House of Representatives

Explanatory Memorandum

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

Chapter 1 - Extending the crowd-sourced funding regime to proprietary companies

Outline of chapter

1.1 This Chapter provides an overview of the Corporations Amendment (Crowd-sourced funding for Proprietary Companies) Bill 2017.

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

Context of amendments

Policy background

1.3 Crowd-sourced funding (CSF) is an innovative type of fundraising, typically online, that allows a large number of individuals to make small financial contributions towards a company, in exchange for an equity stake in the company. Legislation will commence on 29 September 2017 to introduce a CSF regulatory framework for public companies, although with some transitional arrangements for proprietary companies who transition to public company status in order to make CSF offers.

1.4 Access to finance is crucial for innovative new businesses, as they can incur costly research and development in the early stages of a business at a time when there may be little or no revenue flowing in. Bank loans with immediate regular payments may not be suitable if they can even be approved. So equity finance such as CSF is often a preferable type of funding for innovative and early stage companies and the investors in those companies.

1.5 Currently proprietary companies are unable to have more than 50 shareholders or make a public offer. Extending CSF to proprietary companies will enable easier access for small and innovative business types to the capital they need to succeed.

1.6 Acknowledging that proprietary companies that access CSF will no longer be closely held, these companies will be subject to obligations designed to increase shareholder engagement and mitigate the occurrence of fraud. The obligations for proprietary companies that access CSF include: a minimum of two directors; financial reporting in accordance with accounting standards; audit requirements and restrictions on related party transactions.

1.7 These additional company obligations will help to ensure the sustainability of the CSF regime and give investors confidence in the market by ensuring companies meet a minimum standard and that investors have some basic information available to them.

Summary of new law

1.8 The amendments extend the CSF regime to proprietary companies by:

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expanding the eligibility for the CSF regime in section 738H to proprietary companies that meet eligibility requirements;

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providing that proprietary companies with shareholders who acquire shares through a CSF offer are not subject to the takeovers rules;

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adding special investor protection provisions for proprietary companies accessing the CSF regime; and

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removing the temporary corporate governance concessions in the Corporations Amendment (Crowd-sourced Funding) Act 2017 for proprietary companies that convert to or register as public companies to access the CSF regime.

1.9 The special investor protection provisions that will apply to proprietary companies accessing the CSF regime include requirements to:

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maintain a minimum of two directors;

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prepare annual financial and directors' reports in accordance with accounting standards;

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have their financial reports audited once they raise$3 million or more from CSF offers; and

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comply with the existing related party transaction rules that apply to public companies.

Comparison of key features of new law and current law

Detailed explanation of new law

1.10 The amendments in Part 1 of Schedule 1 of the Bill extend the CSF regime in Part 6D.3A of the Act to proprietary companies that meet certain eligibility requirements. As proprietary companies that use the CSF regime will be fundraising from the public, they will be required to adhere to additional reporting requirements and governance standards that will foster greater accountability and better decision making. Extending the CSF regime to proprietary companies

1.11 Paragraph 738H(1)(a) of the Act is amended to extend the CSF regime in Part 6D.3A to proprietary companies. The amendment will allow a proprietary company to use CSF if it has a minimum of two directors and meets any other requirements that are specified in the regulations. [Schedule 1, Part 1, item 41, paragraph 738H(1)(a)].

1.12 Proprietary companies will be required to have at least two directors before they are able to use the CSF regime as this will provide greater transparency, more robust decision-making and greater certainty around succession planning.

1.13 The regulations may also prescribe other eligibility requirements. It is appropriate to have the power to prescribe other eligibility requirements in the regulations so that the Government can quickly intervene to protect investors if required.

1.14 The existing proprietary company framework in the Act provides for streamlined regulation for closely held companies. As proprietary companies that use CSF will be accessing public funding, these amendments provide for additional reporting and governance regulations to protect investors. Despite these additional requirements, it is possible that the CSF regime for proprietary companies will develop in a manner that creates risks for investors that would not be suitable. If this occurs, it is necessary for the Government to be able to intervene quickly to prescribe additional eligibility requirements that proprietary companies may have to satisfy before accessing the CSF regime, thereby maintaining an effective level of investor protection. It is appropriate for these requirements to be prescribed in the regulations as the Government may need to intervene quickly and as the regulations would be subject to disallowance, there would still be an appropriate level of parliamentary scrutiny.

