Lawyer Samara Goode looks at crowd-sourced equity funding for small businesses and start-ups from a legal perspective.
There is currently plenty of discussion around crowd-sourced equity funding (CSEF). The federal government seems to be focused on improving access for small businesses to affordable finance, particularly as small businesses are seen as a significant driver of productivity and economic growth.
There are many hurdles faced by small, innovative businesses in obtaining finance: the lack of a track record showing an ability to service the debt; no demonstrable prospect of success; insufficient security to meet loan to security ratios; and the simple fact that in many instances a traditional bank loan may not be suited to the business – particularly if it is a start-up.
Enter stage left, CSEF. CSEF is a form of capital raising which involves a large number of people each making small investments to the company through an online crowd-funding platform. Unlike traditional debt finance, equity finance does not usually require immediate repayment.
The problem? At the moment, the Corporations Act continues to regulate CSEF. Issuers can either incorporate as a proprietary company, in which case they would remain subject to the 50 non-employee shareholder limitation, which tends to hamper the idea of having a large number of people make small investments, or incorporate as a public company. This means that they would have to accept more onerous corporate governance requirements.
There is also the burden of issuers needing to prepare a disclosure document, or rely on the limited exceptions under the Corporations Act (notably, the small-scale offering exemption and exemptions for sophisticated or professional investors).
These regulatory requirements for traditional equity sources can often be too burdensome for small businesses and start-ups. Consequentially, in December 2014, the Treasury, as part of its Competitiveness Agenda, released a discussion paper seeking feedback on potential CSEF regulatory models. Submissions on the discussion paper were due by 6 February 2015.
So for now, we eagerly await the government's conclusions on CSEF. The expectation is that the CSEF model that is adopted will strike the right balance between supporting investment and protecting investors, while reducing the compliance burden and associated cost – particularly for small businesses.
Samara Goode is a senior associate in the banking and finance team at Colin Biggers & Paisley.
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