Consumers and businesses win in private company equity crowdfunding bill changes

FinTech Australia has welcomed significant changes to draft legislation allowing private companies to crowdfund equity, which will ensure investors are protected while at the same time delivering reduced costs and red tape for companies.

The draft crowdfunding legislation was introduced into the Australian Parliament today.

The legislation is expected to provide a new fund-raising tool accessible by hundreds of thousands of Australian businesses, who will be able to crowdsource up to $5 million a year from retail investors, capped at $10,000 per retail investor, in return for equity in their company.

“We’re pleased to see the recent rapid progress in the development of this draft legislation, and in particular the commitment both sides of Government are making to usher in this new source of funding as efficiently and safely as possible,” said FinTech Australia CEO Danielle Szetho.

“This will help drive growth and innovation for both fintech crowdfunding intermediaries, and small to medium businesses across Australia through a cost-effective new form of fund-raising. We’re finally bringing Australia up to speed with other leading international jurisdictions such as the UK, United States and New Zealand who have equity crowdfunding in place.”

Jonny Wilkinson, co-founder of Equitise and co-lead on FinTech Australia’s crowdfunding policy working group, said: “The introduction of public crowdfunding legislation earlier this year was a great start and we have continued to work with all stakeholders to arrive at this place. Clearly the legislation for private companies is a game-changer as the vast majority of Australian companies are private.”

“We have had considerable demand to use the current public company legislation and once this legislation has been passed, we expect strong interest for more Australian small and medium-sized businesses seeking to use crowdfunding.”

Equitise’s Jonny Willkinson

FinTech Australia, as the peak body for Australia’s fintech industry, has lodged two submissions and held multiple detailed discussions with the Australian Treasury about an exposure bill released by the Australian Government in May this year.

FinTech Australia also held a consultation roadshow in early June across all mainland capital cities to glean detailed industry feedback. This roadshow was held in conjunction with chartered accountants BDO, legal firm King & Wood Mallesons and FinTech Australia’s crowdfunding members Equitise, CrowdfundUP and Jelix Ventures.

Directly as a result of FinTech Australia’s advocacy, the Australian Government has made legislative changes to lift the threshold at which both public, and eventually private crowdfunding companies are required to undertake a full independent audit, to $3m in capital being raised. The original threshold had been set at $1 million.

“As our first submission outlined, the former $1 million threshold would have potentially made crowdfunding comparatively more expensive than business lending and venture capital raising, and in doing so significantly reduced its appeal as a fundraising option,” Ms Szetho said. “We estimate a full audit could cost companies up to $20,000.”

“The requirement for a full audit to be undertaken for fundraising above $3 million is a more balanced approach which makes audit costs comparatively less expensive to the amount of money raised, while reflecting the need for greater disclosure at this funding level.

“We should also point out that any companies undertaking crowdfunding will need to provide offer documents, to ensure detailed disclosure and transparency for consumers.

“These offer documents will be required to be signed by two company directors and lay out key financial and other information about the company. They will also need to comply with Australian Securities and Investment Commission (ASIC) requirements.”

Ms Szetho said FinTech Australia also supported the removal of a provision which would have placed significant red tape around the disposal of shares obtained through crowdfunding, and in doing so reduce the appeal of crowdfunding to both companies and investors.

The provision would have meant that, when shares purchased in a crowdfunding round were on-sold to a new shareholder, the new shareholder would have counted towards the 50 shareholder limit imposed upon private companies. Such sales therefore had the potential to tip companies inadvertently over the shareholder limit, and force them to become public companies at a time that might not suit them.

“This is a very complex piece of legislation, with a number of overlaps with other existing regulations. Through detailed discussion involving a number of industry participants and legal experts, we are happy to have arrived at this new approach which allows shares to be sold in off-market transfers without implications for shareholder limits,” Ms Szetho said.

FinTech Australia is separately working with ASIC on its regulatory guide to accompany the commencement of equity crowdfunding for unlisted public companies on 29 September.

Legislation to support public company crowdfunding passed the Australian Parliament in March this year.

“We have raised concerns with ASIC about what we considered to be excessive ongoing reporting requirements for crowdfunding intermediaries,” Ms Szetho said. “We also wanted to make sure that intermediaries could flexibly display easy-to-understand summary information to investors to aid with comprehension, including on websites, alongside more detailed required information.”

“We’re hopeful that ASIC has taken our feedback on board.”