Following the March introduction of the long awaited Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) (CSF Act), the Government has moved to extend the reach of its crowd-sourced equity funding (CSF) reforms to proprietary companies.
Currently, only public companies can access the new regulatory framework, due to commence in September 2017. In our previous update discussing the passage of legislation establishing a crowd-sourced equity funding regulatory framework, we noted the likely introduction of a bill extending the crowd-funding regime to proprietary companies.
As part of the Budget, an exposure draft of further proposed legislation, the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (Cth) (Bill), was released for consultation. The Bill effectively expands the application of the CSF Act to proprietary companies. The Bill imposes increased governance and reporting requirements for proprietary companies accessing the CSF scheme.
Proposed operation of the CSF regime for proprietary companies
The Bill proposes to achieve the extension of the CSF regime via a strengthened eligibility criteria for proprietary companies wishing to access the CSF regime, including by introducing novel reporting requirements for participating companies and requiring participating companies comply with audit obligations where more than $1 million in funds is raised from CSF offers.
Consistent with the resulting increase in shareholder numbers, the Bill also proposes to subject CSF shareholders to Chapter 2E of the Corporations Act 2001 (Cth) (Corporations Act), being the related party transaction rules, and record the nature of the offer and accepting shareholders in the company register. The Bill provides that Chapter 6 of the Corporations Act, being the takeover provisions, will not apply to a company that has made an allowance in its constitution for CSF exit arrangements.
Key features of the Bill are:
- Eligibility requirements: A CSF eligible company includes proprietary companies with at least two directors that also satisfy any other prescribed regulatory requirements.
- Disclosure requirements: CSF offers must be made via a CSF offer document, which will involve reduced disclosure requirements (when compared with existing disclosure requirements under Chapter 6D of the Corporations Act).
- Relaxation of prohibition on fundraising: The Corporations Act is amended to permit proprietary companies to make CSF offers, which would otherwise be prohibited as a fundraising activity requiring disclosure to investors.
- CSF shareholders not to counted toward member limit: A CSF shareholder, being an entity that holds securities of a company as a result of being issued with such securities pursuant to a CSF offer, is not counted toward the 50 member statutory limit for proprietary companies. Once sold or transferred, the new holder will not be a CSF shareholder and the CSF reforms do not apply to such shareholding.
- Reporting and record keeping obligations: Companies issuing CSF offers will be required to complete annual financial and directors’ reports, to have the financial report audited if the amount of funds raised from a CSF offer exceeds $1 million and to notify ASIC of the commencement and cessation of the membership of CSF shareholders.
- Restrictions on related party transactions: It is proposed Chapter 2E of the Corporations Act will apply to proprietary companies that use CSF funding, reflecting the increased risk of fraud and bias with a broader shareholder base. The usual arms-length commercial dealing exception applies to ensure the restrictions do not jeopardise ordinary commercial decision making.
- Takeovers: It is proposed that the takeover rules in Chapter 6 of the Corporations Act will not apply to a company that has CSF shareholders, provided the constitution of the company protects investors participating in the exit event.
The Bill is open for comment until 6 June 2017, with the Treasury inviting comment from all interested parties.