The Federal Budget extended crowdfunding opportunities to private companies, but a closer look at the amended legislation reveals they may still be forced to act more like public companies.
A sticking point from the Federal Government's Corporations Amendment (Crowd-sourced Funding) Act 2017, was that there was no scope for private (proprietary limited) companies to access crowdfunding. Government sought to address this in the latest Federal budget, but there could be a catch.
The Crowdfunding bill passed in March, and becomes law this September. Feedback suggested few start-ups would consider crowdfunding under the model due to private companies being unable to raise money from the new crowdfunding regime, and the compliance burden of trading as a public company.
Government has listened, and responded via the latest draft legislation, the Corporations Amendment (Crowd-Sourced Funding For Proprietary Companies) Bill 2017 (Bill), released as part of the latest Federal Budget.
Allowing companies to remain private is a positive step forward, though many could question whether they are truly being allowed to remain proprietary companies or whether they are essentially becoming public companies in disguise.
They will face additional obligations, aimed to increase protection for shareholders, which include:
- Maintaining a more comprehensive company register
- Producing financial and directors' reports (which generally only have to be produced where directed by shareholders or ASIC, or in some cases where the company is controlled by a foreign entity)
- Companies which raise more than $1 million from crowdfunding will require annual financial reports to be audited
- 'Related party transaction' restrictions in Chapter 2E of the Corporations Act will apply to a company with crowdfunding shareholders
At this stage, the only key eligibility criterion is that the crowdfunding regime will not apply to sole director companies.
Some concessions to crowdfunded companies apply. For example, the proposal recognises that complex takeover rules in Chapter 6 of the Corporations Act rules may be restrictive for startups who are often positioning for a takeover, or to become listed in the future.
Accordingly, the Bill provides an exemption from Chapter 6 where the crowdfunded company includes a provision in its constitution requiring a person who acquires more than 40 per cent of the voting shares in the company to offer to purchase all other securities in the company on the same terms within 31 days. If a company intends to take advantage of the exemption from Chapter 6, it will be required to lodge a copy of its constitution with ASIC.
All up, the draft Bill is another leap forward for crowdfunding in Australia, which has lagged several overseas markets on crowdfunding, including New Zealand and the USA.
But private companies in a hurry may face a conundrum: either convert to a public company structure to access the regime in September, or face an uncertain wait in the hopes of accessing a crowdfunding regime which may be better suited to their needs.
Harry New is a partner and John Bassilios is a special counsel at Hall & Wilcox.
