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Crowd Sourced Equity Funding: An Unconventional Opportunity for Conventional Resource Equity Raising?
On 29 September 2017 the Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) came into effect. The Act amends both the Corporations Act 2001 (Cth) and the Australian Securities Investments Commission Act 2001 (Cth) to establish a crowd sourced equity funding (CSF) regime, allowing eligible companies to raise money from a large number of investors who each make small financial contributions in exchange for equity.
Although the term ‘crowd funding’ is commonly associated with the technology sector, there is nothing in the legislation which restricts it in that way. We believe the introduction of the CSF regime could also present an alternative capital raising pathway for early stage resource companies. Indeed, these companies often share much in common with their technology counterparts, including high risk / high reward economics, an entrepreneurial mindset, and attraction to a subset of investors willing to “take a punt” on a successful outcome – however much the odds might be stacked against them.
Access to funding still poses a substantial challenge to many small and early stage companies in the energy and resources sector, particularly at a time when ASX is moving to tighten its admission requirements, creating an “interregnum” in the market between the true seed / angel stage (otherwise known as “family, friends and fools”) and listing.
The Corporations Act already provides a reduced compliance regime for relatively small offerings (up to $2m in 12 months), however this may not be sufficient to “bridge” an early stage energy and resources company until the point it can satisfy the $4m net tangible assets or $15m minimum market capitalisation thresholds for a listing on ASX under the “assets test” provisions of Listing Rule 1.3. Anecdotal evidence suggests that the latter threshold in particular can be a stretch where the company is at a conceptual or pre-JORC resource stage.
We have observed an increasing tendency for larger strategic parties to be called upon to cornerstone these IPOs. This is a relatively new development in this market and is not without issues for the listed company, particularly as the presence of a strategic shareholder on the register can be seen as depriving the company of its “corporate appeal”. CSF may provide a potential solution to this conundrum.
Under the CSF regime, eligible unlisted public companies will be able to raise up to $5 million in any 12 month period by publishing a CSF offer document (complying with the prescribed minimum disclosure requirements) on a licensed intermediary’s online platform. This is a meaningful amount for early stage exploration companies. A maximum of $10,000 can be raised from each retail investor in any 12 month period, so companies taking advantage of the regime to raise the maximum amount will need to attract a minimum of 500 retail investors (or, perhaps at the other extreme, $1,000 from each of 5,000 retail investors). CSF may not be sufficiently established in Australia to deliver this depth to resources companies just yet, but if experience in the US in other sectors, including technology, is anything to go by, that may change.
In order to take advantage of the CSF regime, companies must:
- have their place of business in Australia;
- have a majority of directors ordinarily residing in Australia;
- not exceed the assets and annual revenue caps of $25 million; and
- not have a substantial purpose of investing in other companies, entities or schemes at the time the offer is made.
Currently, only public companies can make CSF offers with some reporting concessions available to proprietary companies that convert to public status for the purpose of making a CSF offer. There is a bill before Parliament which proposes applying the regime only to proprietary companies.
Eligible companies are not required to publish a prospectus, but need only compile a CSF offer document complying with the prescribed minimum disclosure requirements. While the legislation takes a slightly more prescriptive approach than the simple “all material information” test for a prospectus, generally speaking, the requirements are not particularly onerous. ASIC has released regulatory guidance in relation to the contents of CSF offer documents.
Of particular interest for early stage resource companies is the question of compliance with the JORC Code. Under the ASX Listing Rules, reporting of exploration targets, exploration results, mineral resources or ore reserves and production targets must comply with the JORC Code. However, as CSF operates as an alternative to listing on the ASX, companies will not be required to comply with the Listing Rules, nor, strictly speaking, with the JORC Code.
Could this lead to a proliferation of non-JORC language in CSF offer documents for resources companies? Possibly, although companies must not include misleading or deceptive information in a CSF offer document, and there could be an argument that reporting non-JORC resources measures is presumptively misleading. The JORC Code itself purports to apply to all “public reporting”, but how does this requirement “bite” in CSF situations?
If CSF offer documents are not required to comply with the JORC Code, this has the potential to be attractive to early stage companies which may have access to sufficient historical data to provide an indication of resource potential, but insufficient funding to bring this up to JORC standard.
It should be noted that ASIC can issue stop orders in relation to CSF offer documents where it considers those documents defective, and licensed intermediaries will also have gatekeeper obligations which will involve screening CSF offer documents.
The CSF regime is not without risks. The ASIC Regulatory Guide for public companies suggests that investments through CSF offers may be highly speculative and carry an increased risk of failure and loss to investors. This is, of course, particularly true in the resources sector, given the risks involved in junior exploration, but perhaps no more so for CSF investors than ASX investors.
The ASIC Regulatory Guide also makes the obvious point that CSF investments may suffer from illiquidity. Other issues could include the practical difficulties associated with small companies managing large numbers of shareholders, and issues eligible companies could encounter in attracting funding from larger investors at later stages of the project’s development.
However, with sufficient foresight and planning, we believe these issues can be overcome.
Indeed, by operating outside the strictures of the ASX Listing Rules, the kind of provisions that could be included are limited only by promoters’ imaginations – and, of course, the Corporations Act under which they are incorporated.
We would also expect to see the emergence of licensed platform providers to capitalise on the CSF opportunity, and it isn’t unreasonable to expect that some will choose to have a specific sectoral focus. The resource sector, with its technical underpinning, “common language” and deep resonance with the Australian retail investor psyche, appears peculiarly well suited to this.
In many respects the new CSF regime could not have come at a better time. Providing the practicalities of the regime can be addressed, it could provide opportunities to efficiently raise capital in a climate where junior resource companies often still struggle to find funding – particularly for grass-roots exploration. The CSF regime not only takes advantage of technology’s ever growing presence in society, but could arguably create a second wind for resources by fostering community interest and enhanced public involvement in that sector.