Eligibility for Crowd Source Funding: Related Parties

The buzz around Crowd Source Funding (CSF) continues with the introduction of the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (the CSF Bill) to expand the CSF Scheme from eligible public companies to proprietary companies.

The CSF Scheme is a fund raising alternative for eligible Australian public companies to raise funds from retail investors through online platforms of licenced CSF Intermediaries. The Scheme came into effect at the end of September through the enactment of the Corporations Amendment (Crowd-sourced Funding) Act 2017 (the CSF Act).

While the Scheme arose from the government’s initiative to support new and innovative business, any small to medium eligible company could also benefit from the regime to access capital of up to $5 million within a 12 month period.

Eligibility Criteria

Until the CSF Bill comes into force, to be eligible to utilize the CSF Scheme, the company must meet the following criteria:

• be public company limited by shares
• not be an investment company  (including its related party)
• have less than $25 million in consolidated assets (including its related party)
• have less than $25 million annual revenue (including its related party)
• has its principal place of business in Australia
• has a majority of directors in Australia
• not be a listed corporation (including its related party)

The twist to the eligibility criteria is that some of the criteria extend to the related parties of the company.

Related parties

The definition of “related party” for the purpose of assessing CSF eligibility criteria is narrower than the normal application of the term under Chapter 2E of the Corporations Act.

In the context of eligible company for the CSF Scheme, “related party” of a company refers to

1. i) a related body corporate of such company, or
2. ii) an entity controlled by
   1. a person who controls such company, or
   2. an associate of that person.

Related body corporate

“Related bodies corporate” of a corporation, as defined by section 50 of the Corporations Act, effectively includes the corporation’s holding (parent) company, the corporation’s subsidiaries, and sibling companies of the corporation – where both companies are owned by the same parent company by more than 50% voting shares.

Control

The concept of “control” refers to the ability to influence the outcome of a company’s financial and operating policies.

The definition of control allows the scope of related party to extend beyond shareholding of less than 50%.

A company may hold less than 50% shares in another entity but has power over such entity’s financial and operating policies, then these two entities are related party to each other through the control limb.

Associate

The definition of “associate” includes a director or secretary of the company, a related body corporate and a director or secretary of a related body corporate of that company. It also includes persons who are acting, or propose to act in concert with each other in relation to a company’s affairs, which may include, family members or persons with common investments and dealings.

Two companies can therefore be related parties through having the same director or through directors who are associates.

Subsidiary of Foreign ListCo

On the face of it, the CSF Scheme is not available to companies who are, or whose related parties are, “listed corporations”.

The term “listed corporation” is a defined term that currently only refers to corporations listed on the Australian Securities Exchange (ASX), National Stock Exchange of Australia (NSX), Sydney Stock Exchange (SSX) and IR Plus Securities Exchange.

It appears that Australian subsidiaries of foreign listed companies are not ruled out on this criteria.   However, the other eligibility criteria on the company having principal place of business and majority of directors in Australia and less than $25 mil turnover and assets still apply.

The CSF Act places liability on the company and the CSF Intermediary for the veracity of the CSF Offer Document, in which the description of related party is prescribed information.  The assessment of the company’s related parties and verification process of the Offer document therefore should not be overlooked.