Tuesday, 3 October 2017

So what is an initial coin offering?

An initial coin offering (ICO) is a concept that has been getting increased airplay in recent times, with estimates that more than $1 billion has been raised globally via ICOs.

With some key decisions being made by regulators globally (including the US and China) – and with guidance from ASIC released last week – we thought it timely to provide an overview on the concept.

So what is an ICO? 
ICOs generally operate as a blockchain-based funding process, allowing investors to use cryptocurrency (such as bitcoin or ether) to purchase coins or tokens relating to a specific product or project via the internet for a set period of time.

The relevant coins or tokens are typically linked to the specific business model of the company running the ICO, providing the holder of the coin or token the right to use the company’s product or participate in the relevant project as a customer at a future date.

Rather than being viewed as an alternative to an initial public offering (IPO), ICOs are more akin to a crowd funding campaign, but noting that they are not the same.

…and what do the regulators think?
Initially, ICOs were considered to be outside the scope of fundraising regulations.

Earlier this year, however, the US Securities Exchange Commission made its position clear that certain coins and tokens can amount to a security and, therefore, be subject to the remit of the existing fundraising framework for US IPOs.

ASIC Information Sheet 225 released last week continues this theme, noting that it will ultimately depend on the circumstances and the rights attaching to the coin or token.  ASIC’s guidance includes explanations of when an ICO:
  • may amount to an offer of a security in a company – e.g. if the bundle of rights, such as voting rights or an entitlement to a future share of profits (dividend) attaches to the coin or token, potentially triggering the requirement for prospectus type disclosure 
  • may constitute a managed investment scheme – e.g. if the value of the coin or token is linked to management of an arrangement, and
  • could become a financial market or crowd-sourced funding platform subject to regulation.

Most recently, China made the decision to ban the funding method, with the People’s Bank of China declaring ICOs illegal, flagging specific concerns in respect of money laundering and economic disruption.  This has included requirements for companies that have completed an ICO to refund funds raised.

The potential risks of an ICO
US regulation followed a particularly high profile example of an ICO undertaken by the ‘Decentralised Autonomous Organisation’ (DAO).   The DAO had an objective to provide a new decentralised business model for organising various commercial enterprises.  It operated using the ethereum blockchain, and had no conventional management structure or board of directors.  It raised approximately $150 million in ether, but was unfortunately hacked within a relatively short time period following the raising (to a value of approximately $50 million).

While many new technologies are to be welcomed, the DAO is an example on needing to proceed with caution, and also flags that cybersecurity is a major live issue.

More broadly, while coins and tokens may increase in value following an ICO, they are subject to extreme price volatility, which makes an ICO an inherently risky investment.

There is also the added complexity of anti-money laundering, privacy and data protection laws to consider.

Recovering funds that may be invested in such schemes (including fraudulent schemes) may also be problematic.

It is certainly a developing area and, with the above risks in mind, we recommend you seek further advice if you are seeking to undertake, or participate in, an ICO.

We will continue to watch this space.

Monday, 25 September 2017

ASIC releases its guidance on equity crowd funding

On Friday, ASIC released its regulatory guide on equity crowd-sourced funding (CSF) for public companies, ahead of the new laws coming in on 29 September 2017, to assist companies seeking to raise funds through equity CSF to understand and comply with their obligations when using the new regime.

This was accompanied by a new regulatory guide for intermediaries involved in the operation of equity CSF platforms, including the process for licensing of such intermediaries, who have a unique ‘gatekeeper’ obligation for operating platforms for equity CSF offers.

See the following links for full copies of the ASIC Regulatory Guides:

The new guidance is an essential read for any person looking to embark on an equity CSF campaign, including the template CSF offer document to be used for such a process.

Further information on crowd funding can be found on ASIC’s website here, including information on applications:
  • to register new public companies or convert existing proprietary companies to public companies, to be eligible to raise funds using CSF and to access the corporate governance concessions, and
  • by intermediaries for an AFS licence with an authorisation to provide CSF services.

For a reminder on the new laws coming in at the end of the month, see our recent blog on three essential things to know on the new CSF regime.

