regime will be removed once these amendments are legislated. However, the concessions will be grandfathered for the companies that register during the period these amendments are legislated. The audit threshold for the eligible public companies will also be increase to $3 million in line with these amendments.
The extension of the crowdsourced equity funding framework to proprietary companies will take effect six months from the date the bill receives royal assent. As such, the real opportunity for private companies to raise funds under the new regime will most likely be in the second half of FY19 if the bill is legislated by the end of FY18.
The Market for Crowdfunding
The chart below provides a summary of initial and follow on public offerings1 in Australia where the capital raised was less than the $5 million (threshold for the CSF offers).
- Follow on offers are included only where market cap was less than $10 million prior to the offer.
The volume of small capital raisings has consistently been over $250 million / year since 2014. It’s likely that the CSF platforms will attract a significant portion of this market along with other early stage companies that are looking to fund growth.
How can we help?
PKF’s Corporate Finance team is dedicated to helping our clients raise capital efficiently and from the most appropriate channels. We understand that crowdfunding presents a great opportunity for some of our customers and we have invested our time to understand the regime and build relationships with several CSF platforms. Get in touch now with your trusted adviser at PKF to discuss your growth objectives and if you want to explore crowdfunding.