1.15 Proprietary companies are currently prohibited from engaging in any activity that requires disclosure to investors under Chapter 6D except to existing shareholders and the employees of a company. As CSF is a fundraising activity that requires disclosure to investors, subsection 113(3) of the Act is being amended so that proprietary companies are allowed to make CSF offers (which is defined in section 738B of the Act). [Schedule 1, Part 1, item 7, subsection 113(3)]

1.16 To allow proprietary companies to effectively use the CSF regime, the existing shareholder cap which provides that a proprietary company cannot have more than 50 non-employee shareholders is being amended so that it also does not count shareholders:

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who are CSF shareholders (see paragraph 1.18) ; and

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who own shares that were originally issued as part of a CSF offer by the company and the transfer to the shareholder occurred prior to the company's shares being traded on a financial market in Australia or elsewhere unless the regulations provide otherwise (see paragraph 1.22); and

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all other requirements prescribed in the regulations are met (see paragraphs 1.21 - 1.23).

[Schedule 1, Part 1, item 6, subsection 113(2)]

1.17 Without this change, a proprietary company would only be permitted to have 50 non-employee shareholders, severely limiting its ability to use the CSF regime.

1.18 A CSF shareholder is defined in section 9 as a person (legal or natural) that holds one or more securities in a company that was issued pursuant to a CSF offer by the company. [Schedule 1, Part 1, item 1, section 9]

1.19 As such, anyone who is directly issued with a share under a CSF offer will be a CSF shareholder and will not count towards the shareholder cap in subsection 113(1).

Example 1.1

Kim invests $3,000 to acquire 3,000 shares as part of a CSF offer by Nero Pty Ltd. As Kim's shares were acquired directly as part of a CSF offer she will be a CSF shareholder in the company and will not count towards the shareholder cap under subsection 113(1).

1.20 Similarly, a shareholder who holds shares that were originally issued as part of a CSF offer and the transfer of those shares to the person occurred prior to the company's shares being traded on a financial market in Australia or elsewhere will not count towards the shareholder cap in subsection 113(1).

1.21 Once a company's shares start to be traded on a financial market in Australia or elsewhere (for example if a market for secondary trading of CSF shares develops), the company would begin to resemble a public company. It is therefore appropriate that shareholders who acquire shares after this starts to occur (either on the market or otherwise) count towards the shareholder cap in subsection 113(1).

Example 1.2

Hannah and Geoff invest $5,000 each to acquire 5,000 shares each as part of a CSF offer by Kavas Pty Ltd.

After a few months, Hannah becomes dissatisfied with the management of Kavas Pty Ltd and transfers all 5,000 shares to Nelson. Nelson will not be a CSF shareholder as he purchased the shares from Hannah rather than through a CSF offer. However, as Nelson's shares were originally purchased as part of a CSF offer and Kavas Pty Ltd's have not been traded on a financial market, Nelson will not count towards the shareholder cap in subsection 113(1).

After Nelson acquires the shares from Hannah, Kavass Pty Ltd's shares start to be traded on a financial market that provides for secondary trading of CSF shares.

Some months later Geoff decides to sell half of his shares (2,500 shares) to Maan. As the transfer to Maan has occurred after Kavas Pty Ltd's shares started to be traded on a financial market, Maan will count towards the 50 non-employee shareholder limit under subsection 113(1). However, Geoff will still not count towards the shareholder cap as his remaining shares were directly acquired as part of the CSF offer.

1.22 There is a regulation making power to provide that some transfers of shares may not count towards the shareholder cap in subsection 113(1) even if a company's shares are being traded on a financial market in Australia or elsewhere. This regulation making power is necessary to provide flexibility in how the shareholder cap will apply if a market for secondary trading of CSF shares does develop. Depending on how a second trading market develops, it may be appropriate that some transfers of shares should not count towards the shareholder cap in some circumstances. For example, it may be appropriate for certain involuntary transfers of shares to be excluded from the shareholder cap even if a company's shares are traded on a secondary market. The regulation making power will therefore provide the Government with an agile approach to refining the operation of the shareholder cap. The regulations will be subject to appropriate parliamentary scrutiny as they would be subject to disallowance.

