The process and disclosure requirements for the offer of debentures or CCUs to non-members, referred to as ‘public offers’, are governed by s337 of the CNL.
A common legislative drafting technique in the CNL is to use the same provisions of the Corporations Act by simply applying them as part of the CNL. This does not make the Corporations Act, which is a federal law, applicable to co-operatives, rather it reproduces the effect of the Corporations Act as a state law as if the same provisions were written in the CNL. The applied provisions are slightly modified to replace the word ‘company’ with ‘co-operative’ and substituting the Registrar as the regulator instead of ASIC.
Importantly, by applying provisions from another piece of legislation, the CNL imports the same requirements of the other legislation as if it was actually written in the CNL. It follows then, that if there are changes to the Corporations Act to permit crowd sourced equity funding, this will also be imported into the CNL.
Public offers of debentures and CCUs require professional assistance and are aimed at raising substantial capital. Applying Chapter 6D of the Corporations Act to public offers of co-operative debt securities also imports the process for these offers and the requirements to appoint a trustee for security holders.
The public offer process varies from the member offer process as it requires the lodgement of the disclosure statement and an embargo on offering the securities for 7 days. During this time the Registrar has the power to place a stop order or make a direction in respect of the offer. Compared with the 28 day process for approval under a member offer, this process is more streamlined. The lodgement fee for this type of offer is substantial; it is commensurate with the fee for the lodgement of a prospectus. The combination of the higher fee, the risk of a stop order, the need to appoint a trustee and the possibility of higher preparation costs places this option outside the scope of smaller community investment offers.
In the event of amendments to facilitate CSEF offers under the Corporations Act being passed, state and territory legislative bodies may consider whether such amendments should ‘flow through’ to co-operatives in the same manner or whether the CNL should modify or adjust their application to co-operative securities.
Public offer or member only offer?
An offer to the public attracts significantly higher costs than an offer to members. However, the size of the project and the potential to attract investment, even in small amounts, across a very large population may justify the higher cost.
As well as examining the comparative regulatory costs of choosing either a member only offer or a public offer, a co-operative needs to consider the value of having a large number of external investors as opposed to a large number of members with membership rights and obligations. The question of offering to the public or to members only also should be considered in the context of whether to offer shares or debt or a mix of shares and debt in order to raise funds.
Most corporate enterprises prefer to issue shares rather than debentures. The reasons for this are fairly straightforward. Debt has to be repaid according to a pre-agreed schedule and normally carries a pre-arranged interest rate. Equity is not subject to any pre-arranged repayment schedule or interest rates.
In a co-operative with share capital, the offer of membership with shares is particularly attractive because there is no additional requirement for a disclosure statement. The disclosure obligation is satisfied by the maintenance of a current member disclosure statement that must be provided to prospective members. Additional share offers are relatively simple to make to members, and the requirement to maintain a current member disclosure statement is one that serves the interests of the community.
Co-operatives that wish to pursue a public offer will need professional advice on whether this is viable and guidance throughout the compliance process.