Crowd Funding, Small Offers and the Takeovers Code

17 April 2014

Crowd Funding, Small Offers and the Takeovers Code

Introduction

Yesterday, the Takeovers Panel issued a press release reminding issuers of small offers of securities and licensed intermediaries offering crowd funding services under the FMC Act of the need to seek advice about the impact of the Takeovers Code – when taking advantage of the exclusions from disclosure under the FMC Act to raise capital.

With Phase 1 of the FMC Act coming into force on 1 April, a number of new exclusions from disclosure for offers of financial products are becoming available. Some exclusions, such as for crowd funding through licensed intermediaries and for “small offers”, are aimed at making it easier for SMEs to raise capital. The objective of the Takeovers Panel press release was heighten awareness of the prospect that, by taking advantage of those exclusions to raise capital, of the fact that a company could become, or may already be, subject to the Takeovers Code and to other regulatory regimes in doing so.

Takeovers Code

A company becomes subject to the Takeovers Code as soon as it has 50 or more shareholders (holding voting shares) and 50 or more share parcels. However, the Panel has stated that it is not averse to companies deciding to structure their holdings so that they do not fall under the definition of ‘code company’, provided that the structuring is undertaken in a manner that complies with the Takeovers Code (see paragraph 25 of the Panel’s Guidance Note for Small Code Companies).

The consequences of utilising one of the new exclusions from the FMC Act disclosure regime only to find that the issuer has become a code company are such that issuer should consider the implications carefully – including by considering whether their needs may be better suited to avoiding those consequences by the use of an alternative structure – such as a limited partnership.

Other regulatory regimes (The Financial Reporting Act)

The veiled reference in the Takeovers Panel press release to becoming subject to “other regulatory regimes” can only be the implications of the Financial Reporting Act 2013. The Financial Reporting Act applies section 451 of the FMC Act – capturing, as an FMC Reporting Entity, every person who is an issuer of a regulated product (which means an offer of financial products to 1 or more investors where the offer to at least 1 of those investors requires disclosure under the FMC Act (regardless of whether or not an exclusion under Schedule 1 applies to an offer to 1 or more other investors). A carve out from the definition of FMC Reporting entity applies in the case of a company that issues equity securities if it has fewer than 50 shareholders.

Notably, by becoming a FMC Reporting Entity, an issuer will be required to prepare full annual financial statements – which will be subject to audit.
Interestingly, the Financial Markets Conduct (Phase 1) Regulations 2014 provides that an entity that has made an offer in reliance upon the 20 x 12 exclusion in Schedule 1 of the FMC Act is an FMC reporting entity if it has 50 or more relevant shareholders and 50 or more parcels of relevant shares. In say interestingly, because this provision does not specifically capture (as an FMC Reporting entity) those entities which tripped the 50 shareholder threshold as a result of an offer through a crowd funding platform.

An additional point to note is that in the case of an issuer that is not ‘large’ for the purposes of the Financial Reporting Act – being an entity (other than an overseas company or a subsidiary of an overseas company) to which at least 1 of the following does not apply:

• total assets of the entity and its subsidiaries (if any) do not exceed $60 million; or
• total revenue of the entity and its subsidiaries (if any) does not exceeds $30 million,

the scope for opting out (with shareholder approval) of the obligation to prepare full financial statements is removed if they become an FMC Reporting entity.

The rising tide of compliance in other areas, particularly in the realm of compiling full financial statements that are subject to audit by a licensed auditor, may mean that any reduction in the compliance burden (and cost) that is achieved by making an offer that is not subject to disclosure may be lost simply by becoming an FMC Reporting entity under the Financial Reporting Act.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.