The legal requirements of crowdfunding in business

The Australian Securities and Investments Commission (ASIC) defines equity-based crowd-sourced funding (CSF) as:

“… a company raising funds—usually through an online intermediary—from a large number of individual investors who make relatively small financial contributions to the company… [and] a fundraising option for start-ups or small to medium-sized companies.”^[1]

Part 6D.3A of the Corporations Act 2001 (Cth) (Act) provides a regulatory framework for CSF (Regime).  Section 738G(1)(a)-(f) of the Act requires a company wishing to offer an issue of shares though CSF (CSF Offer) must:

• issue shares that are of the specified class;
• be an eligible company (Eligible CSF Company);
• not offer more than the issuer cap (Issuer Cap); and
• not reinvest in raised funds other entities or schemes.

This article discusses these requirements.

Shares issued of the specified class

Section 761E(1)-(2) of the Act defines an issue as the first time a share is made available to a person by the issuer.^[2]  This makes transfers within a company or the sale of already issued shares ineligible under the Regime.^[3]

Regulation 6D.3A.01(1) of the Corporations Regulations 2001 (Cth) (Regulations) provides that fully paid ordinary shares are the only securities class permitted in a CSF Offer under the Regime.  This means that a company cannot offer an issue of partly paid or preference shares nor options or debentures.^[4]

Eligible CSF Companies

Section 738H(1) of the Act provides Eligible CSF Companies are:

• public companies and limited by shares; or
• proprietary companies with at least two (2) directors.

The section also requires companies to:

• be unlisted;
• have its principal place of business located and the majority of director’s residing in Australia;
• have a consolidated gross assets value of less than $25 million;^[5]
• have a consolidated annual revenue value that is less than $25 million;^[6] and
• have a primary purpose that is not investing in securities.

The Issuer Cap

Section 738G(2) of the Act provides that the sum of an Eligible CSF Company’s:

• maximum amount sought to be raised;
• total amounts raised one year after the CSF Offer; and
• total amount raised in undisclosed offerings one year before the CSF Offer,

cannot exceed $5 million.

Takeaways

Only private companies limited by shares or proprietary companies with two (2) or more directors can raise funds by issuing equity through CSF.  These companies must be unlisted and primarily conduct business within Australia to utilise CSF in the country.  The company must also have gross assets and revenue values of less than $25 million, respectively.  The shares must be issued meaning the first time they are sold on the market.  The issue must be of ordinary fully paid shares meaning transfers within the company are not allowed under the Regime.  Finally, the sum of the maximum sought to be raised, amounts raised one (1) year after the CSF Offer and total raised that is undisclosed one (1) year before the CSF offer, must be equal or less to $5 million.

Links and further references

Related materials

Australian Securities and Investments Commission, Regulatory Guide 261 Crowd-sourced funding: Guide for companies (June 2020)

Legislation

Corporations Act 2001 (Cth)

Corporations Regulations 2001 (Cth)

The Australian Securities and Investments Commission Act 2001 (Cth)

Further information about equity issuing and raising

If you need advice on equity issuing and raising for your company, or obligations and rights that may apply to you, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1]  Australian Securities and Investments Commission, Regulatory Guide 261 Crowd-sourced funding: Guide for companies (June 2020), RG 261.1-4.

[2] See also Corporations Act 2001 (Cth) ss 9, 761, 1023B; The Australian Securities and Investments Commission Act 2001 (Cth) s 12BAA.

[3] See also Corporations Act 2001 (Cth) s 761E(7); Australian Securities and Investments Commission, Regulatory Guide 261 Crowd-sourced funding: Guide for companies (June 2020), RG 261.37.

[4] Australian Securities and Investments Commission, Regulatory Guide 261 Crowd-sourced funding: Guide for companies (June 2020), RG 261.37.

[5] See also Corporations Act 2001 (Cth) s 738H(a)(i).

[6] See also Corporations Act 2001 (Cth) s 738H(b)(i).

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