There has been a fair bit of congecture lately around equity crowd funding and it’s availablility in Australia. Laws passed through parliament on 20 March give start up companies the ability to raise funds through issuing equity through crowdfunding platforms such as Venture Crowd. But there is a pretty big catch.
Equity Crowd Funding
In Australia private Pty Ltd companies are generally set up for businesses with less that 50 non employee shareholders and make up the majority of initial company startups. In order to issue shares publicly and raise funding, Pty Ltd companies are limited to either issuing shares to sophisticated investors (high wealth individuals) or must go through the arduous and likely prohibitive process of issuing a disclosure document in order to issue shares to the public (retail investors).
The new rules do nothing to change the situation for private companies,( which has been a critizism from the opposition), however allow eligible Crowd Source Funding (CSF) companies which are unlisted public companies to issue shares to retail investors up to the value of $5 million per year. This means that private companies wishing to raise funds through CSF would need to covert to an unlisted company and be subject to additional disclosure requirements and rules for office holders, share registry and financial reporting . Although less burdening than regulations applied to listed public companies, these requirements may make the process unworthwhile. Seeing some change however is a step in the right direction and may raise a case for creating a new kind of company down the track specifically to facilitate easier crowd sourced equity funding to drive innovation and greater diversity for investors.
Sophisticated investors are investors who are assumed to have a greater knowledge of financial products and prospective investments as to not require the same amount of disclosure and information as retail investors. This means that they can invest in certain types of equity offerings without the startup needing to provide complex documentation. To qualify as a sophisticated investor the individual is required to pass one of several measures including obtaining a certificate from an accountant stating that their gross income was greater than $250,000 in each of the past two financial years and have net assets of over $2.5 million. Other tests can be found on the ATO website.
The good news is that Australian companies, including private companies, can raise funds through sophisticated investors without arduous disclosure. The government has also created tax incentives applying from 1 July 2016 for sophisticated investors designed to increase access to funding for innovative startups who meet the criteria to be early stage innovation companies (ESICs). These incentives include a tax offset of 20% of total funds invested in eligible startups up to $1 million ($50,000 limit for sophisticated investors) and no CGT on investments held between 1 and 10 years.
ESIC status is a new concept created as part of the federal government’s innovation agenda and requires start ups to pass an early stage test basically designed to establish that the business is small and in its early stages. It must also pass a 100 point innovation test (like an ID test but for innovation characteristics) or a principles based innovation test. Alternatively, startups can apply to the ATO for a determination regarding whether they classify as an ESIC. The innovation tests are based on criteria such as innovation and R&D activities, participation in accelerator activities, growth potential, scalability and a potential overseas market competitive advantages. A listing of current ESIC’s and applicants can be found here.