In March 2017, Parliament enacted the Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) (Act) which provided a legislative framework for public companies to raise capital on crowd-sourced equity funding (CSF) platforms. Since then, Treasury has released draft legislation proposing to expand access to the framework to proprietary companies. Please see our previous insights discussing the Act and the expansion of the CSF regime to proprietary companies if you would like further information on these topics.
The CSF framework was further developed this month by the release of the Corporations Amendment (Crowd‑sourced Funding) Regulations 2017 (Cth) (Regulations). Two consultation papers were also released by the Australian Securities and Investments Commission (ASIC) providing draft regulatory guidance for companies and CSF intermediaries on their obligations under the Act and Regulations, along with detail on ASIC’s expectations for compliance under the CSF regime. This insight discusses how the Regulations clarify compliance obligations under the Act and the key details set out in the consultation papers. ASIC is accepting submissions on these consultation papers until 3 August 2017.
- CSF Regulations
- Consultation Paper 288: public companies raising funds through CSF
- Consultation Paper 289: intermediaries operating CSF platforms
The CSF Regulations are based on those originally released for consultation by Treasury in the previous Parliament in December 2015, when an earlier version of the Act lapsed as a Bill in Parliament. These Regulations prescribe the content and structure of a CSF offer document as including the:
- Class of securities offered under CSF: only fully-paid ordinary shares are eligible for CSF offers. Importantly, a CSF offeror cannot intend to use funds raised to make a loan to a related party. This is an investor protection measure to ensure the CSF regime is used only where investments are directly in a company and those investments benefit the development of the business and its assets.
- Minimum content requirements for the CSF offer document: the Regulations set out minimum content as including:
- for offer documents, prescribed risk warning statements and a risk acknowledgment in a certain form and wording and, for offer platforms, a general risk warning also in a certain form and wording.
- certain details of the offering company and key personnel (including directors and senior management) requiring disclosure of information identifying the company, whether the company has been subject of any convictions, undertakings, offences or penalties, and key individuals’ relevant skills and any offences, penalties, disqualifications, banning orders and insolvencies to which they have been subject.
- disclosure of the company’s financial statements for the most recent financial year, business and organisation structure, equity and debt structure and any key risks which could cause the business to fail (for example, if a company’s business plans depended on the grant of a patent over an invention).
- disclosure of the company’s equity and debt structure. For a company’s equity structure, this extends to disclosure of any options granted, any rights or obligations owed to a company’s shareholders under a shareholders’ agreement, any rights or obligations in the company’s constitution and any tag-along or drag-along rights. For the debt structure, this includes key obligations relating to each debt, including any security provided.
- information about the CSF offer (including information about the maximum expected duration of the CSF offer and the range of funds sought to be raised) and information about investor rights (including advising of the 5 business day cooling off period, any corporate governance concessions available to the company and the operation of a communication facility).
- CSF intermediary checks to be conducted: the Regulations set out in specific detail the checks a CSF intermediary must conduct, including in relation to the offering company’s identity, eligibility to crowd fund, verification of key personnel details and whether the offer document is clear, concise, effective and meets content requirements. A reasonable standard is prescribed in relation to checks of CSF offer documents which requires that an intermediary verify information by reference to that what is publicly available in ASIC’s registers. Where information cannot be verified by an ASIC register, the intermediary is to require the offering company to provide any information required in accordance with a process the intermediary has developed, documented and implemented.
- No financial product advice: the Regulations provide that any information drawn from a CSF offer document published elsewhere on a CSF intermediary’s website, in advertisements or in publications of a CSF offer does not constitute providing financial product advice. A CSF intermediary will not require an Australian financial services (AFS) licence authorisation relating to the provision of financial product advice.
These Regulations prescribed many of the essential details regarding the content and requirements for CSF offer documentation and clarify the role and obligations of a CSF intermediary.
Start-ups intending to raise funds at an early stage through a CSF offer will need to structure their business from the outset in such a manner as to attract investment in a CSF offer round. This is because the Regulations require a CSF offer document disclose the equity and debt structure of a business. Depending on the capital structure which is implemented, CSF investors may be encouraged or deterred by existing equity and debt structures.
