Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)
Chapter 2 Eligibility requirements
Outline of chapter
2.1 This Chapter sets out the eligibility requirements for making a CSF offer.
2.2 Unless otherwise stated, all references in this Chapter are to the Corporations Act 2001 and the Corporations Regulations 2001.
Summary of new law
2.3 The amendments establish that a CSF offer is an offer that is expressly stated to be made under the CSF regime and that is eligible to be made under the regime by meeting all of the relevant requirements.
2.4 The amendments provide that the relevant requirements for making a CSF offer are:
- the offer must be for the issue of securities of the company making the offer;
- the company making the offer must be an 'eligible CSF company' at the time of the offer;
- the securities must satisfy the eligibility conditions specified in the regulations;
- the offer must comply with the 'issuer cap'; and
- the company must not intend the funds sought under the offer to be used by the company or a related party of the company to any extent to invest in securities or interests in other entities or managed investment schemes.
2.5 The amendments also provide a regulation-making power to permit other eligibility requirements for a CSF offer to be prescribed.
Comparison of key features of new law and current law
|New law||Current law|
|A CSF offer is an offer that is expressly stated to be made under the CSF regime and that is eligible to be made under the regime.||An offer requiring disclosure is an offer made under Part 6D.2 that must comply with the requirements in Parts 6D.2 and 6D.3.|
|An offer will be eligible to be made under the CSF regime where:
|An offer requiring disclosure is an offer made under Part 6D.2 that must comply with the requirements in Parts 6D.2 and 6D.3.|
Detailed explanation of new law
Establishment of a CSF regime
2.6 The amendments establish the CSF regime: a new disclosure regime that can be used by eligible CSF companies to make certain offers of securities for issue. [Schedule 1, Part 1, item 14, section 738A]
2.7 The amendments provide that a company making a CSF offer is also able to offer securities of the same class pursuant to an offer that is exempt from disclosure under section 708. This allows a company to, for example, make a CSF offer of shares via an intermediary to crowd investors but also make an offer of shares to investors for whom disclosure is not required (such as venture capital funds and angel investors). [Schedule 1, Part 1, item 14, section 738E]
Offers eligible to be made under the CSF regime
2.8 A CSF offer is an offer that is expressly stated to be made under the CSF regime and that is eligible to be made under the regime by meeting all of the relevant requirements. [Schedule 1, Part 1, item 14, section 738B]
2.9 Part 6D.2, which contains the general rules regarding when disclosure is required for offers of securities, does not apply to CSF offers except as expressly provided for. [Schedule 1, Part 1, items 7, 8, 9 and 10, heading to Part 6D.2, section 703B, section 704, and section 706]
2.10 Part 6D.3, which contains the prohibitions, liabilities and remedies that usually apply to offers of securities requiring disclosure, does not apply to CSF offers except as expressly provided for [Schedule 1, Part 1, items 11 and 12, heading to Part 6D.3 and section 725A]. This is appropriate as the CSF regime establishes the prohibitions, liabilities and remedies relating to CSF offers. There is, however, an express provision that the CSF regime does not otherwise affect any liability that a person has under any other law [Schedule 1, Part 1, item 14, section 738ZH].
Eligibility requirements for a CSF offer
2.11 The relevant eligibility requirements for a CSF offer are set out in detail below.
Offer of securities for issue
2.12 The first criterion is that the offer must be for the issue, not the sale, of securities; that is, a CSF offer can only cover primary issuances. [Schedule 1, Part 1, item 14, paragraph 738G(1)(a)]
Eligible CSF company
2.13 The second criterion is that the company making the offer must satisfy the definition of an 'eligible CSF company'. [Schedule 1, Part 1, item 14, paragraph 738G(1)(b)].
2.14 A company will be an eligible CSF company where it satisfies the following conditions:
- the company is a public company limited by shares, with its principal place of business and majority of directors in Australia [Schedule 1, Part 1, item 14, paragraphs 738H(1)(a), (b) and (c)];
- the company satisfies the gross assets and turnover caps [Schedule 1, Part 1, item 14, paragraph 738H(1)(d)];
- neither the company, nor any related party, is a listed corporation [Schedule 1, Part 1, item 14, paragraph 738H(1)(e)]; and
- neither the company, nor any related party, has a substantial purpose of investing in securities or interests in other entities or managed investment schemes [Schedule 1, Part 1, item 14, paragraph 738H(1)(f)].
