By Lachlan Commins, Patterson Houen Commins, Lawyers, Sydney
Late last year, the federal government tabled its eagerly anticipated and long awaited revamp to the Corporations Act 2001. That’s right, crowdfunding of the equity kind is here. Well, sort of…
Crowdfunding of the rewards-based kind has been present in the Australian start-up landscape for several years now through such well known platform providers as Kickstarter and Indiegogo. This method of capital raising involves an entrepreneur showcasing the idea, product, business or project (referred to as a “campaign idea”) to the public through the medium of an online crowd-funding platform. Members of the public who like what they see can effectively donate an amount to the cause through the platform. In return these investors (or “backers”) are given incentives in the form of promised “rewards” which could range from pre-sale of the product to future discounts to quite simply an acknowledgement of public thanks.
It is important to remember that under this model the entrepreneur does not sacrifice any equity in or control over the substance of the campaign idea. On the flip-side however, how many people are running out to put their money into “the-next-big-thing”’ just so they can have bragging rights at the local pub?
Crowdfunding of the equity kind (or “crowd-sourced equity funding”, CSEF for short), however, is a different beast altogether. This model allows backers to actually receive a share of the promoted company in the form of equity. Sounds a bit like a public offering? Well you can be forgiven because this, it seems, is exactly what treasury thinks.
Although present in the Australian start-up landscape since 2013 through platform providers such as VentureCrowd, CSEF had until recently been restricted to wholesale investors who earned at least $250,000 or who had $2.5 million in assets. This essentially restricted the potential pool of investors in Australia. The new legislation, it was thought, would change all that by radically opening up capital markets by connecting private start-ups with numerous small private investors. But someone forgot to tell Treasury.
Significantly, under the terms of the new legislation:
- CSEF is restricted to “small, unlisted public companies”;
- Only companies with less than $5 million in assets will be eligible;
- Each company will be limited to raising $5 million a year;
- The company must register each shareholder individually rather than through a trust (therefore vehicles allowing for aggregation of funds – such as unit trusts – are not allowed);
- Each investor will be limited to investing $10,000 per company per year;
- Each investor will be required to complete a “risk acknowledgement statement”;
- Companies that become an unlisted public company in order to access CSEF will receive a “holiday” of up to five years from some reporting and governance requirements otherwise required of public companies under the Corporations Act.
In summary, the CSEF legislation, while it does provide a reasonable balance, does not provide the capital raising panacea for private companies that many had expected. Private companies which wish to raise equity capital by-and-large are still faced with similar options given the restrictions imposed by the Corporations Act 2001 on capital raising. Those options include attracting private equity or venture capital or going public in accordance with CSEF legislation. Nevertheless, the CSEF legislation will provide greater flexibility and cost effectiveness while maintaining reasonable protection for the investor.
As an added sweetener, the December 2015 National Innovation and Science Statement foreshadows a number of investment incentives including generous tax breaks for investors in innovative start-up companies which have been incorporated during the last 3 years and have expenditure of less than $1,000,000.00 and income of less than $200,000.00 in the previous income year including 20% non-refundable tax offsets based on investments capped at $200,000.00 per investor per year and 10 year capital gains tax exemption if the investment is held for 3 years. It remains to be seen just what impact these concessions will have on the crowdfunding market. However, with the new incentive scheme expected to commence from 1 July 2016, we will not have to wait long to find out.