Government Offers Two Months of Discussion to Create Regulatory Model
As the end of 2014 approaches, the SEC has failed to make any progress with equity crowdfunding in the United States. In contrast to the ongoing delay here in America, the AU government recently displayed their approval of equity-based crowdfunding in Australia by releasing a discussion paper on Monday, December 8th. Similar to the discussion paper that was released over a year ago in the U.S., the overall purpose of the discussion paper is to create regulatory framework that everyone can agree on. What makes this particular discussion paper different is it provides various approaches, including the model recently implemented in New Zealand and a model suggested by the Corporations and Markets Advisory Committee last June. The public consultation process will be open from 12/8/2014 to 02/06/2015.
Please click the link to view the paper: Australian Crowd-sourced Equity Funding Discussion Paper
Finance Minister, Mathias Cormann, and Small Business Minister, Bruce Billson, offered this joint statement in a recent AU CSEF article:
“We are keen to ensure that any crowd-sourced equity funding model appropriately balances supporting investment, reducing compliance costs (including for small business) and maintaining an appropriate level of investor protection. Small business and entrepreneurs are a crucial driver of productivity and economic growth.”
The three models discussed in the paper are unique and offer a distinct approach to Australian crowd-sourced equity funding (CSEF). As we all wait to see what the SEC’s final rules will be for Title III equity crowdfunding, it is worth gaining a perspective on Australia’s proposed rules. Here are the three proposed options in detail:
Option 1: CAMAC Model
Back in June 2014, the Corporations and Markets Advisory Committee (CAMAC) released recommendations regarding equity crowdfunding in Australia. One of the most fundamental recommendations highlighted the development of a legislative framework for CSEF to make it more straightforward to use. Issuers also had to be public companies, but a new category, an “exempt public company,” would be created to relieve some of the compliance requirements.
These companies would be exempt from: requirements for continuous disclosure, holding an annual general meeting, executive remuneration reporting, half-yearly reporting, appointing an independent auditor and having a financial report audited. The recommendations were based off the Corporations Act 2001 and did not propose any additional legislative changes. Here are some details for the issuers, intermediaries and investors:
• for issuers: limitation of the regime to certain small enterprises that have not already
raised funds under the existing public offer arrangements, limitation of the regime to one
class of fully paid ordinary shares, reduced disclosure requirements, a cap of $2 million on
the amount that can be raised through CSEF in any 12-month period (excluding funds
raised under existing exemptions from the need to provide a prospectus to certain
wholesale investors), restrictions on advertising of the equity offer and prohibitions on
conflict of interest;
• for intermediaries: requirements for intermediaries to have an Australian Financial
Services License (AFSL) including membership of an external dispute resolution scheme,
requirements to undertake limited due diligence and provide risk warnings to investors,
provisions to prevent certain conflicts of interest, prohibitions on offering investment
advice and on lending to CSEF investors;
• for investors: investment caps of $2,500 per investor per 12-month period for any
particular CSEF issuer and $10,000 per investor per 12-month period in total CSEF
investment, signature of risk acknowledgement statements prior to investment and
cooling off and other withdrawal rights.
Option 2: Regulatory Framework Based on the New Zealand Model
New Zealand’s Financial Market Authority legalized equity crowdfunding in April 2014, issued the first financial license to an intermediary in July 2014 and saw its first successful campaign close in September 2014. Now that’s efficiency!
As neighbors, New Zealand and Australia have shared many things over the years and it appears Australia is a fan of the New Zealand equity crowdfunding model. Option 2 is not an exact replica of the NZ CSEF, but the similarities and differences are cut and dry. Here are four of each for you to reference:
• limitation of the regime to one class of fully paid ordinary shares;
• a cap of $2 million on the amount that can be raised through CSEF disclosure relief in any
12-month period inclusive of any fundraising via the New Zealand equivalent of the small
scale personal offer exemption but excluding investments by wholesale investors;
• requirements for intermediaries to be licensed and belong to an external dispute
resolution scheme, undertake limited due diligence checks and provide disclosure
statements and risk warnings to investors; and
• investors must sign a risk acknowledgement statement.
• no CSEF-specific exemptions from public company compliance costs such as financial
reporting and audit;
• the regime is not specifically limited to small enterprises;
there are minimum disclosure requirements and investment caps are voluntary, with
issuers and intermediaries to have in place arrangements to provide greater disclosure
where there are no or high voluntary investor caps or the issuer is seeking to raise a
significant amount of funds;
• there are no restrictions on intermediaries’ fee structures, although fees paid by the issuer
must be disclosed; and
• intermediaries are able to invest in issuers using their platform, although details of any
investments must be disclosed.
For a detailed comparison of the CAMAC and New Zealand models, please visit pages 9-10 of the Australian equity crowdfunding discussion paper.
Option 3: Status Quo
The third and final option, Status Quo, requires no change to the existing Corporations Act requirements for proprietary companies, public companies or public fundraisings. These requirements involve:
• the limit of 50 non-employee shareholders for proprietary companies, and prohibitions on
making public offers of equity, subject to certain exemptions, including the small scale
personal offer exemption;
• financial reporting and corporate governance requirements for public companies that are
more onerous than those that apply to proprietary companies; and
• the requirement to provide a disclosure statement when making public offers of equity.
Intermediaries, on the other hand, would remain subject to a number of existing requirements, such as:
• the need to hold an AFSL and comply with AFSL licensing obligations if they meet the
definition of carrying on a financial services business5 or to hold an Australian Market
Licence (AML) and comply with AML licensing obligations if they fall within the definition
of conducting a financial market; and
• if a managed investment scheme (MIS) structure is used to facilitate online equity offers,
the intermediary would need to comply with MIS requirements, including having a
responsible entity that is a public company with an AFSL, disclosure and compliance
According to the paper, Option 3 is merely “included as a baseline against which to compare regulatory options, consistent with the Government’s requirements for regulation impact statements.”
With only two months between releasing the paper and closing discussions, it is evident that the powers that be want to make Australian equity crowdfunding happen sooner than later. This tactic may be easier for a smaller country such as Australia, but their three-tiered approach and seemingly wide open channels of communication are great examples for the SEC. It will be interesting to watch as the Australian CSEF discussion unfolds and I hope you all were able to learn some valuable information today.
Thank you for reading and please leave your questions and comments below!