Should any accommodation for CSEF in the Corporations Act be in the form of incremental adjustments to the existing provisions, or be in the form of a self-contained regulatory regime for CSEF?
The answer to this question will vary depending on who is making the submission. This submission poses the idea that it is right to make fresh legislation to govern CSEF. This will mean more work by the regulator and industry initially but will be a better, clearer, smarter move than legislative creep.
The evidence of those internationally making incremental adjustment doesn’t support the argument for incremental legislation. The US has phased in 3 regulatory sets of changes in Acts. This is making money for lawyers and not being as effective as it could be.
A clearer set of rules in the UK has provided greater efficiency in their market when compared with US when it comes to CSEF.
The obvious drawback back of incremental adjustment is that it forces platforms (Intermediaries) Issuers and Investors to have a changing landscape. Some settling in of the changes just made are unsettled with further changes. This reduces confidence in this investment class because the question of doubt of the regulatory environment keeps shifting.
A less obvious issue with incorporating changes to existing regulatory regimes as governed by the Corporations Act is that it will allow existing businesses to change their current structures. If we make fresh legislation for CSEF and aim CSEF only at newly created vehicles within that legislation then everyone who is currently in the market stays in the game rules that they entered into already.
Lets look at an example. If CSEF legislation is made through relaxing or extending provisions of the current Corporations Act then all private companies have something new to consider – massive impact. If legislation is made just for new companies that wish to use CSEF in their “birthing” then the rest of the economy motors on unaffected and not distracted from their core business.
Taking the example further, there may be structures like co-ops that currently operate in a well-governed regime. If you create CSEF legislation within the existing regime, these co-ops may try and “bulk-up balance sheets” and “create scale” by using CSEF to fund expansion.
The transition of co-ops moving into a CSEF context would reduce the co-ops reporting requirements and raise a risk that wasn’t there before. Let alone the risk to existing co-op members that a co-op enters into if it intends taking their capital mixing it with CSEF investors and embarking on ambitious business plans.
So as to prevent upheaval with the introduction of incremental changes, legislation would provide only for new businesses that start their first day within a fresh regulatory framework. Existing businesses would have to be excluded.
A self contained regulatory regime needs to be defined (even broadly) for it to be on the table and so included here is a method. There may be more appropriate methods than this develop. But this could work…
Firstly you need to create two types of new entity.
•A Special Purpose Vehicle (SPV) is a new entity and is created by an Issuer when they wish to raise CSEF.
•The Issuers SPV will become the commercial vehicle (if funded) that offers equity via the SPIV and operates day-to-day like a Pty Ltd.
•The SPV is allowed to generally solicit, to anyone (regardless of sophistication) for any amount below $500,000.
•Crowd funds will enter via a Special Purpose Investment Vehicle (SPIV).
•The SPIV will have rights (equity) in the SPV and the SPV obligations (disclosure and reporting) to the SPIV that the Licensed Intermediary will process and enforce through agreed procedures.
•A SPV may be “closed” from funding on any Licensed Intermediaries after receiving funding from CSEF sources of no more than $5million
•A venture that is started as a SPV with a stapled SPIV seeking further funds in excess of $5m is like any other business and would seek Angel Funding or similar methods of financing according to their needs.
•A “closed” SPV Issue could according to the agreement with the SPIV be purchased by the SPIV for a pre-disclosed sum – turning full ownership over to the SPIV.
•The use of SPV-SPIV structures is particularly useful for local community projects where an Issuer may initiate the project and then sell the project to the local community that uses it and who are also SPIV members.
•The use of SPV-SPIV entities would be no hindrance to start-ups seeking later rounds of funding as they grow, as the later-round of Investors can buy directly into the SPV (as if it were a private Pty Ltd company) and the SPIV carries the CSEF-raised potion on behalf of the SPIV members.
•The use of the SPV-SPIV set of entities is confined to new businesses. Yet to be initiated.
•Existing – already operating or with 2 or more shareholders or that have lodged tax returns – could not raise funds using SPV-SPIV entities.
