BRIDGING THE GAP IN AUSSIE SHARE MARKET FOR SMALLER COMPANIES

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1 ISSUE 19 ON CORPORATE FINANCE QUARTERLY INSIGHTS INTO KEY FINANCE MATTERS AFFECTING YOUR BUSINESS EQUITY CROWDFUNDING: BRIDGING THE GAP IN AUSSIE SHARE MARKET FOR SMALLER COMPANIES IN THIS ISSUE GROWTH OPPORTUNITIES EXPECTED TO REMAIN STRONG IN 2018 MARKET UPDATE: CURRENT STATE OF PLAY FOR THE SALE OF YOUR BUSINESS FIND US ON

2 focus on corporate finance EQUITY CROWDFUNDING: A WELCOME CHANGE FOR AUSTRALIAN BUSINESSES By Vikas Nahar Senior Manager Sydney When I moved to Australia in 2013, I was surprised to see a number of companies taking the ASX route while raising as little as $2. It did not make much sense to me as the listing costs and compliance burden seemed to far outweigh the benefits of listing for most of these companies. While an exchange listing may provide an easier investment vehicle for institutional investors that mostly join the party via private placements in subsequent funding rounds, it also creates an unnecessary compliance burden for a growing business that would be better placed in allocating its resources to innovation and business development. The continuous disclosure requirements can also be onerous where a startup would be better placed to keep its cards in hand. For example, GetSwift shares were recently suspended from trading on the ASX for failure to meet continuous disclosure obligation regarding contracts with key customers. Over time, I ve been able to attribute the listing aspirations for small businesses to the lack of funding alternatives for seed, venture and private equity capital in Australia. Traditional banks also seem to have little appetite for investing in unsecured small business loans. There was a definite gap in the Australian capital markets that needed a regulatory intervention. With the first round of retail equity crowdfunding licenses issued by ASIC this year, it may well be the missing link that Australian businesses have been waiting for. Or is it too early to get excited? Equity Crowdfunding for Eligible Public Companies Let s take a look at the key features of the Australian Equity Crowdfunding regime. ASIC s Regulatory Guide 261 Crowdsourced funding: Guide for public companies, provides the framework for public companies looking to raise crowd-source funding ( CSF ) in Australia. The CSF Regime Under the current CSF regime, eligible public companies will be able to make offers of their shares, via an intermediary CSF service using an offer document. Unlisted public companies with less than $25 in assets and annual turnover will be eligible to raise funds under the CSF regime. Eligible companies will be able to make offers of ordinary shares to raise up to $5 in any 12-month period. Newly created or converted public companies making CSF offers will not have to comply with certain reporting, audit and AGM obligations that would usually apply to public companies, for up to five years. There are obligations and investor protections that apply to CSF offers, together with corporate governance concessions for companies undertaking CSF offers, including: an investor cap of $10,000 per annum per company for retail investors; the provision of a CSF offer document containing minimum information and a prescribed risk warning; and a five-day cooling-off period. Reduced Disclosure Requirements There are temporary concessions, available for up to five years, for eligible public companies making offers under the CSF regime. A public company adopting the CSF model does not have to comply with the requirement for a public company to: hold an annual general meeting; appoint an auditor and have its financial report audited until the company has cumulatively raised more than $1 through CSF offers; and distribute hard copies or electronic copies of its annual reports to shareholders. CSF Platforms Under the CSF regime, intermediaries are required to hold an Australian Financial Services Licence (AFSL) with an authorisation to provide a crowdfunding service. Seven platforms were issued equity crowdfunding licences in January These included Big Start, Billfolda, Birchal Financial Services, Equitise, Global Funding Partners, IQX Investment Services and On-Market Bookbuilds. Legislation for Proprietary Companies The Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 was introduced to the House of Representatives in September The Bill sets out the following key amendments to the Corporations Act 2001 that will enable proprietary companies in Australia to access crowdsourced equity funding: investors who acquire shares through crowdfunding offers will not be counted towards the 50 shareholders cap for private companies; subsequent transfers by crowdfunding investors who on sell their shares will also be exempt if the company is not listed on a financial market; withdrawal period after a company issues a supplementary or replacement offer document from one month to 14 days; and proprietary companies with shareholders who acquire shares through a crowdfunding offer will not be subject to the takeovers rules. The legislation, however, also places new reporting and compliance obligations on a startup or small business looking to raise crowdfunded equity, including: a minimum of two directors instead of one usually required for a proprietary company; preparation of financial reports in accordance with accounting standards with financial statements to be audited once the company raises more than $3 ; and restrictions on related party transactions under part 2E of the Corporations Act The concessions for public companies under the CSF regime will be removed once these amendments are legislated. However, the concessions will be grandfathered for the companies that register during the period these amendments are legislated. The audit threshold for the eligible public companies will also be increase to $3 in line with these amendments.

