The CSF regime & the gatekeeper process

The CSF regime & the gatekeeper process

Australia's crowd-sourced funding (CSF) regime allows Aussie start-ups and SMEs to access capital from a large number of investors. Essentially, your company is able to offer shares to the public in exchange for cash (via a licensed CSF intermediary platform, like Birchal). This has only been possible in Australia since 2018.

CSF allows start-ups and other small to medium-sized companies to access capital from a large number of investors. Part 6D.3A of the Corporations Act 2001 provides a regulatory framework for equity-based crowd-sourced funding by unlisted public companies and proprietary companies, enabling them to make offers of ordinary shares to retail & wholesale investors, through a licensed intermediary’s platform, using an offer document.

‍ASIC's regulatory guide 261: Crowd-sourced funding: Guide for companies is an excellent guide to assist companies making offers of shares under the CSF regime to understand their role and comply with their obligations.

Specifically, the guide will help you understand:

• whether your company is eligible to make an offer of its shares under the CSF regime
• how to prepare a CSF offer document for your company’s CSF offer
• the process for making CSF offers, including what obligations and investor protections apply to your company’s offer
• the reporting, audit and corporate governance obligations that apply to public companies and proprietary companies that have completed a successful CSF offer.
  

While we step you through the key components of the CSF regime, we strongly recommend you read and bookmark ASIC Guide 261: Crowd-sourced funding: Guide for companies (and share it with your advisors). We guarantee you'll refer back to it.

Key features of the CSF regime

Some of the key features of the CSF regime are:

• Unlisted public companies and proprietary companies (excluding investment companies) with less than $25 million in consolidated assets and $25 million in annual revenue that have their principal place of business and a majority of directors in Australia are eligible.
• Eligible companies can raise up to $5 million in any 12-month period (the ‘issuer cap’).
• Retail investors have an investment cap of $10,000 per company in any 12-month period (the ‘investor cap’) and a cooling-off period allowing them to withdraw from a CSF offer up to five business days after making an application.
• A prescribed general risk warning statement must be provided in the CSF offer document and on the CSF intermediary’s platform. Retail investors must acknowledge that they have read and understood the warning before applying for shares.
• If a supplementary or replacement CSF offer document is published to correct a defective offer document, and the defect is materially adverse from the point of view of an investor, all investors have 14 days to withdraw their application and be repaid their application money.
• Advertising of CSF offers is permitted, subject to certain rules designed to direct investors to the general risk warning and CSF offer document for the offer.
• CSF offers can only be made via a licensed CSF intermediary’s platform.
  

Companies making CSF offers must prepare a CSF offer document that includes prescribed minimum information. There are consequences if the disclosure is defective.
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While the CSF offer is open, the CSF intermediary must provide a communication facility (discussion board) for the offer on its platform. The purpose of the communication facility is to allow the issuer company, the CSF intermediary and potential investors to communicate with each other about the company’s CSF offer.
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Public companies and proprietary companies that have completed a successful CSF offer must comply with certain financial reporting and corporate governance obligations. Audit obligations also apply when a company raises $3 million or over through CSF offers.

Who are the key players in the CSF regime?

The four key players in CSF are:

• Company/Issuer — the company that is seeking investment & issues shares
• Investors — members of the public (retail and wholesale) who invest money in the company in exchange for shares (aka shareholders)
• CSF intermediary — the licensed online platform that hosts the offer and has responsibilities as the gatekeeper in the process
• ASIC — the Australian Securities & Investments Commission (ASIC) is the corporate regulator overseeing compliance with Australia's corporations law & the CSF regime

ASIC's role as the regulator

The Australian Securities & Investments Commission or ASIC is the regulator of the CSF regime.

‍ASIC issues Birchal with the Australian financial services licence (AFSL) which authorises it to operate the CSF platform. It also oversees our, and a company's compliance with the CSF regime. ASIC has a range of powers to check compliance and investigate suspected breaches, including issuing stop orders to suspend or close offers.

More information? Check out ASIC and the CSF regime here.

