It’s difficult to ignore the beating of the crowd-sourced funding drum. The new capital raising option for startups and SMEs is becoming more and more popular. We hear it from existing clients, prospective clients and advisors alike, and as each month of 2019 ticks over, it becomes clearer and clearer that it’s not just us at BlueRock that have felt the energy of crowd-sourced funding.
As with any new sector, there have been teething problems. Firstly, crowd-sourced funding was initially limited to unlisted public companies – a limitation that ultimately proved to be a significant barrier to entry.
Secondly, even once the capital raising avenue was extended to private companies, the key ingredients of what makes a great CSF offering were still relatively unknown. As the market has evolved, BlueRock has been seriously pondering the dos, don’ts and absolute musts of CSF offerings.
Our key takeaway: get your constitution right!
Why do you need a crowd-sourced compliant constitution?
Commonly, for private companies, the shareholders agreement is the corporate governance bible and the company constitution is the document that sits in the cupboard under the stairs.
However, in the world of CSF, it’s the constitution that reigns supreme. For this reason, in our experience, it is absolutely critical that companies pursuing CSF revisit and reimagine their constitution.
Our reasoning for this advice is not based on some new law or tax ruling: it’s based on efficiency, flexibility and practicality. That is, the desire to reduce the administrative burden.
Under a Shareholders Agreement, each new investor must sign a deed of accession before being issued new shares – collecting 1,000+ accession deeds following a successful CSF offer does not sound like much fun to us. Nor does attempting to collect signatures from each of your 1,000+ herd of investors when the shareholders agreement needs even a minor amendment (as most agreements do over time).
The best approach to developing a crowdfund-ready constitution
Since the advent of CSF in Australia, we’ve been working with our clients to adopt robust constitutions that blur the line between a traditional constitution and a shareholders agreement.
We prefer this approach because, unlike a shareholders agreement, new shareholders are automatically bound by the terms of a company’s constitution – meaning, no need to chase up deeds of accession.
However, the key advantage of this approach lies in the flexibility. With a traditional shareholders agreement in play, when it inevitably comes time to amend rights, the process can be thwarted by one shareholder (holding only a tiny parcel of shares) refusing to sign an amended document – effectively holding the company at ransom.
Under a crowdfund-ready constitution, this risk is significantly reduced. This is because, under corporations law, the constitution can be amended by a shareholder vote with >75% support – a requirement that is achievable even with 1,000+ shareholders.
Then there is the subscription agreement – the piece of paper that must be signed by each purchasing shareholder that usually set outs further obligations. These too can be linked to your constitution and can be collected through the crowdfunding platform.
Migrating non-typical constitution features to a crowdfund-ready constitution
Some of the features we’ve migrated across to crowdfund-ready constitutions include:
- the rights of certain classes of shareholders (or shareholders controlling a large block of ordinary shares) to nominate a director of the company
- the types of decisions that can be made by board resolution and the types of decisions requiring a shareholder resolution
- the first right to purchase sale shares from existing shareholders before they are sold to a third party
- the appropriate quorum requirements given the potential large volume of CSF shareholders
- the restraints applicable to major shareholders to prevent the establishment of competing businesses
- the way in which any disputes between shareholders or between shareholders and the company are to be handled
In our view, dealing with these matters in your constitution (and sharing that constitution with prospective CSF investors) can lead to user-friendly, administratively feasible and transparent corporate governance for your company and its shareholders.
How to prepare your business for crowd-sourced funding
In the short lifetime of CSF in Australia, BlueRock has worked with a number of businesses looking to take advantage of crowd-sourced funding. We can advise on every aspect of the CSF offering to help your business prepare a robust crowdfund-ready constitution.
If you’d like to chat about how we can help your business navigate its capital raising options, please get in touch.