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Shannon Ryan 14 Aug 2017

Access to crowd-sourced funding for proprietary companies in the pipeline

Crowd-sourced funding (CSF) involves a company raising funds from a large number of individual investors who make relatively small financial contributions to the company.

The Corporations Amendment (Crowd-sourced Funding) Act 2017 which is due to commence on 29 September 2017 currently only allows unlisted public companies to engage in CSF as a means of fundraising. Fortunately, the Government has recognised that as an overwhelming majority of Australian businesses are structured as proprietary companies the currently proposed legislation means that private companies do not benefit from these new rules. Accordingly, the Government has drafted the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 which will extend the CSF regime to proprietary companies.

The draft bill will enable proprietary companies to access CSF without transitioning to public company status if they satisfy the following additional obligations:

  • Minimum number of directors: Proprietary companies will be required to have at least two directors before they are able to engage in CSF.
  • Additional reporting obligations: A proprietary company that makes a CSF offer will be required to include the following information as part of its company register:
    • date of each issue of shares as part of a CSF offer;
    • number of shares issued as part of each CSF offer;
    • shares issued to each member of the company as part of each CSF offer; and
    • date on which each person ceases to be a CSF shareholder of the company for a particular share in the company.
  • Additional financial reporting obligations: A proprietary company that makes a CSF offer will be required to prepare annual financial and directors’ reports while they have CSF shareholders and if it raises more than $1 million from CSF offers it will be required to have its annual financial reports audited.
  • Restrictions on related party transactions: Proprietary companies that have CSF shareholders will be subject to the existing related party transaction rules and penalties under Chapter 2E of the Corporations Act 2001 (“the Act”).
  • Takeovers: A proprietary company that has CSF shareholders will be exempt from the takeover rules in Chapter 6 of the Act if the company’s constitution provides a minimum level of protection for investors to participate in an exit event.

If the company’s constitution does not contain an appropriate minimum level of protection then the existing takeover rules will apply.

To qualify for the exemption, a CSF company must include as part of its constitution a provision that requires someone who acquires more than 40% of the voting shares in the company to offer to purchase all other securities in the company on the same terms within 31 days.

Furthermore, the existing shareholder cap which provides that a proprietary company cannot have more than 50 non-employee shareholders is being amended so that CSF shareholders are not counted as part of the cap.

The question for proprietary companies now is whether to convert to an unlisted public company to take advantage of the CSF legislation on 29 September 2017 or wait for an indeterminate period of time until the CSF regime is extended to proprietary companies.