The Government has listened to the Senate Submission made by Pitcher Partners (read our submission), and has made the Bill (click here) more focused on the middle market. Accordingly, the regime, originally limited to entities with only $5 million of assets and turnover, has been expanded to include entities that have less than $25 million of assets and turnover.
Furthermore, the legislation allows existing private companies to convert into CSF public companies in order to raise capital under the CSF regime. This means that most private groups will now be able to access capital under the new regime.
Under the Bill, an eligible CSF company can raise up to $5 million from retail investors each year, with each investor able to invest up to $10,000 per investment. If the CSF regime is successful, it will provide a new source of alternative finance for businesses in the middle market.
A number of reporting and corporate governance concessions are also provided to a CSF company. For example, an auditor is not required to be appointed unless the total CSF capital raising by the entity is more than $1 million (life to date). An AGM does not need to be held within the first 18 months of CSF registration. For the first five years, accounts can also be prepared and made available online. However, in order to obtain access to these concessions, a CSF capital raising must occur within 12 months of the entity registering as a CSF entity. All of the concessions exist for a limited period of five years.
It is fantastic that the Government has extended the scope of the regime to larger SME entities looking to raise capital. However, it is a little disappointing that the Government has not relaxed some of the corporate governance requirements (such as having a review rather than an audit, or extending the five year concession period).
Furthermore, the regime is limited to ordinary shares. As a starting point, this may result in a limit on the CSF market (on commencement of the regime) from both a supply and demand perspective. For example, this would prohibit project financing under a CSF regime.
Furthermore, limiting the CSF regime to ordinary shares places a higher level of risk on the CSF investors, as compared to a regime that would be open to preference shares. That is, as a redeemable preference share usually pays dividend and capital returns to investors in preference to ordinary shares, this type of financing instrument is typically more preferable from an investor’s perspective. This is especially the case where there is a limited market for exit and information.
The ability to access a preferred fixed return also provides some form of security over the “founding” shareholders, who will usually hold ordinary shares and will have an incentive to drive returns to the CSF investors who would need to be paid in preference to ordinary shares. Accordingly, we believe that it will be critical (over time) for the Government to increase this scope.
That said, the Government is committed to reviewing these aspects of the CSF regime in the future and we are hopeful that over time the CSF regime may develop into a viable alternative funding model for middle market entities.