[Editor’s Note: Since publication of this article, the Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) has been given Crown assent, making it Commonwealth Act No 17 of 2017.]
The Corporations Amendment (Crowd-sourced Funding) Bill 2016 (Cth), which is currently before the Commonwealth Senate, plans to amend the Corporations Act 2001 (Cth) to deal with an increase in crowd-sourced capital-raising activities by companies within Australia. A more detailed exposition and analysis of the proposed Bill is contained within the latest issue of the Company and Securities Law Journal in Catie Moore, “Equity Crowdfunding in Australia: How Far Have We Come and Where to Next?” (2017) 35 C&SLJ 102.
Crowdfunding is a capital-raising activity whereby a company seeks investors to fund some future activity. Quite often, the company is a start-up which has been unable to access investment through traditional loans schemes or angel investors. Often, also, the investors (or “backers”) are many in number, but offer only small amounts of capital per person. Crowdfunding can take many forms, but is largely categorised into four broad types: donations-based, rewards-based, lending-based and equity-based.
Donations-based and rewards-based funding have both taken a front page in the news in recent years, as small startups like Oculus raised millions to fund game-changing technologies like virtual reality headsets; while other campaigns collected thousands of dollars overnight to fly victims of abuse to Rome as Cardinal George Pell gave evidence for the Royal Commission into Institutional Responses to Child Sexual Abuse. Much of this sudden popularity is due to the ability of crowdfunding campaigns to take advantage of the viral nature of social media, as well as to market directly to a growing number of internet-savvy adults with disposable incomes.
It is the fourth area of crowdfunding (equity-based) that Parliament is seeking to regulate with this Bill. Rather than donations-based (which is charitable in nature), lending-based (where repayment with interest is expected) or rewards-based crowdfunding (which acts more like a “pre-order” system), equity-based crowdfunding offers investment opportunities – offering potential backers part ownership in a company in return for their money. Due to the nature of crowdfunding – tending to attract risky, novel and innovative ventures – there have been many calls for greater regulation in this area.
This current Bill passed the House of Representatives on 8 February 2017, after which it was introduced to the Senate. The Bill’s second reading has been deferred to a later date, with amendments by the Opposition to be discussed. This is the second iteration of the Bill, with the Corporations Amendment (Crowd-sourced Funding) Bill 2015 (Cth) having lapsed due to the prorogation of the Senate in mid-2016.
In her article, Moore discusses the 2016 Bill’s strengths and weaknesses, analysing it in light of current legislation and providing recommendations to enhance the Bill’s commercial application. Key recommendations by Moore are:
- An exemption from public company requirements for start-up companies.
- A requirement for disclosure in offer documents.
- An increased assets and turnover cap for eligible issuers.
- An extended offer period from 3 months to 12 months.
- ASIC should build on its current regulatory guide, RG-254 to deal with issuing securities under a crowd-sourced funding offer document.
You can read more on the author’s rationale and insight into the Bill in the latest issue of the Company and Securities Law Journal.