Liquor licensing regimes in Western Australia and South Australia are hindering companies thinking about equity crowdfunding in those states, according to industry players.
Brewers in the two states have been reticent to launch equity crowdfunding campaigns, in which non-professional ‘retail’ investors take a stake in the business in exchange for capital to invest in the business, because of the way proprietary (private) limited companies are treated under state liquor laws in SA and WA.
“It can be a real obstruction to businesses here,” said Jessica Patterson, a partner specialising in liquor licensing and hospitality business at WA law firm Lavan.
“Equity crowdfunding can potentially be a huge positive and tremendous competitor for the banks.
“It’s great for the community and there are so many wonderful things about it, but there is risk and uncertainty and a lot of differences state-to-state that companies need to be aware of,” she said.
The problem in WA and SA lies in the legal position of the shareholder in proprietary companies which hold, or apply for, liquor licences.
They are required by the liquor licensing departments of the two states – regardless of the actual size of their shareholding – to pass a “fit and proper” person test, and there are other nuances to the separate regimes which are causing companies to shelve equity crowdfunding plans.
“The law is usually further behind than society and practical industry developments – it’s when you think outside the box that it becomes an issue,” explained Patterson.
Equity crowdfunding has been permitted in Australia since 2017, but at the time companies were obliged to convert to a public structure as this allows an unlimited number of investors to take a stake in the business, without the responsibilities or liabilities they would have in a private company.
This made sense for crowdfunded companies, who may have huge numbers of shareholders. By the time Black Hops’ equity crowdfunding campaign closed at the end of January for example, it had an additional 539 shareholders while Dainton Brewery closed with a further 239.
“Because publicly-listed companies can have millions of shareholders who are so far removed from the control of the company on a day-to-day basis, it will be too difficult practically for the licensing authority to scrutinise and approve them all,” said Patterson.
Now, with proprietary companies allowed to be widely held if they undergo crowdsourced funding (in part due to legislation changes in 2018 after low uptake from companies unwilling to convert to a publicly listed structure), shareholders in SA and WA are subject to a “fit and proper persons test” in which credit history, criminal records and even informal police records are considered.
“Liquor is a regulated substance and there will always be regulations around those who are involved in the supply of liquor,” explained Patterson.
“Traditionally in WA the licensing authority has dug very deep into [shareholders]. Historically all directors and beneficiaries within a corporate structure required approval by the authority, except in publicly listed companies,” she said.
Shareholders are automatically considered under WA and SA laws to occupy a “position of authority”.
It puts the onus on the company and its directors and shareholders to inform the regulator of any convictions a person in a position of authority has, or may get in the future, and in addition to potential risks to a company, if the regulator in either state wants to take action against the licensee (the holder of a liquor licence which is usually the company) they may be allowed to take action against anybody considered to be in a position of authority.
Matt Vitale of crowdfunding platform Birchal said that the legal technicalities were creating a major obstacle for businesses looking to crowdfund.
“We realised it just in early stage discussions with another brewer, and then we did a full review of the legislation.
“It can be pretty difficult when you think about a shareholder acquiring shares, the whole concept of your liability being limited to the amount you subscribe for totally goes out the window if you’re potentially committing an offence by acquiring those shares,” he said.
“It would be extremely unlikely for a licensing commission to pursue a shareholder that might own 0.001 per cent of a company and the licensee has done something wrong, but it does highlight how ridiculous the situation is and that the legislation needs to be changed.”
He said that there were similar issues in both states but slightly different in South Australia.
“SA takes a similar approach to the ‘position of authority’ concept that’s under WA legislation but there’s some additional liability for disciplinary action under the SA regime as well.”
A spokesperson for South Australia’s Consumer and Business Services said that when a business uses crowdfunding, the fit and proper persons test only comes into play when they receive proceeds from the business.
“These laws are designed to ensure businesses operate under an appropriate degree of scrutiny, and to prevent individuals who may not otherwise be allowed to be involved in such a business from circumventing the appropriate background checks,” they said.
The spokesperson said that profit sharing arrangements can be approved by the Liquor and Gambling Commissioner in SA, but they would need to demonstrate that the venture is either “likely to assist the liquor, tourism or hospitality industry or be in the public interest”.
When questioned about the issue, the WA liquor licensing authorities said that each liquor licence application will be assessed on its merits, but as a “general rule” the probity of directors and “major shareholders” will be assessed. It did not elaborate on what it considered a major shareholder.
“WA’s liquor licensing system is designed to ensure that participants in the liquor industry are fit and proper persons, regardless of whether their business venture is traditionally funded or crowdfunded,” a spokesperson for the WA Department of Local Government, Sport and Cultural Industries said.
“The licensing authority relies on a report from the WA Police to determine if a person is fit and proper.”
The spokesperson said that the licensing authority has the discretion to grant or refuse an application on any ground, for any reason that the authority considers in the public interest.
Turned off equity crowdfunding
Breweries including Bright Tank Brewing and the parent company of WA’s Otherside Brewing, as well as Never Never Distilling in South Australia have turned away from equity crowdfunding due to this issue.
Matthew Moore, founder of Bright Tank, said with an equity crowdfunding round they would buy a new canning line and ideally raise $250,000 towards its packaging operation expansion.
“The main point is that there’s a clause in the Liquor Licensing Act that anyone that holds equity in a business can be held responsible for anything that happens on premise.
“Technically by law you have to give all those names of shareholders and they have a right to do an LLD5 on them which is a form to check on their history and who they are. It’s essentially aimed at keeping organised crime out of the nightlife industry which is fine and I understand that, but breweries are a different beast.
“By the time we’ve hit that peak capacity and go the other way, the laws will probably change then. The government has never been prepared to deal with the influx of breweries.”
Al Taylor, CEO, Triple-1-Three which owns WA’s Otherside Brewing said that equity crowdfunding was an appealing way to raise money and the company had considered it as an option but that it “adds another layer of challenge for us to compete nationally, which is not ideal.”
George Geordias, founder of Never Never Distilling, a two-year-old company based in Adelaide, said that crowdfunding was the “logical next step” for the business.
“When the legislation came in, I made the assumption that it would be introduced in a way there wouldn’t be any technical issues with implementing it,” he said.
“This is an unintended consequence of the historical liquor licencing regimes. Maybe I’m being too optimistic but my interpretation of the situation is that it’s not so much the state liquor licencing saying they think that anyone involved as an equity investor, even at the tiny crowdfunding level, must meet our liquor licencing standards, I think it’s simply an oversight.”
While there are potentially workarounds for it, it would require movement on the part of the state governments to make any changes.
“Who’s to say that its broken or that anything is wrong with the current system? It’s up to the state government and parliament to consider it and whether it needs to be changed,” said Patterson.