While the promise of equity crowdfunding remains largely out of reach for most Australian companies (only public, unlisted companies can raise this way), there's no shortage of action items for startups and crowdfunding platforms for when it finally opens up to private companies next year.
We caught up with startup lawyer, Alex Solo of sprintlaw for the latest update on where things are at, and the items that should be at the top of your to-do list if you're a startup founder or platform looking to raise cash from the crowd.
- The proposed laws to extend equity crowdfunding to proprietary companies (i.e. almost all small businesses/startups) has not yet come into effect (ETA early to mid 2018).
- The latest rule changes, as they currently stand, still only allow public unlisted companies to raise money through equity crowdfunding, but the platforms are yet to get their crowdfunding licences from ASIC (ETA early 2018).
- Proprietary companies will need to sit tight, but there are plenty of things for crowdfunding platforms and startups to do in the meantime.
- Apply for an Australian Financial Services licence as a 'crowd-sourced funding intermediary' via ASIC's eLicensing portal. Read this guide and start your application here.
- Get intimately familiar with ASIC's template 'Crowd-sourced funding offer document', which you can download here – note that this is for public companies, so there should be a new template for proprietary companies, once that regime kicks in. Being able to help your crowdfunding clients with their offer documents (or providing your own, compliant template offer docs to clients) will be a huge benefit.
- Conduct a health check on your business: make sure you actually own your IP, you've got the right corporate structure in place, you've got your ASIC records up to date, and all your contracts are airtight. If you need help, talk to a lawyer that knows this space.
- Consider the investment terms you'll offer to participants: how much will you raise? How will the raise be structured? At what valuation? Get a financial advisor or accountant – who gets startups – to run the numbers.
- Read ASIC's template offer document (as above) because when the template for proprietary companies comes out, it should be pretty similar.
Hi guys, and thanks for tuning in. Today we're talking about equity crowdfunding. If you're a startup founder looking to raise some money through crowdfunding, or if you're a platform looking to gear up to offer equity crowdfunding, or even if you're an investor, then tune in, because today we've got Alex Solo, who's the co-founder of Sprintlaw – a law firm dedicated to servicing the startup ecosystem. Alex has been keeping pretty close tabs on this regime, ever since it release in, I guess, May this year. Where, I guess, it was released, and is a bit of a debacle, I've got to say, and hopefully things have progressed into something that's a bit less of a debacle. So just to kick us off, Alex, take us back to what happened when it released, and where are we up to now?
Alex Solo: For sure. It was sort of an interesting story. People have been talking about the equity crowdfunding laws for three or fours years, particularly since, I think in about 2011, UK was the first country to pass it into effect, and, really, there was a lot of success there, and then there was lots of talk in the US. People were sort of saying, in Australia, when's this going to happen?
There was a lot of talk about how we could do it. We have a little bit of a, I guess, rigid Corporations Act, and it made it quite difficult to copy what the US and the UK have done, which allows private proprietary companies to do an equity crowdfunding raise. In Australia, they, I think in the initial Bill that was proposed, they kind of tried to fudge the issue and just say, "Look, we're going to not allow this for proprietary companies. We're going to allow it for public companies that are unlisted." And that's sort of an odd company structure in Australia. There's very few companies that, particularly startups, that have this unlisted public company structure.
The initial Bill that was passed into law in May made it legal for unlisted public companies to raise, which meant that if you're a startup, you're going to have to convert to this odd structure. In my talks with startups and people in the community, everyone was sort of saying, "Look, that sounds too complicated and too hard. I'd rather just…"
Did anyone actually do it, that you know of? Actually convert to a public company?
Well, it's a bit too early to know. The law only came into effect about a month and a half ago. And, actually, the first platforms haven't even been licenced yet, under the public company regime. I think that will happen, maybe, in early 2018. We'll see what happens then. Those that are getting the licences are saying that, you know, they've got some companies that are interested, but I don't know a single company that's said that they're keen to do it. We'll see what happens.
Okay. So just to step through ... The new legislation, that's passed now. That's in effect now, is it?