Public company limited by shares
2.15 A public company limited by shares includes:
- a public company with share capital registered under Chapter 2A (including a proprietary company that converts to become a public company limited by shares); and
- a body corporate that is registered as a public company under Part 5B.1 of the Act.
2.16 A body corporate that is registered as a public company under Part 5B.1 can include an incorporated foreign company. Such a company has, in effect, transferred its incorporation so that it can now effectively be regarded as a public company registered under the Act.
2.17 The following entities are ineligible to access the CSF regime as they will not satisfy the definition of public company limited by shares:
- proprietary companies, as they are explicitly excluded from the definition of 'public company' in section 9;
- foreign companies and registrable Australian bodies that are registered under Part 5B.2, as they will not meet the definition of a 'company' under section 9; and
- public companies that do not have share capital (for example, public companies limited by guarantee).
Principal place of business and majority of directors located in Australia
2.18 Given one of the policy objectives underpinning the CSF regime is to support Australian businesses' access to capital, one of the eligibility requirements is that a company seeking to access the CSF regime must have a principal place of business in Australia at the time it is determining its eligibility to crowd fund.
2.19 For similar reasons, another eligibility requirement is that the company must have a majority of directors (not counting alternative directors) that ordinarily reside in Australia.
Complies with consolidated gross assets and turnover caps
2.20 As the CSF regime is intended to assist small-scale businesses, there are restrictions on the size of companies that can access the regime.
2.21 Firstly, the value of the consolidated gross assets of the issuer and any related parties must be less than $25 million at the time the company is determining its eligibility to crowd fund ('gross assets test'). [Schedule 1, Part 1, item 14, paragraph 738H(2)(a)]
2.22 The gross assets cap is based on the value of consolidated gross assets of an issuer and any related parties for integrity reasons to ensure that the cap applies appropriately to related parties of the same group.
2.23 The meaning of 'related party' for the CSF rules is set out in paragraphs 2.45 to 2.49.
2.24 As well as satisfying the assets test, the company and any related parties must also have consolidated annual revenue of less than $25 million ('turnover test'). [Schedule 1, Part 1, item 14, paragraph 738H(2)(b)]
2.25 The turnover cap is based on the consolidated annual revenue for the 12-month period immediately prior to the time when determining eligibility to crowd fund. New companies that have not been operating for a full 12 months will still be able to crowd fund as long as their consolidated annual review for the period is under the $25 million cap.
Not a listed corporation
2.26 In order to be eligible for the CSF regime, neither the company, nor any related parties, can be a listed corporation [Schedule 1, Part 1, item 14, paragraph 738H(1)(e)]. A listed corporation is 'a body corporate that is included in an official list of a prescribed financial market' (section 9). Regulation 1.0.02A lists the following as prescribed financial markets: the Asia Pacific Exchange Limited; ASX Limited; Chi-X Australia Pty Ltd; National Stock Exchange of Australia Limited; and SIM Venture Securities Exchange Limited.
2.27 The rationale for excluding listed corporations is that a company that is listed has demonstrated an ability to bear the costs and compliance requirements associated with listing on a public market. These companies generally have access to other forms of equity raisings because of their listed and continuously disclosing status, such as rights issues and share purchase plans.
2.28 An unlisted company that previously made an offer requiring disclosure under Chapter 6D.2 is not excluded from making a CSF offer. Allowing such companies to access the CSF regime will potentially reduce the fundraising costs of these businesses and provide an alternative to making a traditional offer requiring disclosure.
Not an investment company
2.29 Neither the company, nor its related parties, can have a substantial purpose of investing in securities or interests in other entities or managed investment schemes. [Schedule 1, Part 1, item 14, paragraph 738H(1)(f)]
2.30 It would be inappropriate for an investment company, which will itself be investing in other unspecified entities, to undertake such activities in the lower disclosure environment provided by the CSF regime.
Securities prescribed in the regulations
2.31 The securities that are the subject of the CSF offer must be securities of a class prescribed in the regulations. [Schedule 1, Part 1, item 14, paragraph 738G(1)(c)]
2.32 The Government has indicated that only fully-paid ordinary shares would be subject to crowd-funding when the regime commences. This will ensure that there are appropriate limits on the securities made available under crowd-funding as the regime commences and begins to develop. As the CSF regime is new and is expected to evolve quickly, there is a need to have the flexibility to quickly adjust the type of securities that are eligible for crowd-funding.
