Start-up Business: Legal Changes to look for in 2016 (Part 1)

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On 7 December 2015, the Honourable M. B. Turnbull MP, Prime Minister of the Commonwealth of Australia announced $1.1billion government funding for innovation and entrepreneurship. The package provides funding and reform for many distinct areas; including extensive start-up business and investment adjustments. We will cover several of these in this first part of a series on the changes.

  1. Crowd-Sourced Equity Funding (CSEF)

Previously, sourcing company funding from a broad range of investors was restricted by extensive regulatory barriers. Start-ups and small businesses short on funding were required to engage traditional lenders for capital to turn ideas into reality. However as most lenders are risk-averse, investing a significant amount of capital in an untested company was usually viewed as an unworthy investment.

With the new CSEF legislation currently before Parliament (the Corporations Amendment (Crowd-sourced Funding) Bill 2015), individuals wishing to invest in companies can contribute up to $10,000.00 per company, per year. Start-up directors seeking capital for their venture can convert their proprietary companies into unlisted public companies and opt-in to the CSEF programme. Further, these companies will be exempt from holding Annual General Meetings and producing audited statements for a period of five years.

As the Bill stands, there are some notable requirements:

  • A “CSF offer document” must be prepared. This must be published on the platform of a “CSF intermediary” – a host platform that will handle all crowd-sourced funds sent or paid to the company;
  • The securities offered by the company must be of a class specified in the regulations;
  • The offer must comply with the “issuer cap”. The securities on offer comply with the issuer cap if the total of the maximum amount sought and all amounts raised in the last 12 months by the company and related parties does not exceed $5 million (or the prescribed amount by regulation);
  • Companies must not have more than one CSF offer open at any one time; and
  • Funds obtained through the CSEF programme must not be invested in options or shares of other companies.

Companies may also be held liable if the CSF offer document is defective, meaning careful drafting of the document will be essential.

  1. Tax Incentives for Investors

According to Commonwealth statistics, over 4,500 start-ups are missing out on available equity finance each year. To encourage further investment, the Commonwealth propose new tax concessions, including:

  • A 20 per cent non-refundable tax offset on investment (capped at $200,000.00 per investor, per year); and
  • A complete 10 year capital gains tax (CGT) exemption for investments held for at least 3 years.

To be eligible, companies must:

  • be undertaking an “Eligible Business” (scope for this is not yet determined);
  • be incorporated during the last three income years;
  • not be listed on any stock exchange;
  • have expenditure of less than $1 million in the previous income year; and
  • have an income of less than $200,000.00 in the previous income year.

While the CGT exemption is enough to offer a very attractive proposition for investors, the Commonwealth hopes investors willing to get the best return will be actively involved; sharing both wisdom and business skills to ensure start-up growth.

  1. Prototype Digital Marketplace for Small to Medium Enterprises (SMEs)

The Commonwealth also intends to create a ”Digital Marketplace” for SME’s to do business with the government. In the past, start-ups have had limited access to lucrative government contracts due to a relatively “closed” approach; those already doing business with the government normally being awarded repeat contracts. In the view of the Prime Minister, this has led to stagnation and a lack of innovation.

The Digital Marketplace will break contracts down into “component parts”. This will reduce the scale of each government procurement, allowing start-ups to “specialise” and “hone-in” on specific pieces of a government project.

This model had significant success in the UK, and saw explosive growth for many SMEs. The Digital Marketplace will be developed by the new “Digital Transformation Office”, and is expected to go live in January 2017. A prototype will be available later in 2016.

  1. Legal Implications for Start-up Business

With increased growth comes increased risk. It is essential to ensure your start-up is ready; with measures such as adequate structure, robust contracts and intellectual-property protections being a necessity. Investors especially will require indications that you and your business are prepared, as the market shifts and significant government funds are injected.

Furthermore, each opportunity creates new issues. Crowd-funding investment, for example, will not be given obligation free. Start-ups will require very specific investment terms stipulating the rights bestowed upon investors, the control they may exercise over the company, and exit strategies for when investors wish to “cash out”. This should all be provided for in the “CSF offer document”, something that must be drafted with adherence to the legislative requirements. Likewise, the protection of future Intellectual Property must be carefully considered in any Digital Marketplace tender.

Notwithstanding the challenges, and while there are still many unknowns, it is clear that the future looks bright for Australian start-ups.

If you represent a start-up or SME and wish to prepare your company for the “ideas boom”, please contact our Business Development Team on (07) 3252 0011.