In the Startup Founder Research 2018 report, KPMG's High Growth Ventures team discovered that access to funding is one of the top three barriers to the success of a startup. However, this new development will allow the necessary legal infrastructure for early stage proprietary companies to access new avenues of capital raising, and potentially overcome these barriers. The ground for growing and developing a startup company has never been more fertile, and it seems the fruits of CSEF being available for proprietary companies are soon to be borne.
However, these legislative developments have also triggered a series of obligations to ensure adequate investor protection. Startup founders should note some of the key legislative changes which include the following:
- Annual financial and directors’ reports to be issued: small proprietary companies are generally not required to issue annual financial and directors’ reports unless otherwise directed to do so (by their shareholders or the Australian Securities and Investments Commission (ASIC)) or, in some instances, when they are controlled by a foreign company. However, proprietary companies that have CSEF shareholders will be required to prepare these reports in accordance with the accounting standards.
- Financial statements to be audited for raisings of over $3 million: like annual financial and directors’ reports, small proprietary companies are also generally not required to have their financial statements audited. However, if a proprietary company raises more than $3 million from CSEF offers, they will be required to have their financial statements audited.
- Subject to related party transaction rules in Chapter 2E of the Corporations Act 2001 (Cth): to provide investors with adequate protection against fraud, proprietary companies that have CSEF shareholders will be subject to the related party transaction rules in Chapter 2E of the Corporations Act 2001 (Cth) (CA).
- Subject to takeovers rules in Chapter 6 of the Corporations Act 2001 (Cth): under the current law, proprietary companies cannot have more than 50 non-employee shareholders. However, to circumvent any future issues that may arise from proprietary companies accessing CSEF, the new law exempts proprietary companies with CSEF shareholders from the takeover rules in Chapter 6 of the CA.
- Records to be kept in company register: each CSEF offer and the details of that offer made by the proprietary company will have to be recorded in the company register.
- Impact on existing framework: the law has been amended such that eligible public companies that access CSEF, including those who currently take advantage of the exemptions granted under the old framework, will not be required to have their financial statements audited until they have also raised more than $3 million.