Equity and debt structures of start-ups are often a result of circumstance rather than strategy, as co-founders, family, friends and angel investors contribute. If a company is to commence a CSF offer at an early stage, then some consideration should be given to the capital structure of the business at the outset.
This consultation paper seeks feedback on ASIC’s proposed regulatory guidance for public companies raising funds through CSF. The regulatory guidance is intended to assist companies in understanding their role and compliance with their obligations when making offers of CSF shares under the regime.
1. The eligibility requirements for making offers of shares under the CSF regime
The proposed guidance explains whether a company is eligible to make offers of shares under the CSF regime and whether an offer constitutes an eligible, CSF compliant offer within the ‘issuer cap’ and other requirements under the Corporations Act. The guidance outlines how to calculate this ‘issuer cap’ to determine the amount of funds companies are able to raise and also provides examples of how the definition of ‘related party’ in the CSF regime works in different scenarios.
2. The process for making CSF offers and the obligations and investor protections that apply to CSF offers
The proposed guidance also includes a step-by-step explanation of, and a flowchart showing, the process of requirements for making CSF offers under the Corporations Act. The guidance outlines the rules that the company, CSF intermediary and other parties involved with the offer must comply with, including rules on advertising CSF offers, providing information about the company or the offer on the intermediary’s platform, and prohibitions on multiple CSF offers and on providing financial assistance to retail investors to acquire a company’s shares.
3. The minimum information requirements for CSF offer documents
ASIC proposes to give guidance on the minimum information requirements for CSF offer documents, including the offering company’s business, capital structure and financial information; the main risks facing the company’s business; and the use of the funds raised under the CSF offer. These requirements are intended to facilitate simple and concise disclosure in CSF offer documents while ensuring the preparation of these documents for companies using the CSF regime is low-cost and efficient.
The proposed guidance requires additional information to be disclosed in order to assist companies in ensuring that the CSF offer document is not misleading or deceptive. The guidance recommends including information such as majority shareholders’ voting power, post-offer capital structure, events that have had a material effect on the company since its most recent financial statements and information contained in the notes of the financial statements.
A template CSF offer document is included that is accompanied by clear instructions and example content to assist companies in preparing a CSF document that meets the minimum information requirements. It will not be mandatory to use the template document.
The proposed guidance provides a step-by-step approach to assist companies to understand their obligations, and the steps they may take, if it becomes apparent the CSF offer document is defective.
4. The temporary concessions available to eligible companies from certain reporting, audit and annual general meeting obligations that usually apply to public companies
To make CSF offers, companies will need to register as, or convert to, a public company. To reduce the regulatory burden of doing so, temporary concessions from certain public company corporate governance and reporting requirements are available to eligible companies. The proposed regulatory guide outlines when companies are eligible to rely on the temporary concessions, what temporary concessions are available and when they cease to apply.
ASIC proposes to update the relief in ASIC Corporations (Consents to Statements) Instrument 2016/72 so that it applies to statements made in CSF offer documents. The instrument provides relief from the requirement to obtain consent in relation to statements included in prospectuses and other regulated documents made by government officials, statements already published in books, journals and comparable publications, statements taken from certain geological reports, and certain trading data. Without this relief, companies making CSF offers would have to obtain consent of relevant persons (i.e. authors, government officials) to rely on their statements in CSF offer documents, a process which would be overly burdensome and costly.
This consultation paper discusses the proposed regulatory guidance applying to CSF intermediaries regulated by ASIC. The proposed guidance is intended to provide understanding and assist with compliane of CSF intermediaries as AFS licensees under the CSF regime.
1. AFS licence requirements
To provide a crowd-funding service will require a specific AFS licence authorisation. ASIC notes that CSF intermediaries will need to meet a range of conduct and disclosure obligations including handling client money, compensation arrangements, adequacy of resources, adequacy of risk management systems, providing a Financial Services Guide to retail clients and ensuring that advertising is not potentially misleading or deceptive and complies with the CSF regime requirements. ASIC does not propose to amend existing regulatory guides in relation to these areas, but invites comment from potential CSF intermediaries as to whether that regulatory guidance requires tailoring to the needs of CSF platforms.
