Around Australia, communities are gathering to create community energy projects which deliver triple bottom line benefits to regional and urban communities. However, only a handful of projects have succeeded so far – thanks largely to the compliance cost of current investment regulations. In this article we explain how equity crowd-funding reform – if done appropriately could open the floodgates to the community energy sector.
Community solar projects typically involve community members investing in a solar PV asset which is installed on the roof of a host – usually a local business or non-profit organisation. The host receives a zero down-payment solar power system, and the investors receive a better than bank return on investment – a true win-win!
Community energy creates local investment opportunities, builds economic resilience, deepens skills and social capital and expands solar ownership to renters and apartment dwellers who otherwise would not be able to access the benefits of solar and other renewable energy.
Up to 80 groups across Australia are attempting to create such projects – however, only a handful of projects have succeeded so far. A primary reason for the lack of success to date is the current investment regulations which limit equity crowdfunding. In this article we explain how equity crowd-funding reform – if done appropriately could open the floodgates to the community energy sector.
The No-Fly Zone – why the current regulations hinder the sector
The current investment rules have created two tiers of scale for community solar projects, and a gaping hole in the middle which community energy proponents have dubbed ‘The No-Fly Zone’.
Sub-100kW community solar
Two of the most successful community groups – Clear Sky Solar and Repower Shoalhaven, have set up their projects to comply with ASIC’s small scale offering rules, which limits the number of investors to 20 investors in any 12 month period. These project have a natural upper cap of about 100kW of solar power, or approximately $15,000 investment per investor. Any bigger and the project no longer involves the community but rather a subset of wealthy investors – which would breach of the ethos of the sector. The problem however, is that at this small scale it is difficult for community groups to viably develop projects without substantial ongoing volunteer effort.
500kW + community solar
Sydney Renewable Power Company (SRPC) is funding a 520kW solar PV installation at the International Convention Centre, Sydney in Darling Harbour.” SRPC has adopted a non-listed public company structure to manage the investment, and faces all of the expensive disclosure requirements that comes with that structure.
Andy Cavanagh-Downs, SRPC board member and the chief architect of the project, explains:
“The project is a unique project in that volunteers have established and run the company under a public company governance framework. Balance is needed to protect “retail” investors in the capital raising process, as well as facilitating investment. There is a tension between community engagement, building followers and a restriction on stating when a share offer is going to occur – it is the first thing people want to know.
Secondly, even where there is a contracted and sound business plan, ASIC has limited tolerance on forecasts. A new community solar project has no trading history to refer to in most cases. Where forecasts are used, it is expensive to obtain independent advice, as recommended by many legal advisers. For community projects like SRPC, ongoing ASIC requirements are expensive and time consuming, particularly the half yearly review.”
What is the No-Fly Zone?
Tom Nockolds, of Community Power Agency – an organisation which assists community groups develop such projects – has dubbed the gap between 100kw and 500kW community solar projects as ‘The No-Fly Zone’ and explains it as where where community energy models make great economic sense but artificial rules and regulations prevent any projects from being developed.
“The ‘No-Fly Zone’ is caused by the restrictive nature of regulations when applied to community energy projects. Unfortunately, this 100kW to 500kW scale is the sweet spot where many community groups would ideally like to be targeting. A project less than 100kW is too small to be economic, but 500kW and larger is difficult to find, and still marginal in its viability due to the expensive compliance ongoing costs.”
How current projects ‘hack’ around the regulations
Chris Cooper, the President of Repower Shoalhaven, explains how they are having to ‘hack’ around the current regulations for an upcoming project:
“We are in discussions with a local social enterprise to install 250kW of solar across three of their sites, which is about $400,000 in community investment. It’s an exciting project offering rich community benefits.
To pull this off (without breaching investment regulations) we’d need to physically separate the projects into two distinct private companies, and then raise the capital in two lots, first in 2016, then in 2017 (to comply with the 20 investors in 12 month rule). This would allow 80 community members to invest an average of $5000 each. It’s much more administration cost and effort than it should be, and we need to be weary of complying with anti-avoidance provisions – but it’s essentially a hack to work around the outdated regulations.”
How Equity Crowdfunding reform can help
Federal Small Business Minister Kelly O’Dwyer’s speech to the Financial Services Council on November 16 dropped some hints on the Federal Government’s equity crowd-funding reform agenda. Whilst promising, the following suggestions below, if adopted, would eliminate community energy’s ‘No-Fly Zone’ and open the floodgates for the sector.
Reduce compliance and administration costs for fundraising
There are two ways this could take place.
One way is by reducing the compliance and reporting requirements for Public Companies, as proposed. To enable community energy projects within the 100-500kW ‘No-Fly Zone’, the reforms will need to reduce ASIC compliance and reporting costs to a level similar to those currently incurred by private companies. Unfortunately, the discussed five years exclusionary period for full compliance public company reporting does not necessarily help community energy projects as they generally have a 10 to 20 year lifespan and very predictable, low volume trading patterns once operational, rendering full disclosure an overkill. One solution would be to create a ‘Special Purpose Financial Statement’ specifically for community energy projects or similar entities – with less onerous requirements than the general purpose financial statements public companies typically face.
Alternatively, the legislation could be extended to include private companies (who already have low administration and compliance cost) by simply expanding the investor cap within the ‘small scale offering’ framework. The current rules, which permit a maximum of 20 investors in a 12 month period (and 50 in total) could be expanded to at least 300 investors in a twelve month period. Assuming an average investment of $5000 per person, this proposed upper cap would allow community energy projects to raise up to approximately $1.5m (almost 1MW of solar) in any one offer, under a low cost private company structure. This would be sufficient for a vast majority of projects and enabling projects within the ‘No-Fly Zone’ to proceed.
Cap only the total fundraising amount – not number of investors, nor dollars per investor
If the proposed reforms only apply to public company enterprises, the upper limit fundraising cap of $5 million (taken from Minister O’Dwyer’s speech) is sufficiently high to enable a majority of community energy projects. Introducing further caps on the number of participating investors, or the amount that each investor is eligible to invest, would unnecessarily erode the ability and speed at which the community energy group can raise the capital, and is therefore not recommended.
Introduce minimum content requirements for Information Memorandums (IM’s)
To minimise costs, investor information documents for crowd-funded equity projects should not need to be registered with ASIC (or be registered at zero cost). However, minimum information disclosure requirements for such IM’s would ensure investors are protected. Failure to comply with requirements could result in fines or further compliance.
In addition, the Public Company IM’s should not require audited financial statements to be presented to investors prior to the capital raise, given that the entity usually would have no previous trading history (it is a special purpose vehicle established purely to conduct the community energy project).
Permit a fair level of advertising
Proponents of equity crowdfunding should be permitted to conduct a fair level of advertising which will enable them to reach their funding goal. The community energy sector is supportive of the Government’s indication to protect retail investors via use of appropriate disclaimers and a 5 day cooling-off period. Any restrictions on advertising should be clearly laid out in the legislation to avoid further legal interpretation and expense.
Include debt as well as equity fundraising
The reforms should be expanded to include fundraising instruments such as private lending or debentures. This improves the capital raising flexibility for community energy proponents, and may spur some more efficient business models. For example, Abundance Generation, a leading UK community energy platform has successfully raised approximately AU$20m in community investment via debentures, with no ill outcomes for investors.