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Commercial and Corporate update: Crowd-sourced equity funding: lots of talk — no action yet

Nov 20, 2015

After more than a year of reports and consultation on how to ease the legal framework to allow start-ups’ access to crowd-sourced equity funding, the Minister of Small Business Kelly O’Dwyer delivered a speech to the Financial Services Council on 16 November 2015 that contained some indications of how the long-waited legislation would look like.

The government promised that draft legislation will be consulted with the public and presented to the Parliament by the end of the year, but with only 6 weeks before the year ends, it seems unlikely that changes to the legislation will be a reality soon.

Capital raising legislation: not very friendly for start-ups

Under the Corporations Act, start-ups are restricted from accessing crowd-sourced equity funding. Usually incorporated as proprietary companies, start-ups are limited to have no more than 50 shareholders and are not allowed to engage in fundraising from the public, except in limited circumstances.

These restrictions have been identified by the industry as a hurdle for innovation and growth. During the past year the government has been engaged in discussions with experts and stakeholders on what could be done to allow start-ups to access funds from the public.

Kelly O’Dwyer’s speech

Addressing the Financial Services Council on 16 November 2015, Kelly O’Dwyer announced that the changes to the current framework “will be focused on Australian public companies with annual turnover and gross assets of less than $5 million”, accompanied by some measures to protect consumers “including the licensing of intermediaries, risk warnings to investors and a 5 day cooling off period for the investment”.

Kelly O’Dwyer stated that the government will “continue to consult while bringing legislation before the Parliament before the end of 2015”.

Key elements

While Kelly O’Dwyer’s speech did not provide many details of the proposed changes to ease the position currently faced by start-ups, it gave some indications of the key elements that can be expected to be on the table when the draft legislation is presented to the public and to the Federal Parliament:

  • A start-up aiming to raise funds through crowd-source equity funding would need to be a “public company”, with the benefit of an exemption period during which the start-up would not be required to comply with the regulatory burden imposed on public companies. Adopting a “public company” model, which forces start-ups to be public companies, suggests that the government has rejected other alternatives submitted by experts during the consultation process, such as raising the maximum number of shareholders that a private company can have (50 shareholders).
  • Currently start-ups are using crowd-funding platforms to connect with investors. Crowd-funding platforms are generally relieved by ASIC from certain obligations. If the new rules are going to require intermediaries to be licensed, then the costs of compliance and regulatory burden will need to be considered.

The government’s announcement did not include explicit mention of other measures that have been discussed during the consultation process, such as limits on the amount that an investor can invest per offer and per year.

A way to go yet

The government is aiming to present draft legislation to the Federal Parliament before the end of this year. It is expected that an “Innovation Statement” will be released by the government during the next few weeks, which will contain all the details of the proposed legislation.

The key ‘take-out’ from Ms O’Dwyer’s speech is that we have only inched a little closer to relieving the regulatory framework, cost and burden of raising capital by the start-up community.

For the time being, start-ups should be alert that while there are “winds of change” in the air — the current climate remains the same.

More information

If you would like to discuss the proposed changes, please contact Jeremy Goldman, Principal Lawyer, on (03) 8600 8886, who has extensive experience in assisting start-ups and investors undertaking capital raisings.

Note: This update is a guide only and is not intended to constitute legal advice.