Wednesday, 6 September 2017

What attracts investors to IPOs? Critical insights for issuers

On 31 August, ASIC reported on its findings for how investors decide to invest in IPOs, with the release of Report 540: Investors in Initial Public Offerings.  The report includes details on:
  • ASIC’s own inquiries with institutional investors and other financial intermediaries about their approach to investing in IPOs, and
  • a qualitative research report commissioned by ASIC on the factors and information that retail investors rely on when investing in an IPO, followed by a behavioural analysis by ASIC on the research findings. 

Monday, 21 August 2017

Shareholders turn the heat up on directors – suing over failure to disclose climate change risk

One of Australia’s leading banks is being sued in a landmark case which may set the benchmark for climate change risk management.

Following our recent blog on climate change risk management and the impact on directors’ duties (read here), a recent case filed in the Federal Court (here) will explore a different angle, as the first of its kind to test the extent public companies are required to disclose climate change risks in their annual reports.  The Australian Prudential Regulation Authority (APRA) has previously warned that climate change poses a material risk to the financial system and maintains its stance that companies can no longer ignore the risks of climate change just because there is some ‘controversy’ about the policy outlook.

Environmental Justice Australia has filed proceedings in the Federal Court on behalf of two shareholders of the Commonwealth Bank of Australia (CBA) against the bank, alleging that CBA failed to provide a true and fair view of its financial position in breach of section 297 of the Corporations Act by not disclosing the material or major risk posed by climate change in its annual report.                  

Not only are the shareholders asking the Federal Court to find that CBA breached section 297 of the Corporations Act, but it is also alleged that the director’s report within the annual report contravened section 299A of the Corporations Act by failing to disclose risks that investors reasonably require to make an informed assessment of the bank’s operations, financial position, business strategies and prospects.

While it was previously the case that climate change risks were a non-financial problem, APRA is explicit that this is no longer the case (read more here).  The outcome of this case should provide sought after clarification for shareholders, regulators and banks of how companies are required to disclose climate change-related risks and will provide a great indication of how the management and disclosure of climate change impacts will continue to develop in Australian corporate law.  McCullough Robertson will be watching this space with great interest.

Wednesday, 19 July 2017

Scammers hit ASIC customers

Small businesses are a ready target for scammers, with the latest scam targeting innocent companies trying to do the right thing.

‘ASIC’ email scam
ASIC announced today that scammers pretending to be from ASIC have been contacting Registry customers by email, requesting that they pay fees and provide personal information to renew their business or company name (click here to view an example of a scam email).  It has also been reported that these phishing emails may contain malware and links to invoices with false payment details.

ASIC has advised that emails are most likely to be a scam if they ask you to:
  • make a payment over the phone
  • make a payment to receive a refund, or
  • provide your credit card or bank details directly by email or phone. 
If you think you have received a scam email, ASIC has requested recipients to immediately forward the entire email to ReportASICEmailFraud@asic.gov.au or contact ASIC on 1300 300 630.  

Trade mark scam
Similar phishing emails are often sent to trade mark registrants asking them to provide personal information and pay fees associated with trade marks or domain names.  Further information is contained in our previous article on this scam (please click here to read).

Small business
The ACCC Scamwatch website contains useful information on common scams and steps you can take to protect your small business. 

For enquiries, please contact:


Thursday, 6 July 2017

ASIC announces results from review of 31 December 2016 financial reports

On 31 May 2017 we released a post regarding ASIC’s focus areas for surveillance on 30 June 2017 financial reports.

Following on from that theme, ASIC has now announced the results from its review of 31 December 2016 financial reports.  ASIC reviewed the financial reports of 90 listed and other public interest entities for the period.  The results reveal a continued focus on findings relating to impairment of non-financial assets and inappropriate accounting treatments.

Following the review, ASIC made enquiries of 23 entities on 28 matters seeking explanations of accounting treatments.

In addition to impairment of non-financial assets, ASIC also raised queries regarding consolidated accounting, amortisation of intangibles, revenue recognition, tax accounting, business combinations and other matters.

With respect to the key focus areas, impairment of non-financial assets and inappropriate accounting treatment, ASIC’s findings included discrepancies with respect to:

  • determining the carrying amount of cash generating units
  • the reasonableness of cash flows and assumptions
  • use of fair value
  • impairment indicators, and
  • disclosures.

A copy of ASIC’s media release can be found here.

Monday, 3 July 2017

Six million under - The dangers of accessorial liability

A recent Federal Court decision serves as a timely reminder of the repercussions of companies employing new executives and senior managers who bring with them confidential information obtained dishonestly from their former employer.

