How to raise funds in Australia: Crowdfunding & Early Stage Innovation Companies

How to raise funds in Australia outside of issuing a prospectus, or to “sophisticated investors” has been clarified recently.

Companies can offer one or both of:

  • Crowd Funding; and
  • Early Stage Investor Company concessions.

The rules are different for both, and I have put summaries of both here:

CROWD FUNDING SUMMARY

To crowd fund, a company can now be either a proprietary (Pty Ltd) or unlisted public company.  The 50 shareholder limit for pty ltd companies will not count Crowd Source Funding (CSF) shareholders.

A CSF company must:

  • have less than $25 million in gross assets and annual turnover;
  • not be listed;
  • have its principal place of business in Australia.

A CSF company can raise a maximum of $5 million in 12 months via CSF.

ASIC will ‘tag’ a CSF company as such, and will apply increased investor protections to it, such as:

  • The accounts must be prepared in accordance with accounting standards;
  • The accounts must be audited once the company raises $3 million or more from CSF offers;
  • Must adhere to the related party transaction rules that apply to public companies (so can’t just siphon off CSF funds to a related party);
  • Details of the crowd funding must be included in the company register.

There are relatively onerous requirements relating to documentation, and having the funding listed on a Financial Service Licensee’s website (and the FSL holder has to have an additional “crowd funding licence” – which none would have at this early stage I guess, given that the legislation has just been passed).

These FSL gatekeepers are called CSF Intermediaries and the company seeking to raise funding has to send significant documentation to the CSF Intermediary for review.  If accepted by the CSF Intermediary, the Offer Document is then lodged on the CSF Intermediary’s website.

Retail investors can only invest $10,000 every 12 months.  Other investors (including sophisticated investors) are not restricted to any minimum amount.

The documentation has to convince the CSF Intermediary that the company is in an “investment ready state” and that the company’s directors and management team understand modern corporate practice and the immense responsibility of using other people’s money in their business activities.

Companies aspiring to raise capital from Crowd-Sourced Funding will require:

  • Market Research – which identifies the potential for the company’s products or services and at what price.
  • Marketing Plan – which will identify the marketing activities that are proposed to be undertaken together with cost estimates for each marketing activity.
  • Management Plan – which will identify key management positions within the organisation including job descriptions. If some persons have already been appointed a CV for the appointees should be prepared so that it can be incorporated within the documents.
  • Team Plan – a summary of the team members including job descriptions/summary of responsibilities should be prepared.
  • Corporate Chart – an overview of the management and team structure proposed for the company.
  • Intellectual Property Summary – identifying the ownership of intellectual property and details of any patents, trademarks, confidentiality agreements and licenses held by the company.
  • Research and Development Strategy – a summary of the processes that have been implemented for the control of research and development being undertaken within the company.
  • Business Plan – incorporating the earlier documentation and identifying the director’s’ vision for the company for at least the next three years.
  • Budgets and Cashflow Forecasts – financial projections on the vision for the company outlined in the business plan and the other supporting documents for the next three years highlighting projected capital to be raised and identifying how the capital raised will be spent by the company.
  • Information Memorandum – the information memorandum is a “précis” of the business plan document including information required to be produced by the Corporations Act.

We can assist with all these activities, contact or call us on 1800773643.

EARLY STAGE INVESTOR COMPANY SUMMARY

WHAT IS AN EARLY STAGE INVESTOR COMPANY (ESIC)?

In order for qualifying investors to obtain ESIC tax concessions, the company first has to qualify as an ESIC.

An ESIC must be:

  • A company:
  • Recently incorporated or registered (in the last three income years) or incorporated in the last six income years and had total expenses (including 100% subsidiaries) of less than $1m for the prior three income years
  • Had prior year total expenses (including 100% subsidiaries) of less than $1m
  • Had prior year assessable income (including 100% subsidiaries) less than $200,000
  • Must not be listed on any stock exchange (Australia or overseas)

The innovation criteria can be satisfied by gaining 100 points one of the following ways:

A.  The 100 point innovation test (can combine to achieve 100).

Criteria

Points

At least 50 % of the expenses of previous income year are an eligible notional deduction for the R&D tax incentive.

75

At least 15 % of the expenses of previous income year are an eligible notional deduction for the R&D tax incentive.

50

Receipt of Accelerating Commercialisation Grant

75

Involvement in eligible, competitive Accelerator Programme

50

Previous non-affiliate, 3rd party investment ≥ $50,000

50

Enforceable IP rights (e.g. patent)

25-50

Written co-development/ commercialisation agreement with eligible research body or research service provider

25

B. Demonstrating the five principles set out in the Act; OR

C. Seeking a ruling from the Australian Taxation Office (ATO)

…that you are an “ESIC” (most people would go for a ruling rather than rely on self-assessing the five principles).

 

WHAT ARE THE CONCESSIONS?

Qualifying investors get a 20% rebate (20% X their equity contribution) which reduces their tax bill in that year by the same amount.

Sophisticated investors

Can put in any amount, but their rebate is capped at $200K per annum (so rebate runs out over $1 Million equity contribution), if sophisticated investors put in more than $1M they still get a $200K rebate and the CGT exemption for all of their equity (so the CGT exemption is not capped).  The $2M/20 investor threshold (which means you don’t need a disclosure doc) applies per annum, so an ESIC can have up to 20 investors tipping in $50K per annum, but of course 20 investors all tipping in $50K will only get $1 M.

Other (not sophisticated investors)

Are capped at $50K equity contribution per year (so their rebate runs out at $10K per annum), also the section reads that if a non-sophisticated investor  puts in more than $50K a year, they miss  out on getting any rebate at all (360-20).  If non-sophisticated investors wanted to put in more than $50K we would advise them to split the contribution with their spouse or another person.

Note that you have to provide an IM to non-sophisticated investors only.

 

Sophisticated Investors

Not Sophisticated Investors

Must have Gross income of at least $250,000 for each of the last two financial years and net assets of at least $2.5 million and a Qualified Accountant’s certificate saying so.

 

X

Must be given an IM  – Corps Law

N/A

X Unless under the $2M/20 investor per annum threshold.

Maximum Number of Investors (of any type) –Corps Law

N/A

$2M/20 investors per annum unless there is an IM

Maximum amount of investment – Corps Law

N/A

$2M (between 20 investors collectively) if under the 20 per year IM exemption, otherwise no limit if given an IM

Maximum amount of investment subject to 20%tax-payable offset

$1M

$50,000

Maximum amount of investment subject to CGTexemption if shares sold 1>10 years

No limit

$50,000

Again, we can assist with any of these activities, contact us or call us on 1800773643.

By |2017-10-23T11:33:59+00:00October 23rd, 2017|Advisory, Grants|0 Comments

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