Crowdfunding Your Brewery or Distillery? The Liquor Licensing Trap in SA and WA

Why liquor producers are turning to crowd-sourced funding

Australia’s crowd-sourced funding (CSF) regime allows eligible proprietary and unlisted public companies to raise equity from retail investors through a licensed crowdfunding intermediary.1

For breweries, distilleries and other consumer-facing liquor producers, the model can be particularly attractive. These businesses often have a strong local following and a customer base that understands the product, identifies with the brand and may be willing to become part-owner of the business.

A CSF raise may allow a business to:

• raise up to $5 million in a 12-month period using a streamlined CSF offer document rather than a full prospectus;
• access retail investors who would not ordinarily participate in a private capital raise;
• convert customers and supporters into shareholders and brand advocates;
• fund new production facilities, equipment, premises, distribution or product development; and
• raise capital without relying exclusively on bank debt or a small group of private investors.

Retail investors are generally limited to investing $10,000 in a company through CSF offers in a 12-month period. The offer must also be conducted through an intermediary holding the appropriate Australian financial services licence.2

However, liquor producers in South Australia and Western Australia face an additional issue that businesses in most other industries do not. In these states, their liquor licence may make every new shareholder in a proprietary company a “regulated person” resulting in major compliance difficulties.

Issues for South Australian and Western Australian businesses

Liquor licensing laws in both South Australia and Western Australia create an unusual complication for proprietary companies seeking to undertake a CSF raise.

In each State, a shareholder of a proprietary company that holds a liquor licence is treated as occupying a “position of authority” in the company. This applies because they are a shareholder, irrespective of the size of their holding.3

That approach is manageable where a business has only a small number of shareholders. It becomes much more difficult in a CSF raise, which may involve issuing relatively small parcels of shares to hundreds of passive retail investors. If the licensee remains a proprietary company, each incoming investor may technically need to satisfy the applicable liquor-licensing approval requirements.

In Western Australia, the legislation prohibits a person from assuming a position of authority in a corporate licensee without approval. Current WA Government guidance specifically states that approval must be obtained before a person becomes a director or shareholder of the licensee company, and that an application fee applies for each new director or shareholder.4

South Australia similarly requires people occupying positions of authority within a corporate licensee to be approved by the Liquor and Gambling Commissioner.5 Because the statutory definition expressly includes shareholders of a proprietary company, the issue is not confined to directors, managers or controlling shareholders.

These requirements sit uncomfortably with a fundraising model designed to attract many small, passive investors. Individual approval processes could add cost and delay to the raise and, depending on the regulator’s requirements and the number of investors, may make the structure impractical.

A possible solution: conversion to an unlisted public company

In both South Australia and Western Australia, the automatic shareholder limb is directed specifically at shareholders of a proprietary company.

One potential solution is therefore to convert the licensee from a proprietary company to an unlisted public company before undertaking the CSF raise. Public companies are also eligible to use the CSF regime, provided the relevant eligibility requirements are satisfied.6

Following conversion, a passive investor should not occupy a position of authority merely because they hold shares in the company. The liquor regulator may still scrutinise a person who:

• becomes a director or senior manager;
• receives a board appointment right;
• acquires control or substantial influence over the company;
• receives veto rights over the management or operation of the licensed business; or
• otherwise becomes involved in conducting the licensed business.

The conversion therefore does not remove liquor-licensing regulation altogether. It can, however, remove the automatic treatment of every passive CSF shareholder as a person in a position of authority.

Before proceeding, the business should confirm that the proposed conversion and fundraising structure are compatible with the terms of its particular liquor licence and identify any approvals or notifications required by the relevant liquor regulator.

What are the additional obligations of becoming a public company?

Conversion should not be treated as a purely administrative change. An unlisted public company is subject to additional governance, reporting and compliance requirements under the Corporations Act 2001 (Cth).

These generally include:

• having at least three directors, at least two of whom ordinarily reside in Australia;
• having at least one company secretary who ordinarily resides in Australia;
• holding an annual general meeting;
• preparing and lodging annual financial and directors’ reports;
• having the annual financial report audited; and
• complying with broader governance and related-party transaction rules.7

The company will also need an appropriate public company constitution and should review its existing shareholders agreement, board structure, insurance arrangements, registers and procedures.

By comparison, a proprietary company using CSF is already subject to additional reporting obligations. A small proprietary company with CSF shareholders must generally prepare and lodge annual financial and directors’ reports, while an audit is generally triggered once the company has raised the applicable CSF audit threshold ($3 million) or more from CSF offers.8

Conversion may therefore bring forward an audit requirement and impose higher recurring administration costs. Those costs need to be weighed against:

• the amount the company proposes to raise;
• whether future CSF rounds are contemplated;
• the cost and delay of individual liquor-licensing approvals; and
• the longer-term ownership and governance plans for the business.

For a business seeking a substantial raise from its customer community, conversion may nevertheless be the cleaner and more scalable structure.

Why this is generally less problematic in other States

The liquor-licensing legislation is not uniform across Australia. The issue identified above arises because South Australia and Western Australia expressly treat shareholders of proprietary company licensees as persons in positions of authority. That is not generally the approach taken in other States.

New South Wales

In New South Wales, a shareholder is not, merely because they hold shares, regarded as interested in the licence application or licensed business. A shareholder may still be a “close associate” if their financial interest or powers enable them to exercise significant influence over the management or operation of the business. Passive CSF investors should not ordinarily be caught solely because they acquire shares.

Victoria

In Victoria, a shareholder may be an associate if they hold a relevant financial interest and, because of that interest or associated powers, can exercise significant influence over the management or operation of the liquor business. Again, shareholding alone is generally not enough.

Queensland

Queensland regulates associates, corporate officeholders and persons involved in the licensed business, but does not appear to impose the same automatic proprietary-shareholder rule found in South Australia and Western Australia. The position of substantial or influential investors should still be reviewed, particularly where they receive governance or control rights.

Accordingly, liquor producers in NSW, Victoria and Queensland will still need to assess whether cornerstone investors, directors or persons with special governance rights require approval or disclosure. However, they should not ordinarily need to convert to a public company merely because a CSF offer will introduce a large number of passive shareholders.

Plan the structure before launching the offer

CSF can be a powerful capital-raising tool for breweries, distilleries and other liquor producers, particularly where the business has developed a loyal customer community.

For South Australian and Western Australian businesses, however, the company’s liquor licence and corporate structure need to be considered at the outset. Converting to an unlisted public company may provide a practical path through the shareholder approval issue, but it should be planned early enough to address the company’s governance, audit, reporting and licensing requirements before the offer goes live.