1.23 Proprietary companies have traditionally been subject to reduced regulation and disclosure on the basis that they are closely held companies. The extension of the CSF regime to proprietary companies and the exclusion of CSF shareholders from the shareholder cap is significant departure from the current regulatory approach. There is therefore also a regulation making power that would allow the Government to prescribe additional conditions to be met before a shareholder (other than a CSF shareholder) is excluded from the shareholder cap.

1.24 The regulation making power would allow the Government to quickly exclude some shareholders from the definition of a CSF shareholder if it appears that the CSF regime is being used for misconduct or provides avenues for other unintended activities. For example, if the CSF regime is used for illegal activity, the regulation making power could be used to ensure that certain transfers would result in a shareholder counting towards the shareholder cap and thus make the company convert into a public company (once it has sufficient shareholders) and become subject to a more appropriate level of regulation.

1.25 Providing for this in the regulations is appropriate as the Government may need to respond quickly depending on how the CSF market develops. The regulations would be subject to disallowance and thus subject to appropriate parliamentary scrutiny.

1.26 In addition to the changes to the shareholder cap in section 113, proprietary companies will also be able to manage their shareholder base by having clauses in their constitution dealing with transfers of shares.

Proprietary companies with CSF shareholders must have a minimum of two directors

1.27 Once a proprietary company makes a CSF offer, it will be required to maintain at least 2 directors as long as it has CSF shareholders. This is consistent with the requirement for a proprietary company to have at least two directors to make a CSF offer and will provide greater transparency, more robust decision-making and greater certainty around succession planning. In companies where there are only two directors, at least one of the directors must ordinarily reside in Australia. In companies with more than two directors, a majority of the directors will have to ordinarily reside in Australia. [Schedule 1, Part 1, item 13, subsection 201A(1A)]

1.28 Where there are only two directors in a company, existing practices apply in determining how a majority is determined. For example, where there is an even split, the chair may have a casting vote.

1.29 The obligation to have at least the two directors exists as long as the company has a CSF shareholder. If all of the shares issued pursuant to a CSF offer are later sold, otherwise transferred or bought back by the company, the company will no longer have any CSF shareholders and will no longer be required to have the second director.

Additional reporting obligations for proprietary companies that have CSF shareholders

1.30 A proprietary company that makes a CSF offer will be required to include additional information as part of its company register. This information must be maintained on the company's register while the company has CSF shareholders. The additional information to be maintained on the register includes the:

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date of each issue of shares as part of a CSF offer;

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number of shares issued as part of each CSF offer;

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shares issued to each member of the company as part of each CSF offer; and

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date on which each person ceases to be a CSF shareholder of the company for a particular share in the company.

[Schedule 1, Part 1, item 10, subsection 169(6)AA]

1.31 Proprietary companies that make CSF offers are being required to maintain this information as part their company registers so that they have an appropriate record of the securities issued pursuant to CSF offers and that they are aware of the number of CSF shareholders in the company at any given point in time. It is essential for these companies to be able identify if they have any CSF shareholders because they will be subject to additional reporting and governance obligations while this is the case (for example, the requirement to have a minimum of two directors outlined above).

1.32 As proprietary companies that make CSF offers are taking funding from the public, it is important for ASIC to be able to identify the companies that have CSF shareholders and provide appropriate supervision. Proprietary companies that make CSF offers will therefore have additional obligation to report to ASIC once they make a CSF offer.

1.33 As such, where a company makes changes to its register because it has issued shares as part of a CSF offer, the company will also be required to notify ASIC of the change to its register. [Schedule 1, Part 1, item 11, paragraph 178A(1)(b)]

1.34 As part of the new notification requirements, the company will also have to inform ASIC if it:

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starts to have CSF shareholders; or

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stops having CSF shareholders.

[Schedule 1, Part 1, item 12, subsection 178C(1)]

1.35 These new reporting requirements will help ASIC track the proprietary companies that are subject to additional requirements because they have CSF shareholders.

