House of Representatives

Corporations Amendment (Crowd-sourced Funding) Bill 2016

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Chapter 4 Process for making a CSF offer

Outline of chapter

4.1 This Chapter sets out the process of making CSF offers.

4.2 Unless otherwise stated, all references in this Chapter relate to the Corporations Act 2001.

Summary of new law

4.3 The amendments establish:

·
that the process for making a CSF offer involves a CSF eligible company publishing a CSF offer document on a single CSF intermediary's platform;
·
that a new document - a 'CSF offer document' - must be prepared for CSF offers;
·
that the company must obtain certain consents of persons associated with the offer document prior to its publication;
·
that a company making a CSF offer and its related parties cannot have more than one CSF offer open at a time when another CSF offer previously made by the company is open or suspended; and
·
rules for determining when a CSF offer is 'open', when it may and when it must be 'closed', and the conditions that must be satisfied before an offer can be 'complete'.

Comparison of key features of new law and current law

New law Current law
CSF offer must be made in accordance with the CSF regime. An offer requiring disclosure must be made in accordance with Part 6D.2.
A CSF offer document must be prepared for a CSF offer A disclosure document must be prepared for an offer requiring disclosure.
A CSF offer is made by publishing the CSF offer document on the platform of a single CSF intermediary. No equivalent
A CSF offer is made when the offer document is published on the platform of a CSF intermediary. No equivalent.
A CSF offer is open from the time when the offer is made until the offer is suspended or closed by the intermediary. No equivalent.
A CSF offer is closed from the time when a CSF intermediary gives written notice on the offer platform that the offer is closed. No equivalent.
A company making a CSF offer and its related parties cannot have more than one CSF offer open at a time. No equivalent.

Detailed explanation of new law

A CSF offer must be made in accordance with the CSF regime

4.4 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]

4.5 An offer that is subject to the CSF regime is not subject to Part 6D.2, which contains the general rules regarding when disclosure is required for offers of securities, except as expressly provided for. [Schedule 1, Part 1, items 7, 8, 9 and 10, heading to Part 6D.2, section 703B, section 704, section 706]

4.6 An offer that is subject to the CSF regime is also not subject to Part 6D.3, which contains the prohibitions, liabilities and remedies that apply to offers of securities requiring disclosure, except as expressly provided for. [Schedule 1, Part 1, items 11 and 12, heading to Part 6D.3 and section 725A]

A CSF offer document must be prepared for each CSF offer

4.7 Under the CSF regime, a CSF offer document must be prepared in relation to each CSF offer. [Schedule 1, Part 1, item 14, subsection 738J(1)]

4.8 The CSF offer document must contain all the information specified in the regulations [Schedule 1, Part 1, item 14, subsection 738J(2)]. The CSF offer document can also contain the CSF offer [Schedule 1, Part 1, item 14, subsection 738J(1)].

4.9 The above approach has been drafted in recognition of the fact that it is possible for a CSF offer document to satisfy the content requirements specified in the regulations (for example, by including information about the company and its business, the securities on offer, how the proceeds from the CSF offer will be used) but not contain the actual CSF offer (the offer by the company of securities for consideration). In practice, however, it is expected that a CSF offer document would contain the CSF offer as well as the information required to be included by the regulations.

4.10 The information contained in the offer document must be worded and presented in a clear, concise and effective manner and comply with any other requirements specified in the regulations. [Schedule 1, Part 1, item 14, section 738K]

4.11 Where the information in a CSF offer document does not comply with the above requirements, ASIC has stop order powers [Schedule 1, Part 1, item 15, paragraph 739(1)(e)] which will enable it to order that no issues of the securities be made while the order is in force [Schedule 1, Part 1, item 16, paragraph 739(1A)(a)]. This is similar to the position in relation to existing Chapter 6D disclosure documents where ASIC has stop order powers where the disclosure document is not worded in a clear, concise and effective manner. Unlike other disclosure documents, however, the CSF offer document will not need to be lodged with ASIC.

How to make a CSF offer

4.12 The amendments provide that the CSF offer must be made by a CSF eligible company publishing a CSF offer document on the platform of a single CSF intermediary. [Schedule 1, Part 1, item 14, subsection 738L(1)]

4.13 The requirement that the CSF offer be made via the platform of an intermediary is a key element of the CSF regime. An offer of eligible securities by a CSF eligible company, where expressed to be made under the CSF regime, would qualify as a CSF offer (as the requirements in Division 2 of Part 1 to the Bill would be satisfied). However, it is not appropriate that companies be permitted to make CSF offers otherwise than through the platform of a licensed CSF intermediary, given the intermediary's central role in administering a number of aspects of the regime (refer Chapter 3).

