Australian Financial Review | Michael Bailey | Sep 12, 2018
Businesses wishing to raise money from retail investors will no longer have to convert to an unlisted public company structure, after an amendment to 2017's equity crowdfunding legislation passed federal Parliament.
The legislation, which takes effect in 28 days from Wednesday, allows proprietary companies or unlisted public companies with annual turnover or gross assets of up to $25 million to advertise their business plans on ASIC-licensed crowdfunding portals, and raise up to $5 million a year to carry them out. Investors can put up to $10,000 a year each into an unlimited number of ideas.
Australian private companies are typically limited to a maximum of 50 non-employee shareholders. However, under these reforms, investors acquiring shares through a crowdfunding portal are excluded from this cap, allowing private companies to raise funds from potentially hundreds or thousands of investors.
Proprietary companies with crowdfunded shareholders will have to prepare annual financial and directors' reports in accordance with accounting standards.
Only large proprietary companies, defined as those with any two of either $25 million turnover or above, $12.5 million of gross assets or more, or 50 employees or more, have previously had to prepare such reports.
Those private companies accessing equity crowdfunding will also become subject to related party transaction rules and takeover rules, and will have to include details about the offer and the shareholders as part of their company register.
Some compliance relief has been provided to the unlisted public companies already eligible to use equity crowdfunding.
Now, all companies raising money via the crowd will only have to have their financial statements audited when they have raised $3 million or more, up from $1 million previously.
The cost and compliance of converting to an unlisted public company had previously deterred most businesses from considering equity crowdfunding, said Jonny Wilkinson, co-founder of one of the ASIC-licensed portals, Equitise.
"Having a formalised structure and process for smaller proprietary companies to raise funds from the crowd - their customers, friends and family - will be a huge boost to small businesses and the economy, driving both growth and employment," he said.
"In turn, it also gives everyday investors the opportunity to invest in these companies and potentially make a return."
The performance of equity crowdfunding has been mixed in its most established market, the UK, where it has been legal since 2011 . A 2016 study by licensed platform Seedrs of the 250 companies that had used it to raise money found they had produced an overall 14.4 per cent internal rate of return, but 41 per cent of the deals had lost money or collapsed altogether.
The quality of companies seeking funding on equity crowdfunding platforms was questioned by 2018 research from Belgium's Ghent University and France's SKEMA School of Business, which compared data from 277 firms that sought financing on UK-based Crowdcube with two sets of similar firms that didn't list on crowdfunding platforms.
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