In this final paper of our crowd-sourced funding (CSF) series, we set out some of the key points to be aware of if you’re thinking of participating in Australia’s new CSF regime as an investor.
Key points for potential investors
When the CSF regime comes into effect later this year, it will allow eligible unlisted public companies to raise a limited amount of equity capital from the “crowd” at large, including from retail investors, without providing prospectus-level disclosure.
While this represents a potentially significant new avenue for investment, it’s a good idea to understand the process and potential pitfalls of CSF investing before committing any funds to a CSF campaign.
As explained in more detail in Part 1, investors will (at least initially) only be able to invest in CSF ventures by subscribing for fully-paid ordinary shares in fundraisers.
In practical terms, investing in a CSF campaign will work like this:
- A potential investor will be able to access CSF offers by browsing online platforms maintained by CSF intermediaries: think Kickstarter, but for equity investing.
- Before making any decision to invest, the potential investor will be given a CSF offer document containing prescribed information about the investment. These offer documents will have to meet prescribed minimum standards, but they will not contain information to a prospectus level of disclosure such as you would receive for an IPO.
- Should the potential investor decide to proceed, the investor will pay its application money to the intermediary, who will be obliged to deal with those funds in accordance with their Australian Financial Services Licence and the rules of the CSF regime.
- If the minimum subscription amount for the CSF offer is reached by the end of the offer period, and the other conditions prescribed by the CSF regime are met, then the intermediary will forward the investor’s application funds to the fundraiser. The fundraiser will then be obliged to issue the relevant shares to the investor.
Many of the CSF regime’s rules are designed to protect potential investors, particularly those who are “retail clients” under Australian law. In broad terms, “retail clients” are potential investors who are not high net worth, professional or institutional investors. The protection for retail clients includes:
- Retail client investment cap: Retail clients will be limited to investing $10,000 per fundraiser via a particular platform within a 12-month period.
- Retail client cooling-off periods: Retail clients will have a 5 business day cooling off period to withdraw their acceptances under CSF offers.
Although investors who are retail clients will be subject to the per-fundraiser investment cap, there won’t be any aggregate limit on the amount that they can invest in CSF overall.
The new CSF regime will present potential investors with exciting new investment opportunities. But, like all investments, there’s a host of things to bear in mind before investing. Here are some key points to consider:
- Be realistic: It’s easy to get swept up in the wave of enthusiasm for CSF, particularly as a means of investing in cutting-edge tech companies and other innovative entrepreneurial ventures. However, it’s important to realise that most CSF fundraisers will not be the next Google or Facebook! These are likely to be highly speculative investments, so you need to be prepared to risk what you’re investing.
- Limited (if any) liquidity: Your CSF investment is likely to be highly illiquid. There won’t be a readily available secondary market to trade your CSF shares or exit the investment, so you need to take that into account before investing.
- Regulation ‘lite’: Your CSF investment will be subject to less stringent regulation that an investment in public securities markets. Fundraisers won’t be listed companies, so depending on the number of investors in a given fundraiser, the fundraiser may not be obliged to provide continuous disclosure to investors in the same way as a listed company.
Since the CSF regime also provides certain corporate governance concessions to eligible fundraisers, investors may not have the benefit of being able to review audited fundraiser accounts or airing their concerns at an annual general meeting.
- Do your DD: Doing your due diligence on CSF fundraisers (and intermediaries) will be essential.
One notable feature of the CSF regime is that fundraisers won’t be obliged to adopt a template company constitution or enter into a template shareholders agreement to govern the relationship between the company and its CSF investors. Fundraisers will be free to adopt company constitutions of their choosing, subject to compliance with the rules that apply to all public companies.
As a result, reviewing and understanding a CSF fundraiser’s constitution, share register and corporate governance arrangements will be paramount to assessing your potential investment. We can assist with any due diligence to ensure that you’ll be entering your CSF investment with eyes open.
We will keep you updated with any further developments before the new CSF regime goes live. In the meantime, please contact us if you’d like more detailed guidance about how you might be able to harness CSF as part of your business or investment strategy.