1.36 In addition, where a proprietary company issues new shares, it will be required to notify ASIC if the issuance of those shares results in the company having a CSF shareholder. [Schedule 1, Part 1, item 14, subsection 254X(1)]

1.37 Similarly, where a proprietary company cancels any of its shares, it will have to notify ASIC if the cancellation results in the company ceasing to have CSF shareholders. [Schedule 1, Part 1, item 15, subsection 254Y(1)]

Financial reporting obligations for proprietary companies that make CSF offers

1.38 Under section 292, a small proprietary company would normally only have to prepare annual financial and directors' reports if it is directed to by its shareholders (under section 293) or ASIC (under section 294), or in some cases where it is controlled by a foreign company. This is not appropriate where the company makes a CSF offer as the company will be accessing funding from the public and these shareholders should have access to ongoing information on the company's progress. Unlike most investors in proprietary companies, who generally have connections to the company's management and are therefore expected to be able to access information on the company as required, CSF shareholders will generally not have a connection to management and therefore have less ability to obtain the required information on the company.

1.39 As such, to ensure that the individuals who invest their money into proprietary companies through a CSF offer have access to information about their investment in the company, subsection 292(2) is amended to require proprietary companies to prepare annual financial and directors' reports while they have CSF shareholders. [Schedule 1, Part 1, item 18, paragraph 292(2)(c)]

1.40 Requiring small proprietary companies that have CSF shareholders to prepare annual financial and directors' reports will build investor confidence in the CSF regime, allowing the market to become established and then grow. It will also allow investors to monitor progress of the companies and make informed decisions on issues they can vote on. The requirement will also establish a minimum standard, ensuring that only companies that are willing to be transparent with their investors are able to access the regime.

1.41 The financial and directors' reports that are prepared will have to be provided to members in accordance with section 314 and must be provided to ASIC under section 319. There is no requirement for the company to make the reports public but they can elect to do so if they wish.

1.42 The obligation to prepare the financial and directors' reports will apply from the financial year in which the small proprietary company first starts to have a CSF shareholder (which can only occur once the company has completed a CSF offer) and will apply in relation to every future financial year in which the company still has a CSF shareholder. The financial reports prepared must comply with accounting standards.

1.43 Small proprietary companies that have CSF shareholders will only need to provide their annual report via a website and do not have to notify shareholders of alternative ways of receiving the report. An equivalent amendment applies in relation to the provision of concise financial reports to shareholders (where eligible). These provisions replicate the corporate governance concessions for eligible public companies that access CSF in the Corporations Amendment (Crowd-sourced Funding) Act 2017. [Schedule 1, Part 1, item 24, subsection 314(1AF) and item 25, subsection 314(2A)]

1.44 As a result of the requirement for these companies to prepare annual financial and directors' reports, there are a number of consequential amendments required in relation to the current reporting exemptions available for small proprietary companies.

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First, small proprietary companies that prepare annual financial and directors' reports in response to a shareholder direction under section 293 or a direction by ASIC under section 294 will have to lodge these reports with ASIC if they have CSF shareholders. [Schedule 1, Part 1, item 26, paragraph 319(2)(a)]

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Second, subsection 298(3) is amended to clarify that the exemption from preparing a directors' report for a small proprietary company will not apply if the company has a CSF shareholder. [Schedule 1, Part 1, item 21, subsection 298(3)]

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Third, subsection 296(1A) is amended to require a small proprietary company that has a CSF shareholder to ensure its financial reports comply with accounting standards even if it is prepared in response to a shareholder direction under section 293 and the direction provides that the report need not be in accordance with accounting standards. [Schedule 1, Part 1, item 19, subsection 296(1A)]

1.45 Small proprietary companies are generally not required to have their financial reports audited. While this is appropriate for closely held companies relying on private funds it is not appropriate for companies that have public investment. As such, small proprietary companies that raise an amount equal to or greater than the CSF audit threshold from CSF offers will be required to have their annual financial reports audited. [Schedule 1, Part 1, item 22, subsection 301(2)]

1.46 The CSF audit threshold amount is $3 million but may be amended in the future through the regulations. The current $3 million threshold balances the need to keep company costs low with the need for investor protection through external assurance of financial statements. The regulation making power has been included to allow the Government to amend the threshold in future depending on how the CSF market develops. It is appropriate for the power to be in the regulations because if the CSF market develops in a manner that creates unreasonable risks for investors, the Government can quickly intervene and provide greater assurance of financial statements by amending the threshold. It is appropriate for these requirements to be prescribed in the regulations as it gives the Government the ability to intervene quickly and as the regulations would be subject to disallowance, there would still be an appropriate level of parliamentary scrutiny. [Schedule 1, Part 1, item 1, section 9]

1.47 As a result of the requirement for small proprietary companies that access CSF to have audited financial statements once they have raised an amount equal to or greater than the CSF audit threshold from CSF offers, the overview of auditing obligations in section 285 is amended to also provide that small proprietary companies that raise an amount equal to greater than the CSF audit threshold from CSF offers must have their financial statements audited. [Schedule 1, Part 1, items 16 and 17, subsection 285(1) (table item 3, column headed 'comments')]

1.48 Consequential amendments have been made to the content requirements of the annual directors' report. The amendment provides that a small proprietary company that has CSF shareholders is not required to include a copy of the auditor's declaration in its directors' report until it has raised an amount equal to or greater than the CSF audit threshold from CSF offers. This amendment ensures that only proprietary companies with CSF shareholders that are required to have their financial statements audited are required to include the auditor's declaration in their directors' report. [Schedule 1, Part 1, item 20, subsection 298(1AC) and item 23, paragraph 314(1)(a)]

1.49 Once a small proprietary company raises an amount equal to or greater than the CSF audit threshold from CSF offers, its directors will have to ensure there is an auditor appointed from one month after the amount was raised until the company stops having CSF shareholders. If the company later makes another CSF offer, the obligation to have an auditor will again apply from within one month of that offer being made. [Schedule 1, Part 1, item 30 section 325 and item 31, subsection 325(2)]

1.50 Directors who are under this obligation are required to do everything reasonable to comply with it. However, where there is a vacancy in the office of the auditor, the obligation to have an auditor appointed will not apply for a one month period from when the vacancy arose. This will allow the directors the time necessary to appoint a replacement auditor. [Schedule 1, Part 1, item 31, subsections 325(3) and (4)]

1.51 Directors that do not do everything reasonable to comply with the requirement to have an auditor appointed to a company during the periods it has raised an amount equal to or greater than the CSF audit threshold amount from CSF offers and it ceasing to have CSF shareholders will be liable for 25 penalty units or imprisonment for six months or both. This is appropriate as it is the identical penalty that applies to directors of a public company that breach their equivalent obligations. [Schedule 1, Part 1, item 46, schedule 3 (table item 1116KM)]

1.52 Where a small proprietary company has raised an amount equal to or greater than the CSF audit threshold from CSF offers but does not appoint an auditor as required above, the company must notify ASIC no later than seven days after the end of the 30 day period that the company's directors have failed to appoint the auditor. Once the company does this, ASIC is required to appoint an auditor as soon as practicable. This requirement is the equivalent to the existing requirement in relation to public companies that do not appoint an auditor as required. Where ASIC appoints an auditor for a proprietary company that raises an amount equal to or greater than the CSF audit threshold from CSF offers in this way, the auditor will hold office until the company's next general meeting. [Schedule 1, Part 1, item 32, section 327E (heading) item 33, subsection 327E(1) and item 34, subsection 327E(6)]

1.53 Similarly, ASIC's power to appoint an auditor to a public company where one is not appointed as required under the Act is extended to apply to proprietary companies with CSF shareholders that have raised an amount equal to or greater than the CSF audit threshold from CSF offers. Where this occurs in relation to a proprietary company, the auditor will hold office until the company's next general meeting. [Schedule 1, Part 1, item 35, section 327F (heading); item 36, subsection 327F(1), item 37, paragraph 327F(1)(a), item 38, subsection 327F(2) and item 39, section 327G (heading)]

1.54 Proprietary companies that have raised an amount equal to or greater than the CSF audit threshold from CSF offers and have CSF shareholders will be subject to the existing rules that ensure independence between a company and its auditors. This is to protect against any conflicts of interest arising and is appropriate as it only applies to companies that have raised an amount equal to or greater than the CSF audit threshold from the public through CSF offers. [Schedule 1, Part 1, item 27, subsection 326CH(1) (table items 1 to 9) and item 28, subsection 324CH(3A)]

1.55 Similarly, the existing rules that prevent an auditor from becoming a director of an entity they audited for a two year period is extended to also apply in relation to a proprietary company that has raised an amount equal to or greater than the CSF audit threshold amount from CSF offers and has CSF shareholders. [Schedule 1, Part 1, item 29, paragraphs 324CI(e), 324CJ(e) and 324CK(e)]

Restrictions on related party transactions

1.56 Since proprietary companies that use CSF are relying on public funding, they will be subject to restrictions on related party transactions to protect investors. Having these additional restrictions will ensure that individual investors have appropriate protection and will also help build confidence in the CSF regime as more investors participate in CSF offers.

1.57 To protect investors against fraud and bias arising as a result of transactions with related parties, proprietary companies that have CSF shareholders will be subject to the existing related party transaction rules and penalties under Chapter 2E. [Schedule 1, Part 1, item 45, section 738ZK]

1.58 The application of Chapter 2E to proprietary companies that have CSF shareholders provides shareholders with protections where funds are transferred to any related parties through uncommercial transactions without shareholder approval. This will provide investors with confidence that they have access to the existing related party transaction remedies where funds are transferred to a related party for non-commercial purposes without shareholder approval.

1.59 The restrictions are however not too onerous (in the context of companies that have accessed funding from the public through a reduced disclosure regime) as the transactions are still permissible if they are on commercial terms at arm's length or if the shareholders provide consent.

Takeovers of proprietary companies that have CSF Shareholders

1.60 Proprietary companies that use CSF would generally be subject to the takeover rules in Chapter 6 as they are likely to have more than 50 shareholders. These provisions are complex and would inhibit funding and other exit opportunities for proprietary companies that use CSF as they apply in relation to the acquisition of control beyond 20 per cent of a company's voting stock.

1.61 This is contrary to the objectives of proprietary companies that use CSF as they may be positioning for a takeover or to become listed in the future. The shareholders of these companies that invest as part of CSF offers also do so in the expectation that, if the company is successful, they will benefit from a payout as part of an exit event.

1.62 As such, a proprietary company that has CSF shareholders will be exempt from the takeover rules in Chapter 6 as long as they meet any of the conditions prescribed in the regulations. [Schedule 1, Part 1, item 40, section 611]

1.63 Proprietary companies that have CSF shareholders are being excluded from the takeover rules to reduce compliance costs and avoid unduly restricting companies from adjusting their capital structure. However, as proprietary companies that do use CSF will be accessing public funding through a reduced disclosure regime it is important for the Government to be able to impose conditions if required to protect investors. For example, the Government may need to impose conditions on the takeover exemption if as the CSF market develops it appears that CSF shareholders are not able to benefit from exit events at successful companies. It is appropriate for these requirements to be prescribed in the regulations as the Government may need to intervene quickly and as the regulations would be subject to disallowance, there would still be an appropriate level of parliamentary scrutiny.

Clarifying that companies accessing CSF cannot be listed on overseas exchanges

1.64 The meaning of an eligible CSF company is amended to clarify that the company cannot be listed on a financial market overseas in addition to not being listed on a financial market in Australia. [Schedule 1, Part 2, item 50, paragraph 738H(1)(e)]

1.65 This change only applies in relation to CSF offers that are made after Part 2 of Schedule 1 commences. [Schedule 1, Part 2, item 52, section 1643]

Reducing the cooling off period for supplementary or replacement CSF offer documents

1.66 The current CSF regime provides that where a supplementary or replacement CSF offer document is published, an intermediary must give written notice to all applicants that previously accepted the offer to advise them that they have one month (from the date of the notice) to withdraw their acceptance and obtain a refund of application money paid.

1.67 This Bill provides for the cooling-off period to be reduced from one month to 14 days. The reduced period provides greater certainty for the company making the CSF offer and other applicants about the outcome of the CSF offer. The 14 day cooling-off period would still give investors a sufficient amount of time to reconsider their decision to participate in a CSF offer following the provision of a supplementary or replacement CSF offer document. [Schedule 1, Part 2, item 51, subsections 738X(7) and (9)]

1.68 This amendment will only apply to CSF offers that are made after Part 2 of Schedule 1 commences. As such, anyone who invests in a CSF offer that is made before this time will have access to the existing one month cooling-off period if a supplementary or replacement CSF offer document is published, even if the supplementary or the replacement CSF offer document is published after Part 2 of Schedule 1 commences. [Schedule 1, Part 2, item 52, section 1643]

