A Windfall for Start-Ups & Entrepreneurs: New Developments in Crowdfunding
Recent changes to the Corporations Act 2001 (Cth) have made equity crowd-sourced funding (CSF) available to small private companies. Previously, CSF was only available to unlisted public companies
Many people are aware of the concept of ‘rewards-based’ or product crowdfunding through popular platforms such as Kickstarter and GoFundMe, but, in the commercial sphere, crowdfunding in exchange for corporate equity is becoming increasingly commonplace as an important means of corporate fundraising, especially for small companies, start-ups and other entrepreneurial ventures that are looking to become established in their chosen marketplace.
Changes to How Crowdfunding Functions in Australia
Previously, equity crowdfunding was only available to small public companies with a turnover and gross assets both below $25 million, presumably to ensure investors were adequately protected.
However, as of mid-October 2018, private companies (also with turnover and assets each below $25 million) are able to access CSF, provided they abide by some additional governance and reporting obligations:
- Small private companies wishing to take part in CSF must have at least two directors.
- Companies must notify ASIC when they both start and cease to have CSF shareholders.
- Relevant CSF details must be added to the company register, including the number and date of issue of any shares issued via CSF.
- Companies engaged in CSF must prepare annual financial and director’s reports to provide a clear picture of company operations to potential CSF investors.
- Companies that raise $3 million or more must audit their annual financial reports.
- Private companies must abide by the related party transaction rules usually applied to public companies.
- A private company with CSF shareholders is exempt from Corporations Act 2001 chapter 