2.33 As crowd-funding is a new market in Australia, it is important that any changes can be implemented quickly and in response to the way the market is developing as this would ensure the market is given the best chance for success.
2.34 An important aspect of the CSF regime is to ensure investors have appropriate protections when participating in crowd-funding. Prescribing the securities eligible for crowd-funding is an important aspect of the CSF regulatory regime. It ensures the Government can quickly amend the types of securities available on crowd-funding platforms to prevent a systemic issue from arising and maintain investor confidence.
Offer complies with issuer cap
2.35 Consistent with the policy intent that the CSF regime be used to assist start-ups and innovative small businesses to access capital, and recognising that a CSF offer does not require the same level of disclosure as existing Chapter 6D disclosure documents, there is a cap on the maximum amount of funds that an issuer company (and any related parties) can raise under the CSF regime. [Schedule 1, Part 1, item 14, paragraph 738G(1)(d)]
2.36 The amendments set the 'issuer cap' at $5 million in any 12-month period with a regulation-making power to adjust the cap in the future in light of the experience with CSF. [Schedule 1, Part 1, item 14, subsection 738G(2)]
2.37 A company seeking to make a CSF offer must satisfy the issuer cap, which is calculated by taking into account:
- the maximum subscription amount sought by the company under the current CSF offer;
- all amounts raised from any other CSF offers made within the past 12 months by the company or its related parties; and
- all amounts raised within the past 12 months from small scale personal offers (subsection 708(1)) and certain offers made via an Australian Financial Services Licence (AFSL) holder (subsection 708(10)) by the company or its related parties.
2.38 The table below summarises which offers count towards the issuer cap.
|Timing condition||How raised||By issuer||By related party|
|Funds sought under current CSF offer||Yes||N/A, as a company and its related parties cannot have more than one CSF offer open at a time|
|Only if CSF offer made within 12 months of current offer||Funds raised from other CSF offers||Yes||Yes|
|Only if funds raised within 12 months of current offer||Funds raised from subsection 708(1) and subsection 708(10) offers.||Yes||Yes|
|Funds raised from other offers that do not require disclosure, other than subsection 708(1) and subsection 708(10) offers.||No||No|
2.39 The issuer cap takes into account the maximum funds sought to be raised under the current CSF offer as this is potentially the amount that could be raised by the issuer under the CSF offer.
Which offers within the past 12 months count towards the issuer cap
2.40 With regard to previous offers, the issuer cap disregards amounts raised from offers that are exempt from disclosure, such as offers to sophisticated investors (subsection 708(8)) or professional investors (subsection 708(11)). This reflects the policy intent that the issuer company should continue to have access to funding from wholesale investors (such as angel investors and venture capital funds).
2.41 There are two types of offers that are exempt from disclosure which do count towards the issuer cap. These are 708(1) offers (small scale personal offers) and subsection 708(10) offers (offers made via an Australian Financial Services licensee where the licensee is satisfied on reasonable grounds that the person to whom the offer is made has previous experience in investing that allows them to assess the merits and risks of the current offer).
2.42 The rationale for including the amounts raised under small scale personal offers and subsection 708(10) offers in the issuer cap is that the funds raised under such offers may involve retail investors who are very similar to crowd investors. Not including amounts raised under these offers could mean an issuer company could, in effect, raise funds in excess of the issuer cap, with a lower level of disclosure from crowd investors and other retail investors, who are not sophisticated investors and would otherwise require a disclosure document under Part 6D.2.
Distinction between offers made and funds raised
2.43 In the case of previous offers, there is a difference between how amounts raised under a previous CSF offer and amounts raised under a previous subsection 708(1) or subsection 708(10) offer count towards the issuer cap. In the case of a previous CSF offer, it is necessary to look at when the offer was made, not when the amount raised under the offer was received. A CSF offer is made when the CSF offer document relating to the offer is first published on the offer platform of an intermediary [Schedule 1, Part 1, item 14, subsections 738L(6) and 738N(1)].