ASIC has expressed the view that its initial position for AFS licensees operating CSF platforms will be that licensees should only operate one such platform and, if successful, then authorisations to operate multiple platforms can be granted. Additionally, the proposed regulatory guide provides tailored guidance on managing conflicts of interest as a CSF intermediary. These conflicts of interest are unique as CSF intermediaries act as both CSF provider and gatekeeper.
The proposed regulatory guidance also indicates what would amount to adequate financial resources for the AFS licensees operating CSF platforms and audit reporting arrangements in relation to the adequacy of those financial resources. ASIC proposes to apply the general financial requirements for AFS licensees to CSF intermediaries except for those requirements relating to cash adequacy. ASIC is proposing a tailored regime for CSF intermediaries cash adequacy which will have regard to cash flows for 12 months ahead and require board engagement in order to reduce risk of disorderly failures of CSF intermediaries which could disrupt the fundraising process. The consultation paper includes a draft legislative instrument and a new annexure to Regulatory Guide 166 Licensing: Financial requirements giving effect to these proposals.
In relation to the requirement of the responsible managers to possess sufficient organisational competence, ASIC has indicated that it appreciates that AFS licensees may not be able to demonstrate depth and breadth of experience as a CSF intermediary. However, AFS licence applicants for CSF authorisations should be able to explain how the experience of directors and managers, as a whole, provide sufficient capability to deliver and manage that service.
ASIC does not propose modifying or replacing the existing policy in Regulatory Guide 165 Licensing: Internal and external dispute resolution to address dispute resolution requirements for CSF intermediaries.
2. Specific obligations under the CSF regime
The specific obligations that arise under the CSF regime for intermediaries are principally those under the Act and Regulations, the regulatory guide merely states those obligations more fully. In addition to these obligations, ASIC’s proposed regulatory guide sets out that a reasonable process for requiring the provision of information by offering companies will generally include:
- contractual promises by the offering company to provide the information compliantly and in accordance with the requirements that have been explained;
- checking that the offering company’s relevant officers understand the requirements as explained;
- using independent and reliable sources of information, where reasonably available, to check the information is accurate and complete;
- checking that the offering company’s relevant officers understand the potential practical, reputational, and civil and criminal consequences that may flow from non-provision of the required information in relevant circumstances;
- having (and informing the offering company about) an active process for monitoring communications on the communication facility and complaints, to identify possible failures of disclosure and take action where appropriate; and
- requiring personal confirmations by relevant directors that the information is accurate and complete based on their knowledge.
3. Data reporting
Under the proposed regulatory guide, ASIC has developed data reporting requirements for CSF intermediaries to assist in ongoing evaluation of the crowd-sourced funding industry. The data will be used for regulatory and other purposes. It may be shared with other government authorities as permitted by law or compiled and published as aggregate information. The data gathered from the CSF intermediaries will include data relating to successful and unsuccessful CSF offers, investors, the operation of the CSF platform and about companies making CSF offers relying on temporary corporate governance concessions. The data requirements will apply for the 2017/18 and 2018/19 financial years, such requirements will be reassessed at 30 June 2020.
4. Crowd-sourced funding through platforms and custodial arrangements
ASIC considers that there is a risk that clients of IDPSs, registered managed investment schemes that are IDPS-like schemes, and nominee and custody services, may give instructions to accept a CSF offer that are acted on by the platform or service operator, without accessing the CSF offer document. Accordingly, ASIC proposes modifying certain class orders, legislative instruments and regulatory guidance to require the operator of an IDPS, IDPS-like scheme, or nominee and custody service only permit the acquisition of shares in a CSF offer if a person performing the transactional functions is:
- reasonably satisfied that the client has access to the CSF offer document and the operator has no reason to believe that the CSF offer document is defective; and
- retail client protections apply.
ASIC argues that its proposal in relation to access to the CSF offer document reflects existing policies for securities and financial products that would otherwise be required to have a disclosure document.
The proposals in this consultation paper and the draft regulatory guide are ASIC’s interim policy. The interim policy will apply from 29 September 2017, when the Act commences, until the final regulatory guide is issued.