Crowd Control — equity crowd funding for renewables?
The Australian government is promoting legislation to improve the framework for equity crowd funding. Will this be a turning point for renewables investment and in particular for community renewables?
By Gerald Arends and Swati Johri
Capital raisings in renewables
At present, most fund raisings from individual investors for specific commercial scale or utility scale renewables (such as a large roof top solar array or a small wind farm) look to utilise exemptions in the Corporations Act that allow the promoter to avoid the complexity and expense of drawing up a prospects.
This typically means that a promoter will seek to raise funds from:
- less than 20 investors each year and also not more than AUD 2 million; or
- sophisticated investors (high net worth individuals).
These limitations make many renewable assets difficult to fund. Most ordinary private investors (“retail investors”) seek to limit their exposure to well below AUD 10,000. If 20 investors get together, this will rarely suffice to fund more than about 50 to 100 kW. Sophisticated investors and investment funds usually chase the significantly larger renewable projects in the multi-megawatt range where scale effects increase the yield.
The community renewable industry calls this funding gap for projects ranging from a few hundred kW to the low MW range the “no fly zone”. Only some organisations, such as the Sydney Renewable Power Company which is installing solar on the roof of the new International Convention Centre Sydney, have managed to operate in this field.
Equity crowd funding
Under the proposed equity crowd funding legislation, organisations can raise up to AUD 5,000,000 and a maximum of AUD 10,000 per investor per year. The legislation provides for a simplified funding mechanism with an offer document through a crowd funding intermediary (a new form of financial service licensee). While it is unlikely that a single organisation can easily attract 500 investors to maximise the funding potential, it significantly reduces the “no fly zone”.
However, crowd funding organisations have to be public companies which attracts a significant compliance burden. The legislation reduces this burden for an initial 5 year period by:
- reducing the detail required for directors’ reports;
- waiving the requirement for the financial statements being audited; and
- making AGMs optional.
After 5 years, a renewable energy company will typically be in a passive, cash-flow generating mode. Having the full compliance burden set in at this stage will not sit easily with any prospective renewable energy company investing in the “no fly zone”.
Atlassians wanted (only)
The current draft of the equity crowd funding legislation is clearly geared towards preventing the next Atlassian from overdrawing on their credit card. It is not geared towards funding long-term passive assets. Not every company is on an ever-lasting growth path where additional cost in the future can be borne out of expected growth. Given the value society sees in renewables, is there room for improvement?
Pegasus Legal is a boutique law firm with an exceptional level of expertise in the renewable energy sector. Our lawyers have worked on a large number of solar, biomass and wind projects in a wide range of countries. For further information please contact our directors Gerald Arends or Swati Johri.