Category: Crowdfunding

Italian Small and Medium-Sized Enterprises to tap into Equity Crowdfunding
Proprietary companies to be able to access crowd sourced funding
Part 1: What is the new Australian crowd sourced funding regime?
Part 2: Looking to raise capital under the new Australian crowd sourced funding regime?
Part 3: Looking to become a CSF intermediary under the new Australian crowd sourced funding regime?
FinTech in Islamic Finance public lecture
Update on post-implementation review of UK loan and investment based crowdfunding market
UK FCA to publish consultation paper on new rules for investment and loan-based crowdfunding platforms
Global equity crowdfunding developments
Future of Fintech Regulations in the US

Italian Small and Medium-Sized Enterprises to tap into Equity Crowdfunding

By Giampaolo Salsi and Riccardo Malaguti

On June 15, 2017, the Italian Senate approved the conversion into law of Law Decree No. 50, dated April 24, 2017, whereby small and medium-sized enterprises (“SMEs”) are given recourse to equity crowdfunding that was originally restricted to innovative start-ups. In the wake of the recent reforms aimed at providing SMEs with new funding channels, the said piece of legislation has introduced into the Italian legal framework the possibility for SMEs, established in the form of limited liability companies (“società a responsabilità limitata” or “SRLs”), to offer their quotas for subscription via dedicated Web portals for the raising of capital — up to a maximum of €5 million per company.

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Proprietary companies to be able to access crowd sourced funding

By Jim Bulling and Rania Seoud

On 9 May 2017, the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 (Bill) was released for public consultation. If passed into law, the Bill will allow proprietary companies that meet eligibility requirements to access crowd-sourced funding (CSF).

As detailed in a recent blog post on the FinTech Law Watch, CSF will become available in Australia on 28 September 2017 due to the Corporations Amendment (Crowd Sourced Funding) 2016 (Cth) (Act). However, the Act limits the availability of crowd-sourced funding to public unlisted companies.

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Part 1: What is the new Australian crowd sourced funding regime?

By Rania Seoud, Claire de Koeyer and Daniel Knight

Crowd-sourced funding (CSF) is a developing alternative to traditional capital funding methods, allowing eligible early stage / start-up companies to raise funds from a larger pool of investors without the need for costly disclosure documents such as a prospectus.

CSF took significant steps forward with  the Corporations Amendment (Crowd Sourced Funding) 2016 (Cth) (Act) that establishes a regulatory framework to facilitate CSF by small, unlisted public companies in Australia receiving assent and coming into operation. The CSF regime takes effect from 28 September 2017.

The Act allows eligible unlisted public companies with an annual turnover or gross assets of up to $25 million to advertise their business plans on a licensed online crowd funding platform to raise up to $5 million in 12 month rolling periods. Investors receive a share of the company in return for their investment.

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Part 2: Looking to raise capital under the new Australian crowd sourced funding regime?

By Rania Seoud, Andrew Gaffney and Daniel Knight

While the CSF regime removes some of the existing regulatory barriers to capital raising, there are a number of other key considerations for eligible companies intending to utilise the CSF regime.  Below are just a few:

  • CSF intermediary platform requirements: Offers for a company’s securities must be made through an authorised CSF intermediary. At this point in time and apart from service fees, it is unclear whether a CSF intermediary will impose any other obligations on the company to be admitted onto their platform (e.g. due diligence, verification and CSF offer document sign off obligations).
  • Disclosure requirements: The CSF offer document must contain certain information required by the regulations which are yet to be released.
  • Liability: The Company and its individual directors and officers may be held liable for loss or damage suffered by a person due to a defective CSF offer document. Accordingly, it is important that you have a reasonable objective basis for the contents of the CSF offer document. In particular, you will need to be careful when providing financial forecasts and statements regarding future events.
  • Restrictions on advertising: There will be restrictions on advertising for the CSF offer.
  • How do you value your business: In practice, you will need to determine a pre-money valuation for your company to set an appropriate offer issue price.
  • Setting a minimum size for investment: While there is a maximum investment cap of $10,000 per investor per offer, to avoid having many shareholders with small parcels and the associated administrative burden, you may want to consider setting a minimum subscription amount.
  • Share buy-back mechanisms: Where certain requirements are met, companies utilising the CSF regime will be exempt from meeting higher corporate governance and reporting requirements applicable to public companies for a period of 5 years (e.g. annual audit and filing of financial statements). At the expiry of the 5 year period, the company may want to ensure that it has in place effective mechanisms to allow it to convert back to a proprietary company should the need arise (e.g. consider including share buy-back, share valuation mechanisms in the company’s constitutional documents).

You may find our article on CSF intermediaries and ASIC’s CSF Guidance of use. 

Part 3: Looking to become a CSF intermediary under the new Australian crowd sourced funding regime?

By Rania Seoud, Claire de Koeyer and Daniel Knight

Central to the new CSF regime is the inclusion of the AFS licence holder who acts as the intermediary (i.e. the gatekeeper). The intermediary must hold an AFSL with the correct authorisations in order to carry out this role. After 28 September 2017, ASIC will be able to accept AFS licence applications from entities wanting to provide CSF services.