4.14 The amendments require the offer document to be published on the platform of a single intermediary. Limiting the issuer to using one offer platform for each CSF offer is appropriate as it supports compliance with other rules in the CSF regime (for example, the issuer cap and investor cap).

Offer must be contained in, or be published together with, the offer document

4.15 As noted above (paragraphs 4.8 and 4.9) it is possible for the CSF offer not to be contained in the offer document. However, if the CSF offer is not contained in the CSF offer document, the CSF offer must be published on the intermediary's platform. [Schedule 1, Part 1, item 14, subsection 738L(1)]

Applications and application money must be handled via intermediary

4.16 All applications in response to the CSF offer must be made via the intermediary's offer platform. This ensures that investors, particularly retail clients, are provided with the various protections in the CSF regime (such as the communication facility, risk warning and cooling-off rights). It is also intended that all application money in respect of applications to the CSF offer be handled by the intermediary. This ensures that application money is handled appropriately, as the intermediary, being an AFSL holder, will be subject to the client money provisions (as well as obligations in the CSF rules for when money must be paid to the issuer company and refunded to the applicants) (refer to paragraphs 3.74 to 3.79).

4.17 The obligation to ensure that applications and application money are handled via the intermediary is given effect by the provision requiring the agreement between the issuer and intermediary for the publication of the offer document (referred to in the Bill as the 'hosting arrangement') to require all applications relating to the CSF offer to be made via the intermediary's platform and all application monies to be paid to or dealt with by the intermediary. [Schedule 1, Part 1, item 14, subsection 738L(2)]

Failure to comply will be an offence

4.18 If the company does not make the CSF offer as required (by publication of the CSF offer and a complying CSF offer document on the platform of a single intermediary) or the hosting agreement does not require all applications and application money to be handled via the intermediary, the company will commit an offence. [Schedule 1, Part 1, item 14, subsection 738L(3) and item 34, item 245A in the table to Schedule 3].

4.19 The offence carries a maximum penalty of 300 penalty units, five years imprisonment or both.

4.20 The five year term of imprisonment is consistent with the penalty that currently applies to a person offering securities where the offer requires disclosure under Chapter 6D.2. The penalty units for the offence have been calculated in accordance with the fine/imprisonment ratio of 5:1 specified in the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers (section 3.1.3 of the Guide refers).

Only one offer may be published at a time

4.21 An issuer company cannot have more than one CSF offer open at a time when another CSF offer previously made by the company is open or suspended. [Schedule 1, Part 1, item 14, subsection 738R(1)]

4.22 In addition, a company cannot make a CSF offer at the same time as a related party of the company makes a CSF offer. The purpose of this prohibition is predominantly to support the enforceability of the issuer cap, which applies to funds raised by the issuer and its related parties. Allowing the issuer and its related parties to make simultaneous CSF offers would make it difficult to enforce the issuer cap. [Schedule 1, Part 1, item 14, subsection 738R(2)]

4.23 Failure to comply with the prohibitions against making more than one offer at a time is an offence carrying a maximum penalty of 300 penalty units, five years imprisonment, or both [Schedule 1, Part 1, item 34, item 245H in the table to Schedule 3].

Consents required prior to publication

4.24 Consistent with the arrangements applying under Chapter 6D.2 to other disclosure documents, a company must not arrange for publication of the CSF offer document until they obtain the necessary consents.

4.25 Firstly, the company must obtain the consent in writing of each person named in the offer document as a director or proposed director prior to publication. [Schedule 1, Part 1, item 14, subsection 738M(1)]

4.26 Where the CSF offer document includes a statement by a person, or includes a statement that is indicated in the offer document to be based on a statement by a person, the company must not arrange for publication of the offer document unless:

·
that person has consented in writing to the statement being included in the offer document in the form and context in which it is included;
·
the offer document states the person has given their consent; and
·
the person has not withdrawn their consent prior to publication. [Schedule 1, Part 1, item 14, subsection 738M(2)]

4.27 The consents must be retained by the company for a period of seven years. [Schedule 1, Part 1, item 14, subsection 738M(3)]

4.28 The requirement to obtain and retain written consents is important as the consents may be relevant to any criminal proceedings or cause of action that an investor may wish to commence in the event that the CSF offer document is defective (Chapter 5).

