28/09/2015

Will the change of government change the attitude to crowdfunding to raise business equity?

Now that Bill and Hilary Turnbull are ensconced at Kirribilli (government functions only) it will be interesting to see if the government changes any of its ideas about crowdfunding in the commercial context.

The government had not long before the coup released a set of proposals for crowd-sourced equity funding replacing previous proposals that had been discussed up to that time.

For those of you a bit like me who haven’t caught up with the crowdfunding fad, a word of explanation.  Crowdfunding is raising money through lots of smaller contributions from lots of contributors.  It’s been around for a lot longer than people think though the appellation ‘crowdfunding’ only goes back to 2006.  

Amaze all your friends at trivia by knowing that the pedestal for the Statue of Liberty was paid for by what was effectively ‘crowdfunding’ in 1886 – 120,000 contributors.

The federal government has been considering whether to allow crowdfunding in the commercial context to permit companies to raise equity.  

Various limits would apply:

•    limits on who could raise crowd-sourced equity - smaller public companies
•    limits on how it could be done - only with offers made through an Australian Financial Services Licensee
•    limits on the amount raised - $5 million annually per company
•    limits on maximum amounts that could be invested - $10,000 any one company, $25,000 per year.

The companies themselves would need to issue a tailored disclosure document, likely to contain:

•    facts about the company and its structure, including financial statements;
•    facts about the equity raising; and
•    mandatory risk warnings.

AFS Licensees would be required to run prescribed checks on the company and to provide generic risk warnings to investors. That will clearly involve extra potential liability for those Licensees. Query whether it is materially more than the liability attaching to a recommendation to invest in the normal way in a non-blue chip public company.  Would a Licensee be prepared to do those checks and provide those generic warnings if they weren’t recommending the crowd-sourced investment in the first place?

For their part, investors would have to sign an acknowledgement that:

•    investing in small public companies is risky and the investor might lose the lot (like investments in large public companies such as HIH, Gunns and Enron);
•    investors might not be able to sell their shares;
•    the value of the investment might be diluted over time (or even completely disappear along with the directors); and
•    the investor has complied with the investor caps (and so has his wife, kids, family trust and super fund etc).

But if that’s not risky enough for you, they are even considering allowing private companies to raise crowd-sourced equity.  Private companies normally can’t raise equity from the public; that is the big difference from public companies. And there are good reasons for that, because private companies don’t have the additional prudential requirements that public fundraising demands.

Then there is the issue of whether ASIC would really be capable of regulating this area. Over the years it has been impossible to get ASIC excited about any breaches of Corporations Law by private companies and their directors unless umpteen millions of dollars were lost or Eddie Obeid was involved.  

Currently there would seem little prospect of getting ASIC to take action against a private company with no assets, or its dodgy directors, to recover every investor’s $500 investment.  The class action law firms might get involved but the small size of the individual investments may even make their involvement untenable.

The question remains whether our new ‘team’ in Canberra will continue to support the current ideas of crowd-sourced funding and even extend it to private companies.  They might think they’ve got more important matters on their plate at the moment and file it away for the time being.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.