On 12 May 2017, the Full Court of the Federal Court of Australia handed down its decision in Lifeplan Australia Friendly Society Ltd v Ancient Order of Foresters in Victoria Friendly Society Limited [2017] FCAFC 74, finding that the Ancient Order of Foresters in Victoria Friendly Society Limited (Foresters) should account for profits generated by their funeral bonds business which was developed and managed by two former employees of rival Lifeplan Australia Friendly Society Ltd (Lifeplan).

Mr Woff and Mr Corby were both employed by Lifeplan in senior roles and prepared a Business Concept Plan (BCP) for the CEO of Foresters for the development of Foresters’ comparatively small funeral bonds business.  Over the course of a number of months, Mr Woff and Mr Corby solicited the clients of Lifeplan on behalf of Foresters and developed and refined the BCP utilising the information of Lifeplan, including highly confidential rates of return and bonuses paid in the marketplace.  Mr Woff and Mr Corby then resigned from their positions and jumped ship to Foresters.

Monday, 19 June 2017

ASIC industry funding model passes Senate

Following on from our post last year (ASIC’s industry funding model – the long and the short of it) on ASIC’s industry funding model, the ASIC Supervisory Cost Recovery Levy Bill 2017 passed through the Senate on 15 June 2017.

Under the industry funding model, those entities regulated by ASIC will now bear its costs as opposed to ordinary taxpayers.  Further, ASIC expects that good conduct in the market will reduce supervisory expenses, thereby providing an incentive for regulatory compliance.

The passage of this legislation through the Senate provides not only certainty in terms of ongoing resource allocation for ASIC but also greater transparency through the publication of ASIC’s expenditure and subsequent accountability for its performance and regulatory priorities.

The regulatory framework for the operation of the funding model will be released ahead of it taking effect on 1 July 2017.

Wednesday, 31 May 2017

ASIC announces compliance focus areas for 30 June 2017 financial reports

ASIC today announced its focus areas for surveillance on 30 June 2017 financial reports.  The release highlights the matters that ASIC considers key areas for reporting entities to address and focus on in preparing financial reports for the 30 June 2017 financial year.

ASIC has again highlighted asset values and accounting policy choices as key matters.  In particular, the use of unrealistic assumptions in testing asset values and the application of inappropriate approaches to revenue recognition.

The key focus areas announced by ASIC in the release are:
  • impairment testing and asset values
  • revenue recognition
  • expense deferral
  • off-balance sheet arrangements
  • tax accounting, and
  • disclosures regarding:
    • estimates and accounting policy judgements, and
    • the impact of new revenue, financial instrument lease and insurance accounting standards.

A copy of ASIC’s media release can be found here.

Tuesday, 16 May 2017

Crowd funding update - catering for the remaining 99%

It was good to see the release of draft equity crowd-sourced funding (CSF) legislation for proprietary companies, as part of the 2017-18 Federal Budget package (on 11 May) – with the Government responding to a number of criticisms from various stakeholders (including Labor), following the finalisation of the CSF regime for public companies.  These new laws will be welcome to many, with proprietary companies representing over 99% of companies in the Australian market.

The new laws will remove the need for proprietary companies to transition to public companies.  Instead, investors will be protected by additional obligations, which are currently proposed to include a requirement to have a minimum of two directors, complete financial reporting in accordance with accounting standards (including audit requirements where more than $1 million is raised), and restrictions on related party transactions.  In return, the prospectus disclosure requirements for CSF offers will be relaxed and ‘CSF shareholders’ will not count towards the current shareholder limit (of 50 non-employee shareholders) which applies to proprietary companies.

For a copy of the exposure draft of the new laws click here, together with the accompanying explanatory memorandum here.

For further details on the existing and upcoming CSF laws for public companies (which will commence on 29 September 2017), see our earlier blog:

You will need to move quickly to have your say on the new laws for proprietary companies – with submissions closing on Tuesday, 6 June 2017.  However, the likely timing of the further changes remains to be seen and, with the recent laws for public companies having taken nearly 3 years to pass, may be met with some scepticism.  It is one we will continue to watch closely.

Wednesday, 26 April 2017

Time is up for stakeholders to have their say on proposed insolvency law reforms

Following the close of public submissions on Monday, it will be interesting to see stakeholder and industry responses to the proposed insolvency law reforms.

