An introduction to crowd sourced funding offers
Updated: 7 December 2019Those startups with an innovation and social entrepreneurship drive and possibly also shoe-string budgets are good candidates for crowd sourced funding (or CSF for short).
To start, I am going to catch you up on some major CSF changes, then we'll get into the meaning of an offer.
2018 - the big year for private companies
A big 2018 CSF change - private companies can access CSF without changing to a public company.
Some criteria for private companies
To be eligible, a private company that wants to issue a CSF offer, will need at least 2 directors (unless they are a Pty Ltd - they can have 1 director), also, they will be subject to related party transaction laws.
So, let's start with an introduction to CSF below.
So what exactly is CSF?
A CSF is an offer that is one made under Part 6D of the Corporations Act 2001 that meets this criteria:
- Its an offer for the issue of securities of the company;
- the company is an eligible CSF company;
- the securities are of the class in the regulations;
- the offer complies with the issuer cap;
- you won't use the funds to invest in securities or interests in other entities or schemes; and
- Any other regulation requirement.
How to comply with the issuer cap
An offer of securities for issue in a company will comply with the issuer cap if the total of:
- the total maximum amount to be raised; and
- all amounts raised 12 months before the new offer is made for CSF; and
- all amounts raised 12 months before the time when the new offer is made, pursuant to offers by the company, or by related parties of the company that did not need disclosure because of s. 708(1) or (10), does not exceed:
- $5m; or
- A different amount if set out in the regulations.
Now if you are wondering about the meaning of 'related party', here it is below.
Under 6D, each of the following is a related party (a reminder - this meaning is important for the issuer cap rule):
- A related body corporate of the company;
- An entity controlled by:
- A person who controls the company; or
- An associate of that person.
And for offers that don't need disclosure, they are covered in section 708 of the Corporations Act 2001. The key points are below.
Offers that don't need disclosure
Briefly, your offers won't need disclosure if they meet s. 708(1) and (10) of the Corporations Act 2001 - below.
And, this definition is important to comply with the issuer cap.
You won't need to disclose under s. 708(1) if you have:
- small scale offers - one's that don't result in a breach of the 20 investors ceiling; and
- offers that don't breach the $2m ceiling.
And, you also won't need to disclose these offers (per s. 708(10)) under these circumstances:
- offers made through a financial services licensee;
- licensee is satisfied on reasonable grounds the person to whom the offer is made has previous experience in investing in securities;
- the licensee gives the person before, or at the time the offer is made a written statement of the licensee's reasons for being satisfied about these matters;
- the person to whom the offer is made signs a written acknowledgement before or at the time the offer is made that the licensee has not given the person a disclosure document about for the offer.
Now, onto eligibility.
An eligible CSF company
A company is an eligible CSF company at a certain time if these conditions are met at that time:
- The company is a public company limited by shares or a private company that:
- Has at least 2 shareholders
- Meets all other requirements prescribed by the regulations
- The company’s principal place of business is in Australia
- The majority of the directors (not counting alternate directors) reside in Australia
- The company complies with the asset and turnover test
- Neither the company or a related party of the company, is:
- a listed corporation, or
- included in an official list of a financial market operated outside Australia
- Neither the company or any related party of the company has a substantial purpose of investing insecurities or interests in other entities or schemes
Finally, below is the assets and turnover test.
Assets and turnover test
A company complies with the assets and turnover test at the time if:
- the value of the gross assets of the company, and all its related parties is less than:
- $25 million; or
- If the regulations prescribe a different amount - the prescribed amount; and
- The annual revenue of the company, and of all its related parties, is less than:
- $25 million; or
- If the regulations prescribe a different amount - that amount.
I wish you every success for your CSF plans!