4.29 Failure to obtain or retain written consents is a strict liability offence, carrying a maximum penalty of five penalty units. The penalty is consistent with the existing penalty applying to the comparable offence in Chapter 6D. [Schedule 1, Part 1, items 14 and 34, subsection 738M(4) and item 245B in the table to Schedule 3]

4.30 Strict liability, and the level of penalty for the new offence, is appropriate, for a number of reasons:

·
a person named in the offer document as a director or proposed director, or a person said to have made a statement included in the offer document are potentially criminally liable or are exposed to an action for recovery of loss or damage by investors in the event the offer document is defective. Requiring the company to obtain written consent of these persons prior to publication is therefore a crucial step as it provides an opportunity for the person to try to amend the contents of the offer document, or not provide consent, to minimise their potential liability;
·
the requirement to obtain written consent and retain the consent for seven years is clear and easy to understand, and the offence depends entirely on the action or non-action of the company which is liable for the offence.

4.31 Consistent with the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, the maximum penalty for the offence is below the maximum penalty amount in the Guide of 60 penalty units and the penalty does not include a term of imprisonment.

Timing rules related to a CSF offer

When a CSF offer is open, closed and complete

4.32 A CSF offer is open from the time when it is first published on the platform of the responsible intermediary [Schedule 1, Part 1, item 14, subsection 738N(2)].

4.33 A CSF offer can only be closed by an intermediary giving written notice on the offer platform that the offer is closed.

4.34 An intermediary has the power to close a CSF offer at any time, although the hosting arrangement between the intermediary and the issuer can place limits on when the intermediary can close the offer except where the intermediary is required, under these amendments, to close an offer. [Schedule 1, Part 1, item 14, subsections 738N(3) and (5)].

4.35 When an intermediary gives notice on the platform that an offer is closed, the offer will be closed from the time when notice is first given [Schedule 1, Part 1, item 14, subsection 738N(3)]. It is not necessary for the notice to continue to appear on the platform for the offer to be closed.

When an intermediary must close an offer

4.36 The Bill sets out five circumstances, discussed in detail below, where an intermediary must close a CSF offer (paragraphs 4.37 to 4.48). Where an intermediary fails to close the offer as required, the intermediary will commit an offence, punishable by a maximum penalty of 30 penalty units, six months imprisonment, or both [Schedule 1, Part 1, item 34, item 245C in the table to Schedule 3]. The offer must be closed at the earliest of the following times:

·
three months after the CSF offer is made;
·
if the offer document states a date by which the offer will close, that date;
·
when the intermediary considers the offer to be fully subscribed;
·
when the company withdraws the offer; or
·
when the company's 'gatekeeper' obligations require the intermediary to remove the offer document from its platform.

Offer must be closed after three months

4.37 A CSF offer can be open for a maximum of three months [Schedule 1, Part 1, item 14, paragraph 738N(4)(a)]. It is appropriate that there be a capped maximum offer period to ensure information contained in the CSF offer document (which is a limited disclosure document) remains current. A three month time limit is also consistent with the notion of CSF as a simpler, faster way of raising funds with streamlined disclosure.

4.38 The three month time limit cannot be extended for any reason. This means, for example, if the company became aware that the offer document was defective two months into the offer period, the intermediary would still be required to close the offer at the end of three months after the CSF offer was initially made, even if the company prepared a supplementary or replacement offer document. The company would not be precluded, however, from making a new CSF offer.

4.39 Assuming the CSF offer is closed at three months, the intermediary must determine, after the expiry of all withdrawal rights, whether:

·
the offer is 'complete': that is, the minimum subscription condition is met disregarding withdrawn applications. The intermediary will be required to pay application money to the issuer following the issue of the securities [Schedule 1, Part 1, item 14, subsection 738N (7) and subsection 738ZB(2)]; or
·
the offer is unsuccessful as the minimum subscription amount was not raised. This means the intermediary must refund application money to applicants [Schedule 1, Part 1, item 14, subsection 738ZB(3)]

4.40 An intermediary that closes the offer because the three month time limit is reached may, but is not required to, remove the offer document from its platform [Schedule 1, Part 1, item 14, subsection 738P(2)]. The intermediary will, therefore, have the option of maintaining the offer document on the platform after the offer is closed as an archive of the previous offers it has hosted.

Offer must be closed by the date specified in the offer document

4.41 The issuer company is not required to specify an offer close date in the offer document. However, if the issuer does specify a date (or period) by which the offer will close, the intermediary must close the offer at that time (or upon expiry of that period) [Schedule 1, Part 1, item 14, paragraph 738N(4)(b)].