Birchal's role as CSF intermediary and "gatekeeper"

As the CSF intermediary, Birchal has certain obligations under the CSF regime, including to:

• hold an Australian financial services (AFS) licence with an authorisation to provide a crowd-funding service
  
• operate a platform for CSF offers
• ensure eligible companies make eligible offers under the CSF regime
  
• ensure a company's CSF offer document meets the minimum content requirements and is "clear, concise & effective"
  
• perform checks on the issuer company
  
• perform checks on directors & senior managers of the issuer company
  
• perform checks on investors, including assessing whether an investor is a retail client, and holds investor money on trust until the CSF offer is complete
  
• pass investor money to the company when the CSF Offer is complete
  
• suspend or close a CSF offer in certain circumstances (e.g. where the CSF offer document is defective)
  

ASIC's RG 262 Crowd-sourced funding: Guide for intermediaries gives more information about our role on hosting your offer on the Birchal platform. ‍

Key obligations

Below is a snapshot of key obligations to consider when using the CSF regime to raise capital.Your obligations may differ depending on whether you have a proprietary company (Pty Ltd) or an unlisted public company (Ltd).

For more detailed information, please see ASIC Regulatory Guide 261: Crowd-sourced funding: Guide for companies

Key obligations — proprietary companies (Pty Ltd)

*Applies to all Pty Ltd companies

Types of shares you can issue

You must issue fully-paid ordinary shares to investors. Currently, the CSF regime does not support issuing other securities such as A class shares, SAFEs, options, convertible securities or debt instruments.

Directors

You must have a minimum of 2 directors with a majority ordinarily residing in Australia.

This means, if there are are only 2 directors, at least 1 of the directors must ordinarily reside in Australia. If there are more than 2 directors, a majority must ordinarily reside in Australia.

50 shareholder cap

This is one of the benefits of the CSF regime. Usually, proprietary companies must not have more than 50 non-employee shareholders (the 50 shareholder cap).
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Shares issued under the CSF regime are not included in this cap. This means proprietary companies that successfully complete a CSF offer may have more than 50 shareholders. If a CSF shareholder transfers its CSF shares via an off-market transfer, those shares also do not count towards the 50 shareholder limit.

‍Share registry

All companies must maintain a register of shareholders. If you make a CSF offer, you will be required to include additional information in the register. You will essentially need to tag the shares as being issued under a CSF Offer. Most companies appoint an online share registry to manage its share register.

Update ASIC

You will need to notify ASIC of the changes to your share register and share structure, including when you issue shares under a CSF Offer, if you cancel those shares, when you start to have CSF shareholders and when you cease to have CSF shareholders.‍

Financial reporting obligations

You will need to prepare an annual financial report and directors' report in accordance with accounting standards and lodge these reports with ASIC.This obligations applies from the financial year in which the company first starts to have a CSF shareholder and will apply in relation to every future financial year in which the company still has a CSF shareholder.

Related party transaction rules

Pty Ltd companies using the CSF regime will be subject to the rules on related party transactions. This means you will need to obtain shareholder approval before giving financial benefits to related parties (which includes directors and their spouses, children or parents and related companies), unless an exception applies.

Takeover rules

Generally, all companies with more than 50 shareholders are subject to the takeover rules in Chapter 6 of the Corporations Act. These rules regulate acquisitions of voting shares in a company that may result in a change in control of the company. A Pty Ltd company with CSF shareholders are not subject to the takeover rules. However, the company will be subject to the general takeover principals and the Takeovers Panel continues to have jurisdiction to hear disputes relating to the control of the company.These rules are complex and it is important to be aware of the rules and principles as they affect the rights of shareholders if there is a change of control of the company in the future.

Is CSF suitable? 

It may not be suitable for all companies to be widely held by hundreds or thousands of shareholders.For instance, proprietary companies that hold licences or otherwise operate in regulated industries should consider whether having large numbers of shareholders will give rise to issues under any other rules or regulations the companies is subject to.E.g., licensing regimes that employ a “good fame and character” eligibility test or reporting obligation for licensees sometimes extend this test to associates of the licensee, which can include shareholders.

