ASIC have announced a new project as part of their Corporate Plan 2018-22 which will see a focus on compliance for those companies engaging in crowd-sourced funding.
The plan announced on 2nd October 2018 will review the disclosures in the crowd-sourced funding (CSF) for a sample of companies and continue to provide policy advice to the Treasury for SMEs.
This follows the passing of the amended 2017 Equity Crowdfunding legislation in the Australian Senate, in recent weeks and coincides with ASICs overall focus on and tightening of financial lending for small-to-medium enterprises.
Jeffrey Luckins, Director of Audit and Assurance at William Buck Chartered Accountants welcomes the change, saying it makes sense in a high-risk environment and smaller companies should be taking the same steps with their own disclosure, to mitigate risk.
“Smaller companies should be treating their business like a publicly listed company when accessing crowd-sourced funding, through strict compliance,” says Luckins.
“Crowd-sourced funding (CSF) opens up new financing possibilities for proprietary companies to raise capital without having to be public companies or issue prospectuses; however, Directors must not lose sight of their Corporations Act obligations to act with care and diligence and to exercise their powers and discharge their duties in good faith and for a proper purpose.”
“It may seem like a panacea for private businesses in Australia and a seemingly wonderful opportunity for investors. However, there are pitfalls and risks from this type of funding, especially where there is a lack of experience in capital markets, says Luckins.
“While this legislation broadens the base of sources of finance to operate and expand business operations, the risk profile of SMEs which seek to raise crowd funded investment will certainly increase and without the SME actioning appropriate safeguards. With fewer resources and more elementary governance structures in place, there is a greater likelihood that smaller entities will mismanage the raising of such capital or make forward looking statements which they can’t support – or which prove to be false,” says Luckins.
The ASIC’s Corporate 2018-2019 plan outlines how it will continue to provide policy advice to the Treasury for SMEs and a new project which will review the disclosures in the CSF of a sample of companies; ‘…including offer documents and advertising on each intermediary’s platform and elsewhere, with a focus on compliance with specific disclosure obligations and deceptive and misleading statements.
“Equity crowdfunding has had some spectacular fails, largely due to poor governance, business acumen and poor internal control systems. The best way for Directors to mitigate these risks is to empower the CFO to manage the process, the participants, and treat the business like a publicly listed company, says Luckins.
“To be eligible for CSF, companies will still require annual turnover or gross assets of no more than $25m to be eligible to raise up to $5m for equity crowdfunding, so this is ideally suited to businesses which are novel, technology based, in start-up phase, with limited tangible or net assets,” says Luckins.
To view Jeffrey’s ten-step process to navigating crowd-sourced funding click here.
To view Jeffrey’s article on protecting yourself from the downside of crowd-sourced funding – for business and investors, click here.