Businesses that opt to extend beyond the private corporate structure will have wider opportunities to raise capital from the public with the amendments to the Corporations Act 2007 which come into effect on 29 September 2017.
The amendment aims to facilitate flexible and low-cost access to capital for small to medium sized unlisted public companies by reducing the regulatory requirements for making public offers, while ensuring adequate protections for retail investors.
Before 29 September 2017, capital raising options include:
No Disclosure Option
Some offerings fall within the disclosure exemption provisions and are limited to (not the full list) the following:
- small scale personal offerings of no more than $2,000,000.00 from a maximum of 20 investors in any 12 month period (advertising of such offers are prohibited)
- offerings to sophisticated investors with assets of at least $2.5 million or a gross income of at least $250,000.00 pa for the past 2 years
- investors who invest at least $500,000.00 in the company
- offerings through an ASIC licensed investment dealer confirming the experience of the investor in assessing merits of the offers
- investment from professional investors
- people associated with the body
All other offers to the general public will require one of the following, depending on the nature of the offer:
- a prospectus
- a short form prospectus
- a profile statement
- an Offer Information Statement
The two options have drawbacks where the no disclosure exempt option is restrictive as to the scale and reach of the offering whilst the disclosure option entails extensive documentation, time and cost.
Now a third option - Crowd Source Funding (“CSF”) is available to certain unlisted public companies to raise capital from the public
This option fills the gap between large offerings which require extensive disclosure and small scale offerings with very restrictive advertising opportunities and a limited categories of offerees.
Who is Eligible
Unlisted public companies (not investment companies) with a principal place of business in Australia with less than $25 million consolidated assets and the majority of directors residing in Australia.
Maximum Capital Raising Cap
$5 million in any 12 month period
Obligations to Investors
Retail investors are subject to a cap of $10,000.00 per company per 12 month period and a 5 day cooling off period after making an application
CSF offers must be made via a licensed CSF intermediary’s platform.
Advertising is permitted provided that ASIC regulations are complied with. ASIC is now accepting applications from potential CSF intermediaries for AFS licence authorisations to provide a crowd-funding service.
A CSF offer document containing prescribed information must be prepared. ASIC has issued a template as a guidance tool for this purpose.
Temporary Corporate Governance and Reporting Concessions (AGM, audit and reporting requirements)
To be eligible for these concessions, the company must state in its application for registration for or conversion to a public company that it intends to make a CSF offer within the next 12 months and that it will be eligible for temporary concessions on registration or conversion.
It must also:
- be eligible to make CSF offer
- successfully complete the CSF offer within 12 months of registration or conversion
Note also that the exemption from audit requirements only applies when the aggregate amount raised via CSF is less than $1 million.
What this means to you
Businesses looking for funding of less than $5 million in any 12 month period now have the option to reach out to the general public without producing a detailed prospectus which is expensive and time consuming. Exemptions from certain public company reporting and governance obligations mean even more savings on administrative costs of running a public company.
If you are a business with an innovative idea which is likely to appeal to the general public, whether as a start up or branching out into a related business, this venue can be your best option.
Public companies are subject to more stringent requirements under the Corporations Act 2001 as opposed to private companies and before registering or converting to a public company, it is important to note some of the requirements that apply to public companies listed below:
- External audit of financial statements must be lodged with a directors’ report with ASIC annually
- Provision of reports to members within 21 days prior to the AGM or 4 months after the end of the financial year, whichever is the earlier
- Lodgment with ASIC of its constitution, special resolutions adopting, modifying or repealing the same
- Directors with a personal interest in a matter to be considered at a meeting are not allowed to be present or vote without the other directors’ consent
- Directors cannot be removed by other directors but can be removed by members
- Directors are subject to personal liability when the company trades insolvently (this same liability applies to private company directors)
Once you have decided to either register a public company or convert your private company into an unlisted public company to avail the crowd funding venue, you should:
- Create a structure (whether as a single entity or a group structure) for your venture which is capable of supporting both your short and long term business strategies
- Discuss with your accountant as to the most tax effective way of setting up stakeholders’ interests
- Have a funding plan for ongoing costs and future expansions
- Create a marketing plan in sync with your short and long term goals with built in flexibility to cater for changes in market sentiment
- Have assets protection plans in place both built into the corporate group structure and on the shareholders' and directors’ levels
- Have a tailored Constitution that reflects the rights and obligations of the members, sets out meeting protocols and procedures, power of the board and exit mechanisms
- Implement risk management strategies for all immediate and perceived risks
Once the above foundation is laid, you will need to look at compliance issues, some of which are set out below which contains links to our previous articles:
Contractual agreements with third parties
Note: The information contained in this article and on www.laulegal.consulting website is general information only and does not constitute legal or compliance advice.
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