2.44 In the case of a subsection 708(1) or subsection 708(10) offer, funds raised within 12 months of the current CSF offer contribute towards the issuer cap [Schedule 1, Part 1, item 14, paragraph 738G(2)(c)]. Funds from non-CSF offers are included based on when the funds were raised, not when the offer was made, in recognition of the fact there may be some difficulties, in practice, with identifying when the offer was made but there would be less difficulty in identifying when funds relating to the previous offer were received by the company.
Example 2.1 Calculation of issuer cap - previous offers NewTech Limited is intending to make a CSF offer on 14 October 2019. The minimum and maximum amounts for that offer are $1 million and $2.3 million respectively.NewTech previously made a CSF offer on 10 August 2018, which was completed on 15 November 2018. A total of $2 million was raised under that offer.In the period 14 October 2018 to 6 January 2019, NewTech received amounts of $1.7 million from small scale personal offers made on 23 August 2018.In calculating the amounts that contribute towards the issuer cap, NewTech will count the maximum amount sought to be raised under the current offer, which is $2.3 million.In relation to the previous offers, NewTech will disregard the amounts raised under the CSF offer of 10 August 2018 as that offer was made more than 12 months prior to the current CSF offer. In relation to the previous small scale offer, NewTech will include the amount of $1.7 million as this was the amount received from small scale offers in the 12 month period prior to the current CSF offer.The total amount counting towards the issuer cap is $2.3 million + $1.7 million = $4 million. As the total does not breach the issuer cap, the current CSF offer will be an eligible CSF offer (subject to the other eligibility requirements being satisfied).
Certain offers of related parties are included in the issuer cap
2.45 The issuer cap takes into account amounts raised under certain previous offers of the company's related parties.
2.46 A related party of a company seeking to make a CSF offer is:
- a 'related body corporate' of the company; or
- an entity controlled by a person who controls the company or an associate of that person. [Schedule 1, Part 1, item 14, subsection 738G(3)]
2.47 A related body corporate (defined in section 50) of an issuer company would be:
- its holding company;
- its subsidiary; or
- a subsidiary of the holding company of the body corporate (a 'sister' company).
2.48 An entity controlled by a person who controls the issuer company or an associate of that person will pick up 'sister' entities of the company that are not body corporates.
2.49 The definition of 'related party' in the CSF regime is based on the approach in subsection 709(4) which applies for companies seeking to raise funds using an offer information statement (which has a cap on total funds raised of $10 million which applies to the company, its related body corporates and entities controlled by a person who controls the company or associates of such a person).
2.50 The amendments provide ASIC with a power to make a determination that transactions, assets, or revenue of closely related bodies should be aggregated [Schedule 1, Part 1, items 20 and 21, paragraphs 740(1)(b) and 740(2)(d)]. A consequence of the determination is that a company may no longer be eligible to make a CSF offer as it will exceed the issuer cap, gross assets or turnover tests.
Funds not to be used for investing in another entity or scheme
2.51 The policy intent is that the CSF regime, given it involves a lower level of disclosure to investors than other types of public offers, cannot be used to raise money for 'blind pools'.
2.52 This policy intent is achieved by excluding an offer from being a CSF offer where the funds raised are intended to be used to any extent for investing in securities or interests in other entities or schemes [Schedule 1, Part 1, item 14, paragraph 738G(1)(e)]. The content requirements of the CSF offer document, which will be specified in the regulations, could require the company to include in the CSF offer document a description of how it intends to use the proceeds from the offer.
Consequences where the offer is not eligible to be a CSF offer
2.53 Where an offer does not satisfy the eligibility criteria to be a CSF offer, it will default to being an offer of securities requiring disclosure under Part 6D.2, unless one of the exemptions from disclosure in section 708 applies.
2.54 Where a person makes an offer of securities requiring disclosure under Part 6D.2 but does not lodge the required disclosure document with ASIC, the person will commit an offence under subsection 727(1), which carries a maximum penalty of 200 penalty units, five years imprisonment or both.
2.55 Consequential amendments have been made to section 9 to insert a number of new definitions for concepts relevant to the CSF regime. [Schedule 1, Part 1, items 1, 2, 3, 4, 5 ,6, section 9]
2.56 A consequential amendment has been made to subsection 1311(1A) to add the new Part 6D.3A (containing the provisions relating to the CSF regime). The effect is that a person will only commit an offence under the CSF regime where a specific penalty has been set out in Schedule 3 to the Act. [Schedule 1, Part 1, item 33, paragraph 1311(1A)(dba)]