Funding the Future – What is Crowd-Sourced Funding?

In 2018 amendments were made to the Corporations Act 2001 and the Australian Securities and Investments Commissions Act 2001 benefiting start-ups and small to medium sized companies by allowing them to raise crowd-sourced funds without the usual strict regulatory requirements associated with traditional public fundraising, while still providing security for investors.

So, what is Crowd-Sourced Funding?

Crowd-sourced funding (CSF) is funding raised by numerous investors in return for shares. The amounts can be less than $50 but no more than $10,000 (per investor).

The benefit for the company seeking the funding is that they can access an almost infinite number of potential investors without being subjected to the usual requirements for public fundraising. Although, it is important to note that there are still costs associated with preparing the offer document and the crowd-sourced funding process generally. For investors, crowd-sourced funding can be a quick and easy way for them to independently invest in a company that sparks their interest, without the need for a broker or access to large amounts of money or finance to invest. However, as with any type of investment, and despite the protection offered by the regime, there are still risks. For example, the company may not become successful and so the shares become of little or no value, the shares may prove difficult to sell or the company may become insolvent.

Both proprietary and public companies can choose to offer their shares through the CSF regime. Offers must be made through an entity which holds an Australian Financial Services Licence which expressly authorises it to provide CSF services (Intermediary). During the first period after the new regime came into operation, in January 2018, ASIC only granted seven CSF Intermediary Licences. Since then others have sought a licence and the number of successful CSF offers has increased.

The legislation imposes the responsibility for determining that an offer is eligible for CSF, including whether the offering company meets the structural and financial requirements of the Corporations Act 2001. Once an Intermediary determines that the offer is acceptable, it will list the offer on their online platform.

The offer process for CSF is similar to that of a crowd fundraising platform such as GoFundMe, with time periods, minimum/maximum targets, and public online platforms used. When it comes to CSF the offer is open once the Intermediary publishes the CSF offer document (online profile). An offer must close after either:

a) The expiration of three months from the date the offer was made;
b) The expiration of the period specified in the offer document (if less than three months is specified in the offer document);
c) The offer is fully subscribed (before the three-month period or before the period specified in the offer document);
d) The company withdraws the offer; or
e) The Intermediary cannot continue to publish the offer, usually due to a breach by the offering company of one or more of their obligations.

At the close of the offer period, for any of the reasons outlined above, the offer will be deemed to have been successful if the minimum subscription has been raised and all withdrawal rights have expired. The withdrawal rights relate to a five (5) day cooling-off period (for retail investors) and, if there has been a supplementary or replacement CSF offer, then all investors have a 14 day cooling-off period. An offer will be unsuccessful if the minimum subscription amount has not been raised upon the expiry of the offer period.

An offering company can be in almost any industry. Recent successful offers have included those in the travel, technology, fashion and hospitality industries. For example, on Birchal’s intermediary platform, Black Hops Brewery met its minimum subscription of $400,000, whilst on the Equitise platform neobank Xinja raised $2.4 million with over 1000 investors.
Despite the many successful offers, the crowd-sourced funding space is new and those considering entering as an Intermediary or by placing an offer on a platform should consider the risks and requirements associated with doing so.

If you have any questions or interest in becoming or running an Intermediary platform or in crowd-sourced funding, then please do not to hesitate to contact us.

Authors:

Michael Wilton (Partner) with Brianna Date and Madison Davies

Disclosure:

This article is general commentary on a topical issue and does not constitute legal advice.

The Authors

Michael Wilton

PARTNER, MELBOURNE