•Existing businesses already operating could raise funds under the exemption provided for ASSOB or through established Angel Networks etc
Next would be required new legislation to govern the entity rights:
•A SPV can generally solicit as long as the declare they are a SPV in their advertising
•A SPV can not raise CSEF funding directly only via SPIV and only via Licensed Intermediary
•A SPV otherwise works like a Pty Ltd
•A SPIV can have unlimited numbers of non-employee shareholders
•A SPIV cannot employ or engage in any commercial agreement aside from the agreement with SPIV, but this may include a trigger that allows the SPIV to assume full ownership of the SPV under certain circumstances
•A SPIV is open to all investors regardless of sophistication
•A SPIV cannot have a single investor, must be plural
•A SPIV is otherwise like a Trust where it vests returns in full to the members i.e the people who tipped in funds
To manage the market and enforce the new laws for new entities you’ll need a Market Maker or Licensed Intermediary with the following characteristics:
•Licensed Intermediaries provide the “board” on, which SPV’s list and meet the crowd
•Licensed by Regulator, renewal based on Conditions
•Licensed Intermediaries provide no advice and reduce fraudulent activity through processes
•Intermediaries role
–vetting out fraud and qualifying “fit for CSEF policies”
–counting statistics for use in various ways
–Ensuring SPV-SPIV reporting obligations are met and enforceability capacity where not
–“Close-outs” for SPV’s that “graduate” from CSEF qualification
–the means of imposing government limits on Investors and
–ultimately the role of ‘tax collector’.
In order for these laws to integrate with the existing Corporations Act you must consider the process:
1.Issuer creates SPV-SPIV
2.Campaign advertised
3.Investor invests in SPIV
4.SPIV gives funds to SPV, SPV gives equity to SPIV
Then,
1.SPV operates like Pty Ltd returning funds to owners – or
2.SPV graduates structure (to Pty Ltd or Ltd) and carries on with SPIV as shareholder, SPV can change to Pty Ltd of Ltd so long as it is without diminution of SPIV rights – or
3.SPIV can purchase SPV on certain triggers for dilution disclosed at the point of funding
Whilst the above processes may seem tiresome on paper – they are actually feasible and quite simple. Simplicity is key to clarity and clarity rather than favouritism is what is needed for CSEF to be a good economic force liberating time and capital.
The fundamental reason to not make incremental changes to existing legislation is that it DOES NOT make business at large simpler because existing business can participate in any new framework.
Legislators need to view CSEF only within a start-up context. However, they should not limit their imaginations to tech start-ups which are notoriously high-risk, high-return. Instead they should look to see how community groups, local economic groups will use fresh CSEF legislation co-own local infrastructure that provides services close to the point of production. This sort of local economic stimulus is low risk / low return and is more often a facilitator of cheaper and better services for Investors who are also consumers of the product.
As an example, you can imagine many 10,000 person communities where 1000 people (10%) might be willing to invest $1000 each into a Energy project for capture, storage and distribution locally. The combined $1m allows the community to build something that not only will the 1000 investors use but so would the remaining 90% of their neighbours if it were to exist. Each community may want projects specific to their area for Food, Education, Energy, Water, Waste, Social Services and would given fresh CSEF legislation have the means of creating these pieces of infrastructure which because they have a close point of production and consumption are cheaper than alternatives purchased outside the community.
These are the sorts of business models that the UK is seeing emerge in addition to the high tech start ups. The US in the meantime has not seen growth in this local economic sector despite the Jobs Act being inspired in part by this local infrastructure ideal.
Australia has 3 potential CSEF options
1. Do nothing – favoured by those who believe that if it ain’t broke don’t fix it. They rightly point out that the Australian economy is the envy of the world
2. Make incremental (retarded) changes within existing framework. Causing confusion across large parts of the established business envirnment.
3. Do it right with a fresh regime allowable only for new businesses.
This includes
– 2 new entity types specific to new CSEF businesses
– new laws governing these types of entity which mirror a pty ltd and “stapled” trust whilst relaxing laws on solicitation and sophistication to investors.
– new licensed market makers called intermediaries whose processes govern the market bahviour.
The special entities purposefully can integrate to other corp structures for further funding rounds or exit options that are newly created by the crowd such as dilution of the issuer by the crowd ownership vehicle over time – a community buy out is an example.