By way of refresher, in March this year, the Federal Government published draft legislation (Treasury Laws Amendments (2017 Enterprise Incentives No.2) Bill 2017) for consultation, seeking to amend the Corporations Act 2001 (Cth) by introducing:
  • a ‘safe harbour’ carve out to a director’s personal liability for insolvent trading, and
  • stay provisions affecting the enforceability of certain ‘ipso facto’ and other clauses during an administration or scheme of arrangement.

Tuesday, 4 April 2017

A new understanding between ASIC and the Takeovers Panel

A new memorandum of understanding (MOU) between the Takeovers Panel (the Panel) and ASIC was recently released, replacing the previous MOU signed in August 2001.

While the new MOU continues to reinforce the separate, but complementary roles of the Panel and ASIC (to regulate takeovers and control transactions), a comparison against the previous MOU shows a change in tone and approach between the two bodies.

The description of ASIC’s role has shifted from an almost exclusive focus on contravention to a broader outcomes based approach, recognising the need for greater facilitation of transactions at the same time as maintaining investor protections, together with further guidance on ASIC’s approach in exercising its discretion under the Corporations Act 2001 (Cth).

Thursday, 23 March 2017

Equity crowd funding finally past the post - but is it a dodo?

It is good to see that the equity crowd funding laws have finally been cleared for Australia, with the Senate having passed the Bill on Monday. This was following finalisation of the debate on proposed cooling off rights for retail investors (which was ultimately extended from 48 hours to five days). The laws allow unlisted public companies with less than $25 million in assets and turnover to raise up to $5 million in funds in this way.

As per our earlier blogs, a key potential chink in the armour of the new laws is its limited application to public companies and not proprietary (private) companies, which represent 99% of small businesses.

This has been recognised by various stakeholders, including Labor, with Opposition digital economy spokesman Ed Husic suggesting that amendments will be required in the near term and suggesting that “any future changes will make today's new dodo of a system extinct within the year, as smaller business opt for a better alternative.

Wednesday, 15 March 2017

The heat is now on Directors when it comes to climate change

In a recent ASIC liaison meeting, a number of corporate governance items were flagged as being a current focus of ASIC.  Of particular interest is the emerging focus on climate change risk management by directors and implications for directors’ duties.

The opinion ‘Climate change and directors’ duties’ published by the Centre for Policy Development in October 2016 (download here) promoted wide spread discussion about the implications of climate change risk for directors.  It argues that Australian company directors who fail to consider such risks now could be found liable for breaching their duty of care and diligence under section 180 of the Corporations Act in the future.

Wednesday, 1 March 2017

Deeds of Cross Guarantee

New audit relief instrument requires deed changes for new companies


ASIC recently revised Class Order 98/1418, which provides for financial reporting relief to wholly-owned subsidiaries that have entered into a deed of cross guarantee.  As part of the revision, ASIC have also released a new pro forma deed of cross guarantee to replace the previous pro forma.

Existing deeds of cross guarantee (signed before the release of the new pro forma on 28 September 2016) do not necessarily need to be updated, however, ASIC has confirmed that, where parties wish to add a new entity to the group under the deed (so that it can obtain the audit relief), modification of the existing deed will be required by either:
  • all parties executing a new deed in the form of the new ASIC pro forma, or
  • varying the existing deed to reflect the new ASIC pro forma.

McCullough Robertson have been liaising directly with ASIC on these requirements and can assist with new pro forma and variation requirements.  For groups whose financial year ends on 30 June, the new deed will need to be in place and any new entities added to the new deed before that time.

Friday, 17 February 2017

Crowd funding given the nod by Senate committee

We were pleased to see some progress on the crowd-sourced equity funding (CSEF) laws this week, with the most recent Bill passing the House of Representatives and a recommendation from the Senate committee that it be passed by the Upper House, subject to a review after two years.

Unfortunately it remains a contentious Bill, with Labor continuing to push for changes to the laws and releasing a dissenting report.  Labor does not pull any punches, describing the approach to the CSEF laws as having ‘limited scrutiny of a flawed bill in an effort to rush through legislation that is likely to be superseded by a revised framework’.  Even if the Bill is finally passed, it will continue to be an area to watch for further changes.

In particular, there are ongoing objections to the ‘public company’ requirement from an number of stakeholders and industry participants.

For a refresher on the anticipated rules for CSEF see our prior blogs: