Aug 28, 2015
Crowd-Sourced Equity Funding: A way of the future?
2,188,000.
The number of proprietary companies registered with ASIC as at March 2015. It equates to 99% of all companies registered in Australia.
50.
The maximum number of shareholders permitted to contribute to the equity of a proprietary company.
1.
The minimum number of directors required to register a proprietary company.
In the 2015/16 Federal Budget, the government platform consisted of three lofty objectives, an increase in jobs, growth and opportunity. Entrepreneurship and innovation through supporting start-up culture was highlighted as an area requiring specific attention. This week has seen the much-anticipated grand-opening of fintech hub Stone & Chalk in Sydney, a venture enjoying strong support from the similarly Coalition-led NSW Government.
At the same time the Federal Treasury has released a consultation paper to stimulate discussion about the future of Crowd-Sourced Equity Funding (CSEF) in the Australian economic and legal landscape. The central focus is the facilitation of CSEF for public and proprietary companies and whether this is a workable practice at each level. Media outlets have engaged with the frustrated voices of small business owners, unable to access a potentially lucrative form of fundraising due to the nature of their company structure. This of course begs the questions, should CSEF be available to all? If so, how?
Differences between public and proprietary companies
The compliance, disclosure and regulatory requirements of public companies lend them to being an ideal structure for CSEF. Public companies must have a minimum of three directors, can have unlimited shareholders and do not need to advise ASIC of changes to member details. Conversely, a proprietary company is limited to 50 non-employee shareholders, must lodge any amendments to member details with ASIC promptly, and cannot raise funds through public investment.
At this point the obvious solution for a proprietary company would be to convert to a public company type, right?
Most small proprietary companies want to be able fund themselves through crowd-sourcing because money is something they have ‘just too little of’.
Public companies must also lodge their company constitution with ASIC, set office hours that are open to the public, commission an auditor, submit frequent financial reports, conduct an AGM and have a prospectus available to public investors. This can all be very costly.
Do proprietary companies want the best of both worlds, restricted regulation and optimum opportunities for growth? Well, why not?
Any change, no matter how large or small will require amendments to the Corporations Act 2001 (Cth). Already containing over 6000 provisions, it’s clearly begging for more.
Overseas
One benefit of being behind the eight ball is that we can evaluate what has worked for our international friends.
The United Kingdom has introduced licensed crowd-funding platforms, such as CrowdCube, which acts as a semi-regulatory conduit between professional investors and burgeoning start-ups. Full disclosure is required for participants, offering a transparent experience for those pitching their concept and others wanting to make it a reality. There are restrictions on the amount a retail investor can contribute as well as risk assessments by professional advisors.
In New Zealand, investors are not limited to a maximum investment amount, however a company has the opportunity to raise up to $2 million within 12 months.
An amalgam, in the United States small businesses have 12 months to raise up to $1 million but these funds must be invested through a registered broker-dealer or portal. An investor is restricted to contributing a maximum of $2000 of 5% of their annual income (if less than $100 000) and up to 10% of their net worth if over $100 000, with a cap of, you guessed it, $100 000.
What the change would involve in Australia
The purpose of The Hon Bruce Billson MP’s consultation paper is to generate discussion regarding the best solution for Australian start-ups and investors alike. One suggestion is to raise the shareholder limit in proprietary companies to 100, allowing an increased amount of potential investors, certainly, but if anything, making regulatory compliance significantly more onerous. Great.
Another option is to use the time and turnover limit, whereby a company can engage in CSEF for up to 2 years or until $2 million in equity is achieved, whichever is first.
The consultation paper spends an inordinate amount of time meandering through the possibilities of 12 months or $1 million, 5 years or $ 5 million, but you get the idea. The notion of different stipulations between public and private companies is also floated, offering public companies less time to gather a higher level of investment, perhaps encouraging proprietary companies at a certain level to take the plunge and go public.
None of these propositions appear particularly favoured, merely laid out before any interested reader.
The real gem comes closer to the end of the paper where unnecessary and cumbersome regulatory requirements are evaluated for effectiveness. Is there an easier way to legislate the execution of documents? To what extent should company registers be painstakingly maintained? Do proprietary companies really need to pass and document solvency resolutions?
Have your say
You have until Monday, 31 August 2015 to make your own submission based on the consultation paper.
Here’s a copy of the paper Treasury Consultation Paper on CSEF.
Draft legislation will be put together in the coming months in time for the Spring sittings of Federal Parliament.
Now is the time to invoke your democratic right and share your opinion – it may be a busy weekend.
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