3 Newly created or converted public companies making CSF offers will not have to comply with certain reporting, audit and AGM obligations that would usually apply to public companies, for up to five years. The extension of the crowdsourced equity funding framework to proprietary companies will take effect six months from the date the bill receives royal assent. As such, the real opportunity for private companies to raise funds under the new regime will most likely be in the second half of FY19 if the bill is legislated by the end of FY18. The Market for Crowdfunding The chart below provides a summary of initial and follow on public offerings 1 in Australia where the capital raised was less than the $5 (threshold for the CSF offers). IPOs and FPOs < $ $350 Number of offers $300 $250 $200 $150 $100 $50 Capital Raised ($ ) $0 Number of offers Total capital raised 1. Follow on offers are included only where market cap was less than $10 prior to the offer. The volume of small capital raisings has consistently been over $250 / year since It s likely that the CSF platforms will attract a significant portion of this market along with other early stage companies that are looking to fund growth. How can we help? PKF s Corporate Finance team is dedicated to helping our clients raise capital efficiently and from the most appropriate channels. We understand that crowdfunding presents a great opportunity for some of our customers and we have invested our time to understand the regime and build relationships with several CSF platforms. Get in touch now with your trusted advisor at PKF to discuss your growth objectives and if you want to explore crowdfunding.

4 on corporate finance focus MARKET UPDATE: CURRENT STATE OF PLAY FOR THE SALE OF YOUR BUSINESS The general climate for divestment activity in Australia has been strong for some time. Despite recent jitters on the ASX, equity funding is readily available in a wide variety of forms for good quality opportunities and we have worked on a number of successful IPO s in the last months across several offices. We are seeing strong interest from private equity funds, family offices and high net wealth private clients for investments in a range of sectors. In the year ended 30 June 2017 PE Firms raised $2.03 billion based on figures provided by AVCAL and reported in the AFR on 8 December When local venture capital groups are added the new fund tally raises to $3.4 billion. These firms have built a war chest and have specifically identified quality private businesses considering exits or partial exit options. In 2020,when the oldest Boomers hit their mid 70 s, we will witness the biggest intergenerational wealth transfer in history. However, the statistics below would seem to indicate that this may not necessarily indicate that business succession always means handing a business down to the next generation of the family. Generation in Control 1 ST Generation 60% 2 ND Generation 27% 3 RD Generation 13% Source: The MGI Australian Family and Private Business Survey 2013 and The KPMG Family Business Survey 2015 The above statistics indicate that less generational handover of business or succession is occurring and that the manner in which business owners may have planned to divest their business (pass onto next generation) may not eventuate therefore an external sale process may need to be considered In addition to the activity of the PE firms corporates are increasingly pursuing mergers and acquisitions to achieve their growth objectives and we are also seeing increased activity from foreign companies seeking acquisitions in Australia. (see graph) As can be seen by the statistical breakdown of the sale transactions depicted above, by far the biggest quantum of deals occur in the sub $100 range. This is comprised largely of the SME market where vendors generally have more to lose personally, comparatively speaking. It is more common to observe that this category of business owner has often re-invested wealth back into their business to fund expansion and Number of Deals Greater than $1 billion Australian deal volume and value $100 $1 billion $50 $ $20 $ $5 $ $0 $5 growth to the detriment of personal wealth accumulation. Consequently, more may be riding on the outcome of a sale to fund them into retirement. This may require greater support from external advisors as internal resources are either scarce or not experienced enough to be able to manage such a transaction and achieve a superior outcome. In 2020,when the oldest Boomers hit their mid 70 s, we will witness the biggest intergenerational wealth transfer in history Don t leave the process to chance for those business owners considering a sale in the next 5 years now is the time to start considering the alternatives and planning. Issues such as ownership structure, tax exposure, value of business, how to improve value and which parties and how to approach them are all key factors. Even for business owners fortunate enough to be approached by a prospective purchaser expert advice could be the key to ensuring business value is maintained and no inadvertent leakage occurs during a sale process. This is where thorough planning and precise execution of a sale strategy can prove all the difference. PKF Corporate Finance has assisted many clients with sell side advisory mandates and know that the sale of your business, or a division of a business can be a complex and important transaction. If you are thinking about succession or the sale of your business or consider it a realistic option in the short to mid term (3-5 years) you should consult with your PKF advisor on how PKF Corporate Finance is able to assist.

