A Credible Alternative Funding Source?
A decade on from the Global Financial Crisis, businesses are still dealing with the resulting ripple down effects. In a post-GFC and Basel III regulatory environment, Australian bank’s customer credit profiles have drastically changed.
Subsequently, many Australian SME’s have struggled to access adequate bank debt. These same SME’s have also been unable to access capital from investors who, until now, have been largely unreachable because of onerous disclosure requirements imposed on companies seeking to raise share capital.
This “funding gap” has led to a wave of Fintech’s1 entering the market to address and profit from this shortfall. The rise of FinTech’s and the demand for alternative sources of funding led to the passing of the Corporations Amendment (Crowd-sourced Funding) Bill 2016 (“Crowd-Sourced Amendment”) which establishes a framework to facilitate Crowd-Sourced Equity Funding (CSEF) in Australia.
What is CSEF?
CSEF is a method of capital raising whereby offers of securities in unlisted public companies are made to investors via a crowd funding website.
CSEF is characterised by small investments from many investors and essentially offers the opportunity for companies to raise funds with less onerous disclosure requirements. This new legislation enables companies to raise relatively small amounts of capital cost effectively.
When does it start?
The Crowd-Sourced Amendment came into effect on the 29th of September 2017 and will enable unlisted public companies to offer and issue equity securities through crowdsourcing intermediaries with reduced disclosure requirements.
What is the eligibility criteria?
Australian companies are considered CSEF eligible if they are an Australian unlisted public company with less than $25 million in consolidated annual revenue and gross assets. They then need only comply with reduced disclosure requirements when offering ordinary shares to the public.
Offerings must be facilitated through a licensed CSEF intermediary and companies will be capped at raising $5 million over a 12-month period. An investment cap of $10,000 per investor per company applies and subscribers are afforded a five (5) day cooling off period.
The provisions of the Crowd-Sourced Amendment are initially limited to unlisted public companies. This requirement has been widely criticised as it limits private companies (including start-ups) from cost effectively accessing the CSEF provisions.
The eligibility criteria mean the CSEF provisions provides an opportunity for established small to medium-sized businesses to raise capital. These businesses are unlikely to be ready, or eligible, for listing on the ASX. They will, however, be better resourced to deal with the increased reporting requirements resulting from adopting an unlisted public company structure. CSEF could be transformative for these business, especially when considering the pool of investors wanting to invest in them.
What are the benefits?
The potential benefits of CSEF to established SME’s is highlighted by the case of New Zealand brewer ParrotDog. In 2016, ParrotDog raised NZD 2 million (the maximum amount allowable via CSEF in New Zealand) from 816 backers in 2 days. ParrotDog used the funds to establish a new production facility, which transformed its business. It enabled ParrotDog to invest in production infrastructure to increase capacity and achieve brewing and bottling economies of scale. In less than a year ParrotDog has been able to more than double its revenue and increase its GP margins, allowing it to reach a scale and cost structure where it was able to sign-up a national distributor.
What is the catch?
Businesses considering raising capital via a CSEF offer need to understand the additional corporate governance and reporting requirements imposed by the CSEF legislation. These requirements include:
- Changing to an unlisted pubic company structure,
- Preparing CSEF offer documents that require certain disclosures, including details of the post-offer capital structure,
- Continued reporting obligation to shareholders, namely the distribution of annual director and financial reports, and
- The requirement to have their financial statements audited if more than $1 million has been raised.
Businesses can now start to consider CSEF as a credible source of capital.
Attached to the 2017 Budget was the exposure draft – the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (Cth) (Bill) (“Crowd-Sourced Extension”). The Crowd-Sourced Extension proposes to extend the CSEF provisions to proprietary companies. This extension will enable significantly more companies to access CSEF, especially start-ups and other pre-revenue companies.
Although the “Crowd-Sourced Extension” has not yet been passed by parliament, it shows the intent of the government to actively expand and develop the CSEF framework.
In 2015, Ingogo, an Australian mobile payment and transportation network, raised US$4.2 million from US equity-crowdfunding platform Venture Crowd. This was a missed opportunity for Australia and highlighted the need for a competitive CSEF framework.
While the Crowd-Sourced Amendment is a positive step forward in facilitating early-stage capital raisings, the requirement to be an unlisted public company will limit the ability of start-ups in need of seed capital to cost effectively access CSEF. The recently released exposure draft proposing the extension of the CSEF provisions to proprietary companies is crucial if CSEF is to deliver broader economic benefits.
Although the CSEF provisions have been a long time coming, they are a step in the right direction and, if implemented and regulated correctly, could assist in promoting innovation and growth in the broader economy.
For more information contact your William Buck advisor
1Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century. Originally, the term applied to technology applied to the back-end of established consumer and trade financial institutions. Since the end of the first decade of the 21st century, the term has expanded to include any technological innovation in the financial sector, including innovations in financial literacy and education, retail banking, investment and even crypto-currencies like Bitcoin. Source: Investopedia.com
Disclaimer: The contents of this article are in the nature of general comments only, and are not to be used, relied or acted upon without seeking further professional advice. William Buck accepts no liability for errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice. Liability limited by a scheme approved under Professional Standards Legislation.