Considering acting as a CSF intermediary? There are a number of things you may wish to consider, including:

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FinTech in Islamic Finance public lecture

By Jonathan Lawrence and Solomon Olukoya

The University of East London Centre for Islamic Finance, Law and Communities held a public lecture on 22 February 2017 focused on FinTech in Islamic Finance. The keynote speaker was Professor Volker Nienhaus, a Professor at the International Centre for Education in Islamic Finance in Malaysia. Professor Nienhaus dealt with four topics:

1. Islamic FinTech and crowdfunding regulations.

Research indicated that only three equity-based and two loan-based crowdfunding platforms were active and Shari’ah compliant in 2016. This was an indication that there was much more room for development in this area. FinTech in many Middle East countries is still unregulated despite recent movements in that direction via sandboxes and other methodologies.

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Update on post-implementation review of UK loan and investment based crowdfunding market

By Jonathan Lawrence

The UK’s Financial Conduct Authority (FCA) has given an update on the post-implementation review of the UK loan-based and investment-based crowdfunding market since current rules came into force in April 2014. The FCA says it believes it is appropriate to modify a number of rules for the market.

For both loan-based and investment-based crowdfunding platforms the FCA has found that, for example:

  • it is difficult for investors to compare platforms with each other or to compare crowdfunding with other asset classes due to complex and often unclear product offerings;
  • it is difficult for investors to assess the risks and returns of investing on a platform;
  • financial promotions do not always meet the FCA’s requirement to be ‘clear, fair and not misleading’; and
  • the complex structures of some firms introduce operational risks and/or conflicts of interest that are not being managed sufficiently.

In the loan-based crowdfunding market in particular, the FCA is concerned that, for example:

  • certain features, such as some of the provision funds used by platforms, introduce risks to investors that are not adequately disclosed and may not be sufficiently understood by investors;
  • the plans some firms have for wind-down in the event of their failure are inadequate to successfully run-off loan books to maturity; and
  • the FCA has challenged some firms to improve their client money handling standards.

The FCA plans to consult on more prescriptive requirements on the content and timing of disclosures by both loan-based and investment-based crowdfunding platforms. For loan-based crowdfunding the FCA also intends to consult on:

  • strengthening rules on wind-down plans;
  • additional requirements or restrictions on cross-platform investment; and
  • extending mortgage-lending standards to loan-based platforms.

The FCA’s ongoing research and investigatory work should be completed early in 2017. At that stage, the FCA will determine whether further consultation on rule changes is needed.

For the full feedback statement, please click here.

UK FCA to publish consultation paper on new rules for investment and loan-based crowdfunding platforms

By Tom R. Wallace

In December 2016 the UK FCA published a statement of its intention to publish a Consultation Paper in Q1 2017 proposing new rules for investment and loan-based crowdfunding platforms.

Based on information the FCA has gathered through a consultation ending in September 2016 and its supervision and authorisation of crowdfunding platforms, the FCA’s view is that aspects of the crowdfunding market currently pose some risks to its objectives. The FCA perceives risk of regulatory arbitrage in the loan-based sector, and potential for investors to misunderstand the nature of the products offered. While respondents to the FCA’s request for feedback rightly note that many of these risks existed when the FCA established the current crowdfunding regulatory framework in 2014, the FCA counters that the market has grown in significance and complexity since then.

While investment-based crowdfunding is facilitated entirely by fully-authorised firms, most loan-based crowdfunding firms, including the largest ones, have so far operated under interim permissions. The FCA notes that, while it has identified some issues about the investment-based crowdfunding market, most of its attention at this time is on issues in relation to loan-based crowdfunding.

Taken together with its other statements on the crowdfunding sector, the FCA is giving an indication of its perspective on the issues associated with the #crowdfunding market and, pending publication of consultations on the new rules, incumbents and innovators should take care to create legal, operational and compliance structures that are likely to align with the FCA’s direction of travel in this market.

The FCA frame this as an evolution of the existing regulatory framework, not a revolution, and I find the FCA’s depth of the knowledge about, objectives for and focus on the market to be a source of optimism for the future of the crowdfunding market in the UK for investors, incumbents and innovators.

Global equity crowdfunding developments

By Jim Bulling and Michelle Chasser

Australia’s equity crowdfunding reforms have been delayed due to the Australian federal election. After passing the House of Representatives back in February the Corporations Amendment (Crowd-sourced Funding) Bill 2015 lapsed in May when Parliament was dissolved. As the Turnbull Government was returned to power at the election it is likely the Bill will be reintroduced shortly. While crowdfunding changes have stalled in Australia developments have been continuing in the rest of the world .

Easier crowdfunding for FinTech start-ups in the USA has moved a step closer. The Fix Crowdfunding Act and the Supporting America’s Investors Act easily passed through the US House of Representatives on 6 July 2016 with bipartisan support and will now be introduced in the Senate. The Fix Crowdfunding Act will increase the maximum amount of money that a start-up can raise through crowdfunding from US$1 million to US$5 million. The Supporting America’s Investors Act increases the number of people allowed to invest in a qualifying venture capital fund from 100 up to 500. Read More

Future of Fintech Regulations in the US

By Charles Carter and Anthony (Tony) Yerry (ed. Cameron Abbott and Giles Whittaker)

Investment in financial technology (fintech) companies has surpassed US$24 billion worldwide since 2010, which consequently emphasises the importance of the relationship between fintech companies and regulators as they attempt to establish a culture of compliance while not stifling innovation.

As suggested by the industry experts according to The Wall Street Journal, the Office of the Comptroller of the Currency (OCC) may be the best federal agency to regulate fintech companies in the US. On March 31 the OCC during a speech at Harvard University on the innovation of the fintech industry released a white paper which attempts to launch formal discussions between regulators and the industry.

For more information and analysis of the OCC white paper please see K&L Gates’ e-alert here.

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