Denham Sadler
September 21, 2017

Gov't publishes new crowd rules

Policy

Gov't publishes new crowd rules

How it works: ASIC has published its first iteration of crowd-sourced funding rules

The corporate regulator has released the set of guidelines outlining how the first iteration of Australia’s equity crowdfunding regime will work.

Crowdsourced equity funding mechanisms for retail investors will be available in Australia from 29 September, but only for startups and SMEs that are willing to convert to an unlisted public company.

While the government has recently introduced legislation to Parliament extending this regime to proprietary companies, this will take at least six months to come into effect. These new guidelines apply only to the public company scheme.

ASIC issued on Thursday a regulatory guide for public companies wanting to undertake an equity crowdfunding raise, and another for crowdfunding platforms, known as intermediaries, outlining their obligations and requirements under the new laws.

The guidelines offer an insight into how equity crowdfunding will function in Australia, with an emphasis on protecting investors, and placing the onus of due diligence onto the intermediaries.

“Crowd-sourced funding provides an opportunity for small to medium-sized businesses to access an alternate source of capital without the regulatory burden of traditional fundraising. ASIC’s new guidelines will help public companies and crowdfunding platform operators comply with their obligations under the CSF regime, while supporting investor confidence,” ASIC commissioner John Price said.

The government’s equity crowdfunding legislation, which passed through Parliament earlier this year, allows unlisted public companies with annual revenue and assets less than $25 million to raise up to $5 million per year from retail investors, who can invest up to $10,000 in a company.

The first document released by ASIC, Regulatory Guide 261, provides information for companies looking to undertake an equity crowdfunding round, especially relating to new obligations and compliance that will be imposed on them.

To be eligible, a business must be a public company limited by shares, be based in Australia along with the majority of its directors, annual revenue and assets of less than $25 million and not have a “substantial purpose of investing in other companies”.

To begin a funding round, the company will first enter into a hosting arrangement with an eligible crowdfunding platform, and then produce a CSF offer document.

ASIC has outlined the minimum information that must be included in the offer document, including risk warnings, financial information about the company, details of the offer and information about investor rights. This offer document must be “clear, concise and effective”.

“We strongly encourage your company and the CSF intermediary to present and format the CSF offer document in a way that enhances the readability, accessibility and digital compatibility of the document for retail investors,” the guidelines read.

“It is critical that the directors are involved in this process, since directors of startups or small to medium sized businesses are often intimately involved with and have a close understanding of the company’s business.”

Once this document has been completed and the necessary consents have been received, it will then be published on the intermediary’s platform.

The platform will then close the equity crowdfunding round “as soon as practicable” after the money has been raised or the cut-off date reached.

If successful, the company then issues shares to investors and the intermediary transfers the money.

The guidelines also detail the temporary concessions that are on offer for businesses that opt to convert to an unlisted public company. But these concessions will be obsolete once the government’s legislation allowing private companies to take part in equity crowdfunding comes into effect.

While the unlisted public company regime is in place, participating businesses will be exempt from having to hold an annual general meeting, appointing an auditor and having its financial reports audited for a maximum of five years if it raises less than $1 million.

ASIC also released its guidelines for the platforms that will facilitate equity crowdfunding raises, with the crowdfunding regime placing a lot of the onus on these intermediaries to conduct due diligence on companies and identify any issues with an offer.

The intermediary platform will have to hold an Australian financial services license authorising it to provide equity crowdfunding.

“A CSF intermediary plays a significant role under the CSF regime, operating the platform through which investors invest and companies offer their shares,” the guidelines read.

“This role includes managing some of the risks identified...in relation to crowdsourced funding, to help ensure that investors and offering companies can be confident in using the CSF regime.”

Intermediaries will be responsible for checking the identity and eligibility of the company, its offer document and the identity of its directors and senior managers.

ASIC will not play a role in checking these offer documents, but will conduct “surveillance” to make sure the intermediaries on complying with these obligations.

“It is not our responsibility to review CSF offer documents at any time. Unlike prospectuses, CSF offer documents are not required to be lodged with ASIC,” the guidelines read.

ASIC can issue stop orders and take enforcement action if concerns are identified with an offer document, or how it has been advertised.

An intermediaries “gatekeeping obligations” will extend to checking a company’s information on ASIC, checking information in the offer document and asking for further information from the company.

“The consequences of failing to conduct one of the gatekeeper checks, or failing to conduct a check to a reasonable standard, are serious. It is a strict liability offence to not comply with this requirement and if you do not comply you are taken to have knowledge of anything you would have had knowledge of had you conducted the check to a reasonable standard,” the guidelines read.

ASIC has also implemented data reporting obligations for equity crowdfunding intermediaries, requiring them to provide certain information at the end of the financial year, including the total amount raised through the platform, numbers of eligible and ineligible companies, system outages and remuneration received.

“This information will help us better understand your business and how it compares to other CSF intermediary businesses,” the guidelines said.

“We may publish a report based on the aggregated information collected. Disclosure from the data will not be made available to the public generally in a way that identifies individual AFS licensees or offering companies, unless ASIC is compelled to do so by law.

Equity crowdfunding will be available to unlisted public companies from 29 September, and the bill to extend the regime to proprietary companies is currently before Parliament.

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