Issue 003 Crowd-Sourced Funding Now Available for SMEs
The long-awaited legislation for Crowd-Sourced Funding becomes operational from 29 September 2017. This is great news for the small/medium enterprise community who have long suffered from a disadvantage in that they have been unable to go to the market to raise capital. Instead many small/medium enterprise operators have had to take out second and third mortgages on their homes, borrow from relatives and friends and run up large debts on credit cards so that they were able to finance their business operations.
If you need more capital for your business – Crowd-Sourced Funding Equity Raising may be the answer!
The Crowd-Sourced Funding Legislation in its current state allows Propriety Limited Companies that have converted to an Unlisted Public Company (which the government has promised can be done fairly easily and for not much cost) to raise up to $5 million every twelve months from the “crowd” if the company’s directors wish.
The government has also announced that it is seriously looking at enabling Proprietary Limited Companies to utilise Crowd-Sourced Funding without having to become an Unlisted Public Company. The government has released an “Exposure Draft” on this proposed change to the legislation with public comments closing on 6 June 2017. When you examine the timetable for legislation to be passed and then implemented it is difficult to foresee that even if passed by Parliament the Propriety Limited Company option would be available before March/April 2018.
In the meanwhile small/medium enterprises, which have converted to an Unlisted Public Company, will be able to raise capital utilising Crowd-Sourced Funding from 29 September 2017.
Eligible companies must have a group turnover of less than $25 million per annum and have group assets with a gross value of less than $25 million. Companies will also need a “good story” as to what they need the money for and how the directors envisage that the company is going to trade over the next few years.
Company directors are going to have to undertake some “quality planning” to visualise the “capital raising journey”. The “journey” should commence with a “vision of what the directors envisage the company could look like if it was able to raise capital”.
Key questions to be answered include:
- What do you want to achieve in your business?
- What is your short-term plan?
- What is your plan for the next two to three years?
- What is the CEO’s dream of what this business will look like in the future?
The next step is to prepare an honest SWOT (Strengths, Weaknesses, Opportunities and Threats Analysis) on the business and the directors’ ideas.
Once the directors have established the vision for the company they could then move to the next stage which is the “market review”:
- Who are the current customers?
- What are they paying for the company’s products? What do they think about the company’s products? What geographical locations are these customers from?
- Who are the potential customers?
- Who are the competitors to the company?
At this stage it will be a good idea for the directors to get some advice from an accountant who is experienced in Business Advisory Services who will be able to offer you advice on your “Crowd-Sourced Funding Equity Raising Journey”:
- The directors will need to understand how Crowd-Sourced Funding operates, and the documentation that the directors are going to need to be able to produce and formulate the company's Crowd-Sourced Funding Offer Document.
- If the Directors do not have a recent market review document this is where the journey will commence. The directors will need to appoint a market researcher to carry out research on the current and projected markets.
- Following the market research it will be necessary for a consultant to prepare a marketing plan which will identify the activities and costs for those activities that the company will need to implement to create an awareness of the company’s products and services.
- Your appointed accountant will then be able to assist you in the next phase of the journey which relates to items:
- Corporate Chart – directors, managers, team;
- Business Plan – articulating the vision for the next three years;
- Budgets – the performance requirements for the Business Plan to be achieved;
- Cash Flow Forecasts – including how much capital the directors would like to raise so that the funds raised can be utilised to implement the businesses vision;
- Company Valuation (what is the realistic value based on a reputable valuation method);
- Share price calculation (based on the Company Valuation and the number of shares to be issued);
- Information Memorandum (require by the Corporations Act);
- and then the Crowd-Sourced Funding Offer Document will be able to be finalised.
Directors will also need to finalise discussions with a Crowd-Sourced Funding Intermediary who the government has appointed as the “Gatekeepers” for the operation of Crowd-Sourced Funding Equity Raising. There is no direct involvement by the Australian Securities and Investments Commission (ASIC). The Crowd-Sourced Funding Intermediary has a responsibility to check the companies, that wish to raise capital, have complied with the legislation and that the CSF Offer Document has been prepared based on the key information from the company's records and forecasts, as summarised earlier.
The CSF Intermediary is responsible for checking all of the documentation and when he/she is satisfied the Intermediary can then place the CSF Offer Document, together with all supporting information, onto their website where potential investors are able to view the information before deciding whether to make an investment.
Directors of companies need to appreciate that the legislation requires fairly detailed disclosures if the company, a director, officer or manager has had any previous “problems” with ASIC. The documents submitted, as part of the CSF Offer Document, will be placed on the CSF Intermediary’s website and will be available for review by any member of the public who logs on to the Intermediary’s website.
The Crowd-Sourced Funding Legislation is primarily targeted at “retail investors” who traditionally have had difficulty in being able to directly invest in new emerging companies and established private companies.
That opportunity is now available to retail investors who can invest up to $10,000 every twelve months per company, if they wish. The legislation imposes a number of warnings to advise retail investors of the marketplace risks that all investors need to be aware of, but particularly a Crowd-Sourced Funding Company, because there is no necessity to produce a formal prospectus nor undertake the normal investment criteria for a Listed Public Company.
If a company’s directors were interested in being able to list their company’s Offer Document on 29 September 2017 or shortly thereafter there is a significant amount of work to be undertaken to get the Crowd-Sourced Funding Offer Document finalised and reviewed by the CSF Intermediary so that the listing can be made on 29 September 2017 or shortly thereafter.
A suggested timetable is as follows:
- June 2017
Market Research and Marketing Plan to be finalised
Review of intellectual property
Review incorporating patents, trademarks, copyright material, trade secrets to be summarised so that pertinent details can be included in the CSF Offer Document.
- July 2017
Preparation of Budget, Cash Flow Forecasts, company valuation, share price determination. Discussions with CSF Intermediaries to enable the directors to select an Intermediary that they are comfortable with.
- August 2017
Preparation of the company’s Corporate Chart and Business Plan.
Preparation of the draft CSF Offer Document.
- September 2017:
Finalisation of the CSF Offer Document.
Discussions with the CSF Intermediary.
Submission of the CSF Offer Document to the Intermediary for review.
Making any amendments that the Intermediary requests so that the final document is ready for placement on the Intermediary’s website on 29 September or shortly thereafter if that’s what the directors would like to occur.
Are you interested in this concept of being able to raise capital from Crowd-Sourced Funding Equity Raising? If so we invite you to visit www.esssmallbusiness.com.au where we have various material available for you to purchase with some free material available for you to read.
We can also supply you a list of accountants in or near your postcode who are interested in supplying services to companies that wish to utilise the Crowd-Sourced Funding Equity Raising Legislation to assist companies.
If you wish to receive future editions in the Empowering SMEs series, you can visit our iTunes – Podcasts - Empowering SMEs and subscribe to our podcasts. If you have any questions or suggestions on future items to be covered in Empowering SMEs, please don’t hesitate to contact us.
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Empowering SMEs Episode 003 - Crowd-Sourced Funding Now Available for SMEs
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