Question 3 In the CSEF context, what changes, if any, should be made, and for what reasons, to the regulation of:
(i) proprietary companies
(ii) public companies
(iii) managed investment schemes. In considering (c), should the disclosure obligations of issuers to investors differ, in principle, if investors are investing directly (as equity holders in the issuer) or indirectly (through acquiring an interest in a managed investment scheme) and if so, how and why?
i) Within a CSEF context the resulting business would be similar to a private company as it stands today. It could in fact remain a private company if the lift to general solicitation, accredited investors and non-employee shareholding was lifted under a proposed new Chapter of the Corporations Act.
ii) Given that CSEF context refers to seed and elatively small amounts of capital. The decisions of which, would not generally put thousands of people out of work or expose Australia wide economic repercussion – such as a failing bank or public company might.
In light of the role and importance of large companies with their commensurate value on exchanges, it seems appropriate to leave public company governance (which is generally accepted as high quality) in tact. If it aint broke don’t fix it.
It would be anticipated that a successful CSEF venture would mature and if requiring greater sums of money may progress through established Angel, VC, and Public Listing Options along with being targets of trade-sales. These further investment rounds and exit rounds can remain largely unaffected as CSEF is designed to untap economic activity in the start-up and local community resilience space, which is at the other end of the spectrum in terms of scale to the Public Company and the role it plays.
iii) In light of my comments above that successful start-up businesses may want to grow and be targets for Angels, VC’s and larger sources of capital having thousands of direct shareholders in the singular company may be arduous. This can potentially be solved by the creation of a “stapled” trust or special purpose investment vehicle that holds the proportional representation of the crowd in a singular shareholding. This special purpose vehicle attached to the company founded under CSEF legislation may have some mechanisms to allow polling of its “unit-holders” or composite shareholders and may be able to appoint either executive or non-executive voting rights in conjunction with the Founders and Executive
BUT, The creation of the “stapled” trust or Special Purpose Investment Vehicle would not necessarily constitute a Managed Investment Scheme. As this entity is confined to the operations of a singular business investment and would not be able to participate in other trade such as employing people or being party to commercial contracts. The idea being to provide an aggregation point to keep the shareholder register small and manageable for the trading company that is the ultimate beneficiary of funds raised in the CSEF context. Which, of course should theoretically be the best return for shareholders, regardless of them being listed directly or “pooled” as discussed above.
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