Increasing the threshold for audited financial statements for eligible public companies using the corporate governance concessions under the Corporations Amendment (Crowd-sourced Funding) Act 2017

1.69 As small proprietary companies with CSF shareholders will only be required to audit their financial statements after they have raised $3 million or more from CSF offers, public companies eligible for the corporate governance concessions provided for in the Corporations Amendment (Crowd-sourced Funding) Act 2017 will also only be required to have their financial statements audited and appoint an auditor after raising $3 million or more from CSF (as opposed to the current $1 million threshold). [Schedule 1, Part 2, item 47, paragraph 301(5)9b), item 48, section 328D(heading), item 49, subsection 328D(1)]

Removal of the corporate governance concessions for new public companies and proprietary companies that convert to access the CSF regime

1.70 The Corporations Amendment (Crowd-Sourced Funding) Act 2017 provided for a number of corporate governance and reporting concessions for new public companies and proprietary companies that convert to access the CSF regime. These concessions were provided to facilitate new companies registering as public companies or proprietary companies converting to public companies in order to access CSF. As the amendments in this Bill will allow proprietary companies to use CSF without having to convert, the corporate governance concessions are no longer required.

1.71 As such, section 738ZI is amended so that the corporate governance concessions are not available to public companies that incorporate, or proprietary companies that convert, after the commencement of these amendments (which will be six months after Royal Assent). Public companies that incorporate or convert prior to these amendments commencing will still be able to access the concessions as long as they are eligible for them. [Schedule 1, Part 1, item 42, section 738ZI; item 43, paragraph 738ZI(1)(a) and item 44, subsection 738ZI(2)]

Example 1.3

Winter Walker Ltd (WWL) registers as a new public company one month after this Bill receives Royal Assent. WWL has indicated on its registration that it intends to make a CSF offer and meets all the eligibility requirements to access the corporate governance concessions. WWL will be able to continue accessing the concessions as long it continues to meet the eligibility requirements even after these amendments take effect six months after Royal Assent.

Example 1.4

Snow Dragon Ltd (SDL) registers as a new public company seven months after this Bill receives Royal Assent. As these amendments will have commenced, SDL is not eligible for the corporate governance concessions.

1.72 As public companies (newly incorporated and proprietary companies that convert) will not be able to access the corporate governance concessions after commencement of this Bill, the provisions for companies to indicate their intention to access the corporate governance concessions are being repealed. Companies that have indicated their intention to use CSF on their application (for registration or conversion) prior to this Bill taking effect will be able to continue accessing the corporate governance concessions as long as they meet the eligibility requirements. [Schedule 1, Part 1, item 8, paragraph 117(2)(mc), item 9, subparagraph 163(2)(d)(iii)]

Consequential amendments

1.73 The small business guide in Part 1.5 of the Act is being updated to explain that the cap on the number of non-employee shareholders a proprietary company can have will also no longer include shareholders who have shares issued pursuant to a CSF offer as long the company's shares are not traded on a financial market. [Schedule 1, Part 1, item 3, paragraph 2.1 of the small business guide in part 1.5]

1.74 Similarly, the small business guide in Part 1.5 of the Act is updated to explain that the prohibition on proprietary companies engaging in fundraising activity does not extend to raising funds under a CSF offer. [Schedule 1, Part 1, item 4, paragraph 8 of the small business guide in part 1.5]

1.75 Part 1.5 of the small business guide is also updated to reflect the fact that proprietary companies will have to prepare annual financial and directors' reports if they have CSF shareholders. [Schedule 1, Part 1, item 5, paragraph 10.3 of the small business guide in part 1.5]

1.76 The notes under subsection 45A(1) are updated to explain that the cap on the number of shareholders a proprietary company can have does not include shareholders connected with a CSF offer. [Schedule 1, Part 1, item 2 subsection 45A(1) (note 2) and (note 3)]

Application and transitional provisions

1.77 The amendments in Part 1 of Schedule 1 to extend the CSF framework to eligible proprietary companies will take effect from the day after the end of the period of 6 months beginning on the day this Act receives Royal Assent.

1.78 The amendments in Part 2 of Schedule 1 relating to eligible public companies that access CSF will take effect from the day after this Bill receives Royal Assent.