CSF refers to ‘crowd-sourced funding’. Through CSF, start-ups and small businesses can raise capital by seeking investments from a large group of people. A ‘CSF Shareholder’ is an individual or entity which has invested in the CSF. For their investment, which is generally a small amount, the CSF shareholder receives a security in the business. The security can be an ordinary share in the company. Individuals may invest in the company through a variety of platforms. Regardless of the method for CSF, there must be a certified and licence intermediary party operating the platform.
There are a variety of reasons a company may consider CSF. A full discussion of the various considerations is available in our guide here. Notably, for an investor and a shareholder, investing in a CSF carries a significant risk. Companies often use CSF in an early stage of development. This means investments can be highly speculative. They also carry an increased risk of loss. Further, a CSF shareholder’s security may be highly illiquid which prevents an early exit for the CSF Shareholder.
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CSF Regime
In, Australia, the Corporations Act 2001 (Cth) regulates and governs CSF. Significant reformation of the CSF regime occurred in 2017 and 2018. The amendments have widened the scope of companies that can seek to raise capital through CSF. The amendments have also ensured the protection of CSF shareholders when investing through CSF platforms. ASIC is responsible for enforcing CSF regulations. It prepares various regulatory guides, reports, consultation papers and other information for the protection of CSF shareholders.
Companies that can seek CSF
The recent amendments have broadened the criteria for a company that can seek CSF. Investors seeking to become CSF shareholders may now invest in unlisted public and proprietary companies. The company must have an annual revenue of less than $25 million.
A proprietary company is a private and unlisted company that has less than 50 shareholders who are not employees. Public companies do not have such a restriction and can have thousands of shareholders who are not employees. For a comprehensive guide on the difference between a proprietary company and a public company, you can refer to our guide ‘What’s The Difference Between Pty And Pty Ltd? (2022 Update)’.
Before the amendments in 2017, proprietary companies could not make an offer for CSF. As proprietary companies are the most popular form of companies in Australia, the amendment allows potential CSF shareholders greater access to investments.
Protections for CSF Shareholders
Companies that are not public traded on the share market can raise capital through CSF. However, as they are not publicly traded, they are not subject to the same requirements as publicly traded companies. This includes ASIC requirements for notices, annual reports and financial statements. However, the amendments to the Corporations Act introduced a variety of requirements to ensure the protection of CSF shareholders.
The CSF regime introduced a variety of protections for CSF shareholders. Firstly, a company is required to describe the possible risks associated with the CSF within its offer. It also required to provide information relating to the company and its finances.
Secondly, there is a statutory five day cooling off period. A CSF shareholder may negate the investment within this period.
Thirdly, the company is then required to lodge and file its financial and directors’ reports with ASIC.
Fourthly, the company must also keep records and track the CSF securities held by CSF shareholders. This applies regardless of the company being a huge proprietary company with some million dollar revenue or a much smaller proprietary company with a few hundred thousands in revenue. A CSF shareholder can have access to the annual reports on ASIC’s websites.
Lastly, the company must conduct an audit if it raises funds greater than $3 million through CSF.
