On 29 September 2017 new crowd sourced equity funding legislation will come into force. This will allow public companies to utilise crowd sourced equity funding. Although the ink isn’t even dry, the Government has already announced that it proposes to change the legislation to open up crowd sourced equity funding to proprietary companies.
While this sounds great, it could become confusing.
At present, things are relatively simple. If you want to run a business through a company and pass the profits to your shareholders then you’ve broadly got two choices. You can have a public company or a proprietary limited company.
Proprietary Limited Companies are quick and easy to set up with limited ongoing compliance obligations. They allow for limited liability for shareholders, have separate legal personality and are a very common vehicle through which business is conducted. The main drawback is that you can’t raise capital broadly, you have to use a Public Company for that.
Public Companies are very similar to Proprietary Limited Companies, save that there are some significantly more robust compliance obligations around reporting, governance and ensuring that transactions involving the Public Company are equitable to all shareholders. In particular, the Corporations Act includes significant protections around related party transactions and takeovers. Public Companies can seek capital more broadly than Proprietary Company’s, providing they issue a formal disclosure document such as a prospectus.
It is expensive and time consuming to prepare a prospectus and for early stage companies, the cost and complexity generally outweighs the potential benefit of accessing broad based funding from ‘mum and dad’ investors.
The original crowd sourced equity funding legislation seeks to address this problem by significantly reducing the compliance burden on a public company in raising crowd sourced equity funding. This has been achieved by placing some obligations around the process for raising those funds (through an intermediary platform), by reducing the disclosure burden (by requiring an offer document with significantly lower compliance and risk requirements than a prospectus) and by reducing the compliance burden (by removing some of the administrative burden of preparing audited accounts and holding general meetings while retaining a number of the protections around related party transactions).
While the original crowd sourced equity funding legislation reduced the compliance burden, the fact that you had to be a Public Company to access the benefits provides a very big signpost to both directors and owners that you’re dealing with a more regulated company with ‘different’ obligations to those of Proprietary Companies.
Under the proposed new rules, Proprietary Companies that meet the eligibility requirements will:
- be able to access the crowd sourced equity funding regime;
- if they have shareholders as a result of a crowd sourced equity offer (‘CSF Shareholders’), have to prepare annual financial and directors’ reports in accordance with accounting standards and be subject to the related party transaction rules in Corporations Act;
- if they raise more than $1 million from a crowd sourced equity offer, have to have their financial statements audited;
- not breach the takeovers rules if their constitutions contain appropriate exit arrangements for CSF Shareholders that are complied with; and
- have to include details as part of their company registers about any crowd sourced equity offer they make and CSF Shareholders they have.
All of these rights and obligations are fundamentally different to the provisions generally applying to Proprietary Companies and with the absence of any change to become a Public Company to signpost the obligations, there must be a risk of companies getting confused as to which compliance regime applies to them.
If you want to know more about how the new regimes are going to apply to you, please contact Gerry Cawson.