Crowd-sourced equity funding regulations for proprietary companies

Following legislation introduced to parliament on 14 September 2017, the Federal Government has now released exposure draft Regulations which make further changes to the crowd-sourced funding (CSF) framework, anticipated to be extend to proprietary companies in 2018.

Takeover rules exemptions

The Corporations Act prohibits a person from acquiring an interest in certain bodies corporate where it will increase their voting power from:

• 20% or below to more than 20%, or
• a starting point that is above 20% and below 90%.

The existing draft legislation provides an exemption for proprietary companies with one or more CSF shareholders (CSF proprietary companies) from these takeover rules, to reduce compliance costs and avoid unduly restricting companies from adjusting their capital structure as their business grows.  However, the draft Regulations modify the exemption to make clear it will only apply while the company is still an eligible CSF company.  That is, a company:

• with consolidated assets and turnover under $25 million
• with its principal place of business in Australia
• which has a majority of its directors residing in Australia, and
• which, together with its related parties, do not have a principal purpose of investing in securities or interests in other entities or schemes.

The rationale for this change is to reflect that, as a CSF proprietary company grows and engages in more sophisticated activities, it will no longer be appropriate to be exempt from the takeover rules.

Unsolicited offer exemptions

The unsolicited offer provisions under the Corporations Act imposes specific requirements for unsolicited offers to purchase shares off-market.

The draft Regulations modify the application of the unsolicited offer provisions in the Corporations Act in relation to any securities of a CSF proprietary company that is an eligible CSF company by:

• reducing the minimum amount of time an offer has to be open from 1 month to 14 days, which is considered to be sufficient time for CSF shareholders to consider an offer and get appropriate advice, and
• allowing variations to the terms and consideration offered to provide additional commercial flexibility to facilitate the offers and provide exit opportunities for CSF shareholders.

On the expectation CSF proprietary companies will (at least in the early stages) be exempt from the takeover rules, this change provides additional commercial flexibility to facilitate offers and provide exit opportunities for CSF shareholders.

Additional disclosure requirements

The draft Regulations also impose additional disclosure requirements on CSF proprietary companies to ensure that the impact of regulatory concessions and investor protection measures are adequately disclosed to potential investors. Specifically, they prescribe that CSF proprietary companies are required to disclose:

• the requirement for it to obtain shareholder approval for related party transactions
• that it benefits from an exemption to the takeover rules (as noted above)
• the requirement to have its financial statements audited once $3 million or more is raised from CSF offers, and
• the requirement to provide its annual financial statements online.

Other changes

For both public and proprietary companies, the draft Regulations also make minor changes to the existing CSF framework to add flexibility to the structure and contents of CSF offer documents, including the ability to provide summaries of key documentation and information in the CSF offer document (with the more detailed disclosure in an annexure or appendix).

Feedback is being sought on the draft Regulations until Friday, 2 February 2018 and all interested parties are invited to lodge a submission by this date. Please visit the Treasury website or contact us for more information on making a submission.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.