Correct. That's right.
Right. So if I'm a platform, for example, what should I have done already, or be doing right now, in order to gear up to offer equity crowdfunding to the market?
The main thing you're going to need to do is get an AFS limited crowdfunding licence, and you can apply for that with ASIC. They've got some pretty good materials on their website about how to apply. The key thing is, when you're applying there's a bunch of minimum requirements that you have to have, as a platform or company, to start a platform. Some of those are around minimum cash amounts that you have in the bank accounts, human resources, risk management procedures, and things like that.
It's not as simple as just building a platform and launching it. But it's not too bad. It's not the same as a full-on AFS licence, and if it had been, then startup platforms would really have had a lot of trouble launching. Once you have the licence, it's really about just ongoing compliance with the Act. That's things around making sure that you're not advertising particular offers, and making sure that you're doing due diligence on the companies that you list. You'd have to have procedures in place, when you're building the company, that can manage that stuff.
And roughly how many platforms do you think have a licence and are ready to go?
I think there's probably like five or six at the moment that have applied. Probably, yeah, companies like Equitise have been around for two or three years. They've been operating mainly in the sophisticated investor space in Australia, but they also launched in New Zealand. I reckon they would have been first to apply. I think ... yeah, maybe five or six are going through the process. I expect that ASIC's going to spend a little bit of time really going through those applications, the first few applications, and making sure that everything's fine. I don't think we'll see the first licence, as I said, until early 2018. But, yeah, I think there's going to be a big boom in this space, and a lot of new platforms launching now that it's legal, keen to be the first movers, I think. So it'll be interesting.
I guess for this to happen there does need to be the platforms in place, not till 2018. So on the startup side, like if I'm a startup founder, I'm considering this, I've seen the success of crowdfunding overseas, I want to do this for myself ... What do I, as a founder, need to start doing now, in order to gear up for when the platforms are ready, early next year?
For sure. I mean, apart from the most important question, which is, yeah, asking yourself, is this the right way to raise capital for me? Which I think a lot of people get excited about equity crowdfunding, but it can be a headache to have a large number of investors. So you have to ask, you know, am I the type of company that really needs this, that will benefit from this?
If you're a company that's built on a huge consumer market, then maybe it makes sense to have a lot of customer advocates. But if you're a company that's building ... I don't know ... robotics or something, technology, where you really could just do with two or three venture capital investors, then maybe it's not the right option for you.
Basically, if you can't put together a really amazing video promoting your services, that captures the hearts and minds of the masses, it's probably not your thing, but if you've got a really cool product, an amazing marketing machine behind you, maybe it's a way to go.
Yeah, yeah. I think that's right. That's what you see has happened in the UK and the US. But, yeah, if it is right for you, I think that the first step is probably going to see a lawyer and getting them to do a health check on your business. You just want to make sure that everything's in place before you're approaching platforms. Because the platforms are going to be doing due diligence on you, essentially, to check that everything's there.
You need to make sure that the IP's assigned to your company, you've got the right structure, you've got your ASIC records in place, and all your contracts are airtight. That'd probably be the first thing to do. For some companies, that may not be a big deal. For others, it might be a huge shock to find out that they ... there's all kinds of things they haven't done. It's probably a good idea, anyway, to do that.
Then, after that, it would just be planning your campaign. If you do get accepted by the platforms, then really, it comes down to marketing and promotions and things like that. The other thing I should probably mention is also thinking about the terms of investment that you're going to put on the platform. Some platforms dictate, you know, we only allow startups to raise capital in this one way. Others are more flexible and you can choose five or six different terms of investment, and do things with preference shares, and different sorts of rights. That's probably another thing to think about, and you can speak with a financial advisor about that. And also your valuation. What are you going to say your company's worth? Those are probably the biggest questions to answer.
What about disclosure documents? Because, as a startup, you do need to prepare a ... from my understanding ... quite a hefty document that goes out to your investors, that meets all sorts of regulatory requirements.
