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With the ASX increasing the threshold of admission, small to medium –sized business, including start-up and early stage companies, may find more suitable alternative to raise funds and gain its early majority in equity crowd-sourced funding (CSF).

The Corporations Amendment (Crowd-sourced Funding) Act 2017 (the CSF Act), which comes into effect from 29 September 2017, will provide the regulatory framework for which equity crowd-sourced fund raisings operate in Australia. 

Who’s Eligible?

Under the CSF Act, start-ups earning less than $25 million in annual revenue and having less than $25 million in gross assets may be eligible to make CSF offers to the market and accept investment from retail investors of up to $5 million in any 12 months period.

The CSF regime is only available to eligible public companies.  The CSF companies will benefit from an initial 5 year concession period of reduced compliance and standard reporting obligations.

These concessions include:

• exemption from the requirement to hold an AGM
• the option to provide online reports to shareholders
• an exemption from the requirement to appoint an auditor until the company has raised $1 million or more from CSF offers.

Note that the companies converted to public companies prior to the CSF regime commences will not be eligible for these concessions.

The Offer Document

The CSF regime is designed to facilitate small to medium sized unlisted public companies access to capital by reducing the regulatory requirements for making public offer of shares. However, companies wishing to utilize the CSF regime should bear in mind that the liability in relation to the preparation of CSF Offer Document will be similar to that for a prospectus.

Not unlike capital raisings on the ASX, the companies making the CSF offer will need to publish on a licensed CSF intermediary platform its Offer Document, which must be worded in a “clear, concise and effective” manner and is subject to various specific content requirements:

• prominent risk warnings
• information about the company
• information about the offer, and
• information about investor rights.

Though the general disclosure test for a prospectus (i.e. containing all the information that investors and professional advisers would “reasonably require to make an informed assessment”) does not apply to a CSF Offer document, similar rationale applies to the preparation of a CSF Offer Document.

For example, the inclusion of any forward- looking statements or prospective financial information would be considered inappropriate and the exclusion of material information contained in the notes to financial statements may be considered misleading.  The CSF offer document must not be published until the necessary consents required by law have been obtained.

The liability in relation to the preparation of a CSF offer document is same as that for a prospectus, i.e. the Company, the directors of the Company, the persons named in the CSF offer document with their consent as having made a statement will be liable for any misleading or false statement in the Offer document.

The provision of any false and misleading information is a criminal offence under the Corporations Act, so the verification process typically undertaken for a prospectus should be applied to the preparation of CSF Offer documents.

Allocation of risk and responsibilities – Investor obligation and protection

The CSF Act has interestingly sought to attune the risks and responsibilities amongst the three groups of stakeholders.

While both the Company and the CSF intermediary have the responsibilities over the accuracy of the information in the CSF Offer document, the CSF Act goes beyond the Company and the CSF intermediary to require that the investors acknowledge the investment risk before he or she is able to make an application to subscribe to the CSF Offer.

 At the same time, the CSF Act has sought to afford some protection to the retail investors by allowing a cooling-off period of 5 days.  It would be interesting to see whether the cooling-off period offer some arbitrage to the CSF regime in practice.

Regulatory Guidance

At the time of this article, ASIC is still holding public consultation and finalizing the regulatory guides related to the CSF regime.   ASIC has suggested additional disclosures in the Offer Document, which would be prudent for any companies wishing to raise funds through the CSF regime to include in its CSF Offer Document.

Please contact us to discuss how Macpherson Kelley may assist you with your fund raising through the CSF regime.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.