Crowd Sourced Funding PDF

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Summary

notes on crowd source funding for exam...

Description

Crowd Sourced Funding: 

Crowd source funding (CSF) involves the use of internet and social media to raise funds in support of specific project or business ideas. People who pledge their money to support such business initiatives typically expect to receive some reward, in return for their funds.

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Part 6D 3A of the Corporations Act provides the legal framework for equitybased crowd source funding by eligible unlisted companies to make offers of ordinary shares to retail investors

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Generally, this new regime reduced the regulatory requirements for public fundraising while maintaining appropriate investor protection measure. To qualify as an eligible company, the following requirements in s 738H(1) need to be satisfied – The company must: o Be a public company limited by shares o Have its principal place of business, directors living and being in Australia o Not exceed the assets or annual revenue of $25 million o Not be a limited company, and o Not have a substantial purpose of investing in other companies, entities or schemes for example a managed fund

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Eligible companies can raise up to $5 million in any 12-month period – funds raised by sophisticated or professional investors do not count to this cap

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Retail investors have a cap of $10,0000 per company in any 12-month period and a cooling off period allowing them to withdraw from a CSF offer up to 5 days after making the application; s 7382D

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These laws apply to eligible unlisted companies – the new laws did not address the regulatory barriers which prevent proprietary companies from accessing crowd source funding.

Crowd Sourced Funding – The changing landscape of corporate fundraising (Jason Harris Article): 

Crowd sourced funding refers to raising funds (usually in small amounts) from a large number of individual investors

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These services are often characterised as donation funding. While investors may hope to receive some benefit from the investment (such as early access to a product or a discount on the price of the completed product) the goal is not usually to make a profit from the investment

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Crowd sourced equity funding is different in that it involves the issue of shares, usually up to a limited value, to a large group of investors. Investors who acquire shares are therefore “members” of the company and have rihts under the Corporations Act 2001 (Cth).

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Chapter 6D (CA) has long had a range of exceptions to the prospectus requirements (see s 708) but these cannot offer the same spread of investors as crowdfunding

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For proprietary companies nor more than 50 non-employee shareholders (s 113)

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Small-scale capital raising exception in s 708(1)-(8)

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Crowd funding is typically undertaken through online platforms, which in Australia are required to be licensed – ASIC RG 262

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Investors apply through licensed platforms, which places the platform operator in a gatekeeper role – s 738Q

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Only one offer can be open at any one time by the company making the offer and all of its related parties – s 738R

Crowd funding for public companies: 

An eligible public company defined in s 738H

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CSF offer – s 738B  made through an intermediary – s 738C

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CSF offer needs to include a “CSF offer document” which can remain open for a maximum of 3 months – s 738N

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CSF offer is subject to a cap of $5 million

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The $5 million covers not only the CSF offer but also all CSF offers by the company and its related parties within 12 months before the CSF offer – s 738G

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Only unlisted public companies were classified as “eligible CSF companies” and no such company could be a related party to a listed company or to a company whose substantial purpose was investing in securities or interests in other entities or schemes – s 738H

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Cap of $25 million in consolidated gross assets and $25 million in consolidated annual revenue for the company making the CSF offer and all related parties – s 738H(2)

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Only one offer can be open at any one time by the company making the offer and all of its related parties – s 738R

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Civil and criminal penalties apply for defective CSF offer documents, including liability on the intermediary if they had knowledge of a defect in the CSF offer documents before posting the CSF offer on their platform – s 738Y

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5-day cooling off period for retail investors – s 738ZD

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Concessions were made to allow proprietary companies that converted to public companies to take advantage of the new laws to have “limited governance” for 5 years after their conversion – s 738ZI

Crowd Funding for Proprietary Companies: 

Proprietary companies are required to: s 738H o Have at least 2 directors o Prepare annual financial and directors’ reports in compliance with accounting standards o Have their financial reports audited once they raise $3 million or more from CSF offers o Comply with the existing related party transaction rules in Ch 2E

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Proprietary companies can now raise crowdfunding equity up to $5 million using one of the licensed platform intermediaries in Australia

Crowd source funding lecture: 

Intermediary reviews all offer documents NOT ASIC

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The Act allows unlisted public companies and proprietary companies with less than $25 million in consolidated assets and annual revenue to make offers of ordinary shares to retail investors, only through a licensed intermediary’s platform using a CSF document. Eligible companies can raise up to $5 million in any 12-month period under the CSF regime

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Retail investors have a cap of $10,000 in any 12-month period and a cooling-ff period allowing withdrawal of application 5 days after making application

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Audit obligations apply when a company raises $3 million

Requirements for company eligibility: 

Company must: o Be a proprietary company (minimum 2 directors) or a public company limited by shares o Have its principal place of business in Australia o Have a majority of its directors ordinarily residing in Australia o Not exceed the assets and annual revenue caps of $25 million (including the assets and revenue of its related parties) o Not be listed on a financial market in Australia or overseas o Not have a substantial purpose of investing in other companies, entities or schemes

Role of CSF Intermediary: 

Must hold an Australian financial services (ASF) licence with an authorisation to provide a crowd-funding service

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Perform checks on the offering company, its directors and the CSF offer document

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Perform checks on investors, including assessing whether an investor is a retail client, and holds investor money on trust

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Operates a platform for CSF offers

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Has an obligation to suspend or close a CSF offer in certain circumstances (e.g. where the CSF offer document is defective)...