Definitely. Definitely. I think the disclosure document is very important. I think the platforms will probably help the companies with the disclosure document. The good thing about the disclosure document, it's ... There was a lot of concern it would be a lot like a prospectus. You know, what companies have to do to list on the stock exchange. ASIC has released a template on their website which is actually pretty good, and quite simple.
That will save a lot of time and money in preparing the docs. And I do think, if the platform doesn't provide the disclosure doc, then definitely, you need to go see a lawyer and get them to work with you on it. But I don't think companies should be too scared that it's going to be a similar process to listing on the stock exchange. It's really just about identifying the key risks with your business, and summarising the terms of offer. As I say, it may be that the platforms do that for you, so ... yeah.
And there's also, I guess, financial reporting obligations that, as a startup or a proprietary company, a small proprietary company, doesn't normally need to prepare. So maybe getting a good accountant on board to get books drawn up, to comply, is another one.
Definitely. The law that's been passed for public companies, and is been proposed for proprietary companies at the moment, both have additional accounting requirements for companies, particularly if you're going to be raising over $3 million. You actually need to have audited financial statements.
If it's under $3M, you just need to prepare yearly financial reports, which, as a normal private or small company, you wouldn't have to do. I think, yeah, a good accountant is really, really important.
Okay, so you've got financial reports, you've got the offer document, or disclosure document. Ball park figures, how much are startups looking ... will be needing to spend to get all this prepared, both at an application side, and also ongoing costs?
I guess it depends, in many senses, how much of the legal stuff you've done already, and what lawyers you go see. But, look, I think for the legal side of things, if you're not ... if you're going to do the conversion to public company structure, it might be a little expensive. I think you're looking at maybe $10K just to get ready, and then if you are going to have to do the ongoing compliance, you probably want lawyers on board, and accountants on board, to help you with that, so maybe another $10K per year after that.
Wow. That's to convert to public company, yeah, right?
Yeah, exactly. I mean, the actual conversion process isn't too hard, it's just that once you convert, there's a lot of compliance obligations, and I really just think that if you're a small company, you really want someone helping you out with that. You don't want to try and DIY.
But you wouldn't convert now, I would imagine, given that the regime now lets proprietary companies do this in their current structure?
Well, the law for proprietary companies hasn't yet passed. So the public company law was the one that passed in May, but the new Bill ... There was a new Bill proposed in, I think, mid-September by the Turnbull Government, and that wanted to extend it to proprietary companies. I really expect that will have bipartisan support, because Labor's whole problem with the original Bill was that it didn't extend to private companies, and now it does. I think that will go through, but that probably won't be passed into law until early next year, and it may be that, if you want to raise, as a private company, it might be six to nine months from now that you can do it.
That's sort of what will happen. But, yeah, you're right. Totally, like, if you're going to do the proprietary company raising, it'll be a lot cheaper. You don't have to worry about this stuff.
Yeah. Mate, it sounds like everyone's just going to sit tight.
That time horizon's a lot longer than I expected. So I guess if you convert to public company, looks like you could be doing a raise as early next year, if the platforms are ready. But if you're a proprietary company, the law still hasn't passed, so you've still got to wait till that happens early next year, and then another ... extend it out six months, maybe.
Yeah, who knows how long it will take for the regime to come into effect. I think it will be quicker. They waited six months with the public companies, but I think that sort of ... it will be a little bit quicker with proprietary companies. And for the platforms, your licence, I believe, is going to work for both public and private. You don't need to get a second licence or anything. Yeah, platforms can get going now, I think. It's not a bad idea.
Okay. Well, I think that maybe the upshot is, proprietary companies, so pretty much all startups and small companies, are hold fire! The law has still not changed, so little bit of waiting and fingers crossing to do. I guess, we, yeah, stay tuned for another update when it actually passes, and then we can give you more concrete direction on what to do right now. But, Alex, thanks so much.
No worries. Great to chat.
And thanks for tuning is, guys. We'll deliver more updates in the coming weeks and months, so tune in and we'll talk to you soon.
See you later.
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