5 focus on corporate finance GROWTH OPPORTUNITIES EXPECTED TO REMAIN STRONG IN 2018 The general climate for investment activity has been strong in Australia. Debt and equity funding is readily available in a wide variety of forms for good quality opportunities. We are seeing strong interest from private equity funds, family offices and high net wealth private clients for investments in a range of sectors. Corporates are increasingly pursuing mergers and acquisitions to achieve their growth objectives and we are also seeing increased activity from foreign companies seeking acquisitions in Australia. Despite recent corrections the mediumterm outlook for both the ASX and NSX continues to be positive. The long-term outlook remains strong and both equity capital markets continue to provide a good opportunity for companies to list. Our Corporate Finance team has certainly been kept busy by all this activity. We completed engagements for a diverse range of clients including Brookfield, Illion (formerly Dun & Bradstreet), Rio Tinto, Global Infrastructure Partners, Scentre and Audinate. We helped our clients on some notable transactions: Lead advisor to Tech-Link on its acquisition of Dexion, a $150m turnover business, from GUD Industries. Investigating Accountant for both of Fat Prophet s investment fund IPOs, the Fat Prophets Global Contrarian Fund and the Fat Prophets Global Property Fund. Assisting Plutora with their capital raising from Macquarie Group. Lead Advisor to Furnware on its acquisition of Sebel Furniture. Independent Expert and Investigating Accountant for the reverse takeover of Freshtel by Field Solutions. Independent Expert for the Hastings High Yield Fund proposed takeover. Independent Expert in relation to the takeover, recapitalisation and re-listing of Thorney Technologies Limited. Investigating Accountant for IPO of leading Medicinal Cannabis business Cann Group Limited. Advisor to Paragon Care Limited on several recent acquisitions. Investigating Accountant for IPO of telco 5G Networks Limited. Investigating Accountant for IPO of education technology company ReadCloud Limited. Independent Expert Report for Trustees Australia Limited for the acquisition of a FinTech.

6 Our Corporate Finance Team GROWTH OPPORTUNITIES EXPECTED TO REMAIN STRONG IN 2018 CONTINUED Independent Expert Report for compulsory acquisition of Nido Petroleum Limited by BCP Energy International Pte. Ltd. We also advised on some significant deals in the Newcastle and Hunter region including: Lead advisor on the sale of Towers Transport, a $25m turnover business, to Followmont Transport. Lead advisor to UGM on the refinancing of its debt facilities. Lead advisor to Borg Industries on its acquisition of Carter Holt Harvey s Particle Board production facilities, including support with obtaining ACCC approval for the deal. Vendor Due Diligence services to Fitness Passport with respect to its capital raising from The Growth Fund. Assisted Aviator Capital to raise funds for its Hudson and Highpoint Funds. Valuation of Steeline Group and major founding shareholder interest and subsequent negotiation of exit position. Lead advisor in valuing the interests in the Colterlec Group and completing a national rollup. Lead advisor for the ACS Group on the sale of their business to Millennium Services Group as part of Millennium IPO. Lead advisor in the sale of Sharp Electronics Newcastle group. Whilst acting for the owner in the sale of the business we were able to provide guidance to the management team to facilitate an MBO. We have established a new business in Newcastle, PKF Corporate Finance Newcastle, to focus on helping businesses in Newcastle and the Hunter Region achieve their growth objectives through mergers and acquisitions, accessing equity and debt capital as well as advising on divestments and valuation matters. This business will be lead locally by Andrew Beattie and Simon Rutherford with support from Andrew Jones. If you are considering growing your business in 2018 through mergers and acquisitions or by accessing additional capital or perhaps a sale of your business, please contact one of our directors who can talk you through the options in achieving your growth objectives. Andrew Jones E: ajones@pkf.com.au M: Simon Rutherford E: srutherford@pkf.com.au M: Andrew Beattie E: abeattie@pkf.com.au M: Nick Navarra Principal E: nnavarra@pkf.com.au M: Vikas Nahar Senior Manager E: vnahar@pkf.com.au M: Steven Perri E: sperri@pkf.com.au M: Paul Lom E: plom@pkf.com.au M: Alastair Richards Associate E: arichards@pkf.com.au M: Stefan Galbo Manager E: sgalbo@pkf.com.au M: Liam Murphy E: liam.murphy@pkf.com.au M: Shaun Lindemann E: Shaun.Lindemann@pkf.com.au M: If you would prefer to receive your newsletter via , please contact your local Corporate Finance representative. To download a soft copy of this newsletter please visit: John Bell E: jbell@pkf.com.au M: PKF International Limited administers a network of legally independent firms and does not accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms. Rick Hopkins E: rhopkins@pkf.com.au M: