Crowd-sourced funding regime comes into operation
The long awaited crowd-sourced funding (CSF) regime officially came into effect for unlisted public companies late last month. Although it will be some time before CSF offers are regularly being made on crowd funding platforms, as ASIC did not commence processing intermediary licence applications until after the official commencement of the regime, start-ups finally have the green light to start raising money from retail investors without many of the limitations imposed by the Chapter 6D regime.
- enactment of new regulations and
- publishing of two ASIC regulatory guides about the operation of the CSF regime.
Corporations Amendment (Crowd-sourced Funding) Regulations 2017
Prior to the commencement of the CSF regime, the government enacted the Corporations Amendment (Crowd-sourced Funding) Regulations 2017.
These regulations amend the Corporations Regulations 2001 and provide prescriptive rules regarding what needs to be included in a CSF offer. They also outline what checks CSF intermediaries must have in place.
Some of the key points are set out below.
Contents of the CSF offer document
The amended regulations provide that a CSF offer document must be set out into the following four sections:
Section 1: Compulsory risk warning statement
The regulations provide a compulsory statement which must be contained within section 1 of all CSF offer documents. This statement warns investors of the risks specific to the types of investments likely to be listed on crowd-funding platforms.
Section 2: Information about the offering company
Companies making a CSF offer must include a range of specified information about the offering company within section 2. The requirements ensure that investors have at least the basic information about the offering company and the key people behind the company. It also requires the offering company to consider and detail the main risks which are specific to its business.
Section 3: Information about the offer
Section 3 of the offer document should include a description of the securities on offer, the rights attaching to those securities and the minimum and maximum subscription amounts. It must also make clear how long the offer will remain open.
Section 3 should also contain disclosure regarding any previous CSF offers that have been made by the company and a description of any payments that are to be made from the proceeds of the offer (directly or indirectly) to a range of people involved in the company or the offer.:
Section 4: Information about investor rights.
Section 4 must include information about investor’s rights, such as any relevant cooling-off period. To the extent that the company is exempt from auditing, holding AGM’s or has reduced financial reporting requirements as a participant in the CSF regime, the effect of these exemptions must be explained.
The content that must be included in each these sections in prescribed in detail in the regulations. Companies making CSF offers should ensure that they comply with the form and content requirements of the CSF regime to ensure that their offer document is not defective. Making CSF offers under a defective offer document could expose the company, directors and others involved in the company to liability.
Checks for CSF intermediaries
The regulations also impose obligations on CSF intermediaries to ensure that an applicant acknowledges the risk involved in making a decision about investing in the scheme. The regulations provide a statement which must be included in the acknowledgement of risk. This is on top of the general risk statement to be used by CSF intermediaries.
In addition, the regulations set out the due diligence enquiries that the CSF intermediary must undertake in its role as gatekeeper. This includes checking the identity of the offering company, their eligibility to crowd fund, information relating to directors and other key personnel. These checks must be conducted to a reasonable standard, for example by asking the offering company to provide supporting key information, and checking ASIC’s registers.
Following the release of the regulations, ASIC undertook a consultation process with respect to the guidance it should provide to public companies and intermediaries to assist them in using the new CSF regime. This has resulted in the publication of RG 261 Crowd-sourced funding: Guide for public companies and RG 262 Crowd-sourced funding: Guide for intermediaries which provide straight-forward overviews of the operation of the CSF regime.
RG 261 acts a user-friendly how to guide for start-ups by giving an overview of the CSF regime, eligibility, the process of a CSF offer and temporary governance and reporting concessions. In addition, the regulatory guide provides guidance around the preparation of an offer document and helpfully includes a template CSF offer document. Given that many start-ups seeking to make use of the CSF regime will not have experience raising funds from the public, this is likely to be an invaluable tool and will help to make the CSF regime available to start-ups operating on a tight budget.
RG 262 is aimed at CSF platform operators who, in accordance with the regime, must hold financial services licences. Accordingly, this guide is somewhat more technical than RG 261 and focuses particularly on ASIC’s interpretation of AFS licensee obligations and specific obligations under the CSF regime.
For example, RG 262 provides that ASIC intends to only provide licence authorisations to intermediary’s in respect of a single specified platform and (similarly to its approach to registered managed investment schemes) does not intend to grant “of a kind” licences. There is also clarity provided around the application of existing licencing concepts, including the types of authorisation required, financial resource requirements, dispute resolution and risk management, amongst many other topics. For example, ASIC does not believe that an intermediary requires authorisation to deal in the securities offered on its platform, but may require authorisation to provide financial product advice.
Our financial services team is well placed to assist both intermediaries seeking an AFSL and companies seeking to raise capital under the new crowdfunding regime.
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