4.42 Neither the intermediary nor the issuer are able to extend the closing date beyond what was specified in the offer document, including if the offer document was found to be defective and the issuer prepared a replacement or supplementary offer document.

4.43 An intermediary that closes the offer because the offer closure date specified in the offer document is reached may, but is not required to, remove the offer document from its platform. [Schedule 1, Part 1, item 14, subsection 738P(2)]

Offer must be closed when intermediary considers the offer fully subscribed

4.44 An intermediary has the power to close an offer when it considers the offer to be fully subscribed to the maximum subscription amount [Schedule 1, Part 1, item 14, subsection 738L(7) and paragraph 738N(4)(c)]. This is consistent with the policy intent that an issuer not be able to raise more than the maximum subscription amount specified in the offer document as disclosures regarding the purpose to which funds would be put would be premised on the basis that no more than the maximum subscription amount would be raised.

4.45 Allowing an intermediary to close an offer where they 'consider' the offer to be fully subscribed provides some flexibility. For example, an intermediary may allow the application facility to receive applications that exceed the maximum subscription amount if, from experience, it expects a certain proportion of applicants will withdraw their acceptances (pursuant to cooling-off rights). If the offer does result in applications worth more than the maximum subscription amount being received, even after taking into account withdrawals of acceptances, the intermediary should reject applications to ensure that no more than the maximum amount is collected and transferred to the issuer. Application money relating to rejected applications must be returned to the investor [Schedule 1, Part 1, item 14, paragraph 738ZB(4)(b)].

4.46 An intermediary that closes a CSF offer because it considers the offer to be fully subscribed may, but is not required to, remove the offer document from its platform. [Schedule 1, Part 1, item 14, subsection 738P(2)]

Offer must be closed if the company withdraws the offer or gatekeeper obligations apply

4.47 A company has the power to withdraw a CSF offer at any time before the offer is complete [Schedule 1, Part 1, item 14, section 738S)]. To do so, the company must notify the intermediary that the offer is withdrawn. Once an intermediary receives such a notification it must, as soon as practicable, close the offer and remove the offer document from its platform. [Schedule 1, Part 1, item 14, paragraph 738N(4)(d) and subsection 738P(1)]

4.48 The intermediary must close an offer if it is required to remove the offer document pursuant to its gatekeeper obligations (discussed in paragraphs 3.28 to 3.54) and must remove the offer document from its platform. Failure to comply is an offence, punishable by a maximum penalty of 30 penalty units, six months imprisonment or both [Schedule 1, Part 1, items 14 and 34, paragraph 738N(4)(e), subsection 738P(1), item 245D in the table to Schedule 3]

Dealing with application money once an offer is closed

4.49 Once an offer is closed, the next step is for the intermediary to determine if the offer is 'complete' and, if so, handle application money appropriately.

4.50 There are three conditions that must be satisfied before an offer can be 'complete'.

4.51 Firstly, the offer must have closed because: the three month maximum duration of a CSF offer expired; the offer close date specified in the offer document was reached; or the intermediary considered the offer to be fully subscribed [Schedule 1, Part 1, item 14, paragraph 738N(7)(a)]. If an offer is closed for another reason (for example, because it was withdrawn by the issuer, or the intermediary had to close the offer pursuant to its 'gatekeeper' obligations), it can never be 'complete'.

4.52 The second condition is that all possible withdrawal rights - whether statutory or provided for by the intermediary - which permit an applicant to withdraw their application must have expired [Schedule 1, Part 1, item 14, paragraph 738N(7)(b)]. This means that an intermediary must wait for the expiry of the 48 hour cooling-off rights for retail clients (refer to paragraphs 6.18 to 6.22), the one month right to withdraw an application (which applies to all investors where an issuer publishes a supplementary or replacement offer document in relation to a defective offer document, refer to paragraph 5.31) and any other non-statutory withdrawal rights that the intermediary provides.

4.53 The final condition is that the value of the applications received, disregarding any applications that have been withdrawn or rejected by the intermediary, must exceed the minimum subscription amount set out in the offer document [Schedule 1, Part 1, item 14, paragraph 738N(7)(c))].

4.54 An offer that is closed but not complete, because it was withdrawn by the issuer or the intermediary was required to close the offer pursuant to its 'gatekeeper' obligations, will result in the intermediary refunding application money held to the applicants (paragraph 3.77).


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