Share transfers

The Corporations Act & the Company Constitution generally govern the circumstances in which shareholders can transfer their shares.Also note, investors are not able to sell shares acquired under a CSF offer within 12 months of their issue without a prospectus or other disclosure document, unless an exemption in s708 applies (e.g. sales to sophisticated or professional investors) or unless ASIC gives relief.There's also different rules around whether shares offered under a CSF offer retain "CSF status" once transferred.This area of the law can be tricky, so please ensure you seek advice if you're not sure how it operates.

Pre-emptive rights, founder rights, shareholder meetings, drag & tag rights, other share transfer restrictions etc!

These rights and obligations will be provided in the Company Constitution. Before you undertake a CSF Offer, it's important to carefully consider your Constitution (and seek advice) to ensure it's appropriate for your company once you have hundreds or thousands of new shareholders.

*Also applies to small Pty Ltd companies

Making financial reports available‍

You will need to make a copy of your annual financial report, directors report and (if applicable) auditor's report or a concise report reading accessible on your website.

*Also applies to small Pty companies that have raised $3 million or more from all cumulative CSF Offers

Audit requirements

You must appoint an auditor and have your annual financial reports audited.

*Also applies to large Pty Ltd companies

Audit requirements

You must appoint an auditor and have your annual financial reports audited.

Making financial reports available

You will need to notify shareholders in writing on the ways they can elect to receive a copy of the annual reports or a concise report and send the annual reports (or concise report) to the shareholder via their selected method.

Key obligations — unlisted public companies (Ltd)

Types of shares you can issue

You must issue fully-paid ordinary shares to investors.Currently, the CSF regime does not support issuing other securities such as A class shares, SAFEs, options, convertible securities or debt instruments.

Directors

You must have at least 3 directors and at least 1 company secretary.
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The majority of directors must ordinarily reside in Australia.
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The directors cannot be removed by other directors but are subject to removal by the company’s shareholders.
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The directors cannot be present or vote on matters where there is a material personal interest being considered at a directors’ meeting.

AGM

You must hold an AGM every year.

Reporting

You must prepare and lodge audited annual financial reports and appoint an auditor to conduct a yearly audit of the financial reports. You must also distribute copies of the company’s annual reports to shareholders within four months of the end of the financial year.

Constitution

You must lodge a copy of the Company's Constitution with ASIC and notify ASIC of changes to the Constitution.

Related party transaction rules

You will need to obtain shareholder approval before giving financial benefits to related parties (which includes directors and their spouses, children or parents and related companies), unless an exception applies.

Share transfers

The Corporations Act & the Company Constitution governs the circumstances in which shareholders can transfer their shares.Also note, investors are not able to sell shares acquired under a CSF offer within 12 months of their issue without a prospectus or other disclosure document, unless an exemption in s708 applies (e.g. sales to sophisticated or professional investors) or unless ASIC gives relief. There's also different rules around whether shares offered under a CSF offer retain "CSF status" once transferred. This area of the law can be tricky, so please ensure you seek advice if you're not sure how it operates.

Pre-emptive rights, founder rights, shareholder meetings, drag & tag rights, other share transfer restrictions etc!

These rights and obligations will be provided in the Company Constitution. Before you undertake a CSF Offer, it's important to carefully consider this document (and seek advice) to ensure it's appropriate for your company once you have hundreds or thousands of new shareholders.

All companies must maintain a register of shareholders. If you make a CSF offer, you will be required to include additional information in the register. You will essentially need to tag the shares as being issued under a CSF Offer. Most companies appoint an online share registry to manage its share register.

Update ASIC

You will need to notify ASIC of the changes to your share register and share structure, including when you issue shares under a CSF Offer, if you cancel those shares, when you start to have CSF shareholders and when you cease to have CSF shareholders.

Please note, this guide is intended to be a summary only and is not a substitute for legal advice. If you are unsure, please seek advice.