The answer to this question will vary depending on who is making the submission. This submission poses the idea that it is right to make fresh legislation to govern CSEF. This will mean more work by the regulator and industry initially but will be a better, clearer, smarter move than legislative creep.
The evidence of those internationally making incremental adjustment doesn’t support the argument for incremental legislation. The US has phased in 3 regulatory sets of changes in Acts. This is making money for lawyers and not being as effective as it could be.
A clearer set of rules in the UK has provided greater efficiency in their market when compared with US when it comes to CSEF.
The obvious drawback back of incremental adjustment is that it forces platforms (Intermediaries) Issuers and Investors to have a changing landscape. Some settling in of the changes just made are unsettled with further changes. This reduces confidence in this investment class because the question of doubt of the regulatory environment keeps shifting.
A less obvious issue with incorporating changes to existing regulatory regimes as governed by the Corporations Act is that it will allow existing businesses to change their current structures. If we make fresh legislation for CSEF and aim CSEF only at newly created vehicles within that legislation then everyone who is currently in the market stays in the game rules that they entered into already.
Lets look at an example. If CSEF legislation is made through relaxing or extending provisions of the current Corporations Act then all private companies have something new to consider – massive impact. If legislation is made just for new companies that wish to use CSEF in their “birthing” then the rest of the economy motors on unaffected and not distracted from their core business.
Taking the example further, there may be structures like co-ops that currently operate in a well-governed regime. If you create CSEF legislation within the existing regime, these co-ops may try and “bulk-up balance sheets” and “create scale” by using CSEF to fund expansion.
The transition of co-ops moving into a CSEF context would reduce the co-ops reporting requirements and raise a risk that wasn’t there before. Let alone the risk to existing co-op members that a co-op enters into if it intends taking their capital mixing it with CSEF investors and embarking on ambitious business plans.
So as to prevent upheaval with the introduction of incremental changes, legislation would provide only for new businesses that start their first day within a fresh regulatory framework. Existing businesses would have to be excluded.
A self contained regulatory regime needs to be defined (even broadly) for it to be on the table and so included here is a method. There may be more appropriate methods than this develop. But this could work…
Firstly you need to create two types of new entity.
•A Special Purpose Vehicle (SPV) is a new entity and is created by an Issuer when they wish to raise CSEF.
•The Issuers SPV will become the commercial vehicle (if funded) that offers equity via the SPIV and operates day-to-day like a Pty Ltd.
•The SPV is allowed to generally solicit, to anyone (regardless of sophistication) for any amount below $500,000.
•Crowd funds will enter via a Special Purpose Investment Vehicle (SPIV).
•The SPIV will have rights (equity) in the SPV and the SPV obligations (disclosure and reporting) to the SPIV that the Licensed Intermediary will process and enforce through agreed procedures.
•A SPV may be “closed” from funding on any Licensed Intermediaries after receiving funding from CSEF sources of no more than $5million
•A venture that is started as a SPV with a stapled SPIV seeking further funds in excess of $5m is like any other business and would seek Angel Funding or similar methods of financing according to their needs.
•A “closed” SPV Issue could according to the agreement with the SPIV be purchased by the SPIV for a pre-disclosed sum – turning full ownership over to the SPIV.
•The use of SPV-SPIV structures is particularly useful for local community projects where an Issuer may initiate the project and then sell the project to the local community that uses it and who are also SPIV members.
•The use of SPV-SPIV entities would be no hindrance to start-ups seeking later rounds of funding as they grow, as the later-round of Investors can buy directly into the SPV (as if it were a private Pty Ltd company) and the SPIV carries the CSEF-raised potion on behalf of the SPIV members.
•The use of the SPV-SPIV set of entities is confined to new businesses. Yet to be initiated.
•Existing – already operating or with 2 or more shareholders or that have lodged tax returns – could not raise funds using SPV-SPIV entities.
•Existing businesses already operating could raise funds under the exemption provided for ASSOB or through established Angel Networks etc
Next would be required new legislation to govern the entity rights:
•A SPV can generally solicit as long as the declare they are a SPV in their advertising
•A SPV can not raise CSEF funding directly only via SPIV and only via Licensed Intermediary
•A SPV otherwise works like a Pty Ltd
•A SPIV can have unlimited numbers of non-employee shareholders
•A SPIV cannot employ or engage in any commercial agreement aside from the agreement with SPIV, but this may include a trigger that allows the SPIV to assume full ownership of the SPV under certain circumstances
•A SPIV is open to all investors regardless of sophistication
•A SPIV cannot have a single investor, must be plural
•A SPIV is otherwise like a Trust where it vests returns in full to the members i.e the people who tipped in funds
To manage the market and enforce the new laws for new entities you’ll need a Market Maker or Licensed Intermediary with the following characteristics:
•Licensed Intermediaries provide the “board” on, which SPV’s list and meet the crowd
•Licensed by Regulator, renewal based on Conditions
•Licensed Intermediaries provide no advice and reduce fraudulent activity through processes
•Intermediaries role
–vetting out fraud and qualifying “fit for CSEF policies”
–counting statistics for use in various ways
–Ensuring SPV-SPIV reporting obligations are met and enforceability capacity where not
–“Close-outs” for SPV’s that “graduate” from CSEF qualification
–the means of imposing government limits on Investors and
–ultimately the role of ‘tax collector’.
In order for these laws to integrate with the existing Corporations Act you must consider the process:
1.Issuer creates SPV-SPIV
2.Campaign advertised
3.Investor invests in SPIV
4.SPIV gives funds to SPV, SPV gives equity to SPIV
Then,
1.SPV operates like Pty Ltd returning funds to owners – or
2.SPV graduates structure (to Pty Ltd or Ltd) and carries on with SPIV as shareholder, SPV can change to Pty Ltd of Ltd so long as it is without diminution of SPIV rights – or
3.SPIV can purchase SPV on certain triggers for dilution disclosed at the point of funding
Whilst the above processes may seem tiresome on paper – they are actually feasible and quite simple. Simplicity is key to clarity and clarity rather than favouritism is what is needed for CSEF to be a good economic force liberating time and capital.
The fundamental reason to not make incremental changes to existing legislation is that it DOES NOT make business at large simpler because existing business can participate in any new framework.
Legislators need to view CSEF only within a start-up context. However, they should not limit their imaginations to tech start-ups which are notoriously high-risk, high-return. Instead they should look to see how community groups, local economic groups will use fresh CSEF legislation co-own local infrastructure that provides services close to the point of production. This sort of local economic stimulus is low risk / low return and is more often a facilitator of cheaper and better services for Investors who are also consumers of the product.
As an example, you can imagine many 10,000 person communities where 1000 people (10%) might be willing to invest $1000 each into a Energy project for capture, storage and distribution locally. The combined $1m allows the community to build something that not only will the 1000 investors use but so would the remaining 90% of their neighbours if it were to exist. Each community may want projects specific to their area for Food, Education, Energy, Water, Waste, Social Services and would given fresh CSEF legislation have the means of creating these pieces of infrastructure which because they have a close point of production and consumption are cheaper than alternatives purchased outside the community.
These are the sorts of business models that the UK is seeing emerge in addition to the high tech start ups. The US in the meantime has not seen growth in this local economic sector despite the Jobs Act being inspired in part by this local infrastructure ideal.
Australia has 3 potential CSEF options
1. Do nothing – favoured by those who believe that if it ain’t broke don’t fix it. They rightly point out that the Australian economy is the envy of the world
2. Make incremental (retarded) changes within existing framework. Causing confusion across large parts of the established business envirnment.
3. Do it right with a fresh regime allowable only for new businesses.
This includes
– 2 new entity types specific to new CSEF businesses
– new laws governing these types of entity which mirror a pty ltd and “stapled” trust whilst relaxing laws on solicitation and sophistication to investors.
– new licensed market makers called intermediaries whose processes govern the market bahviour.
The special entities purposefully can integrate to other corp structures for further funding rounds or exit options that are newly created by the crowd such as dilution of the issuer by the crowd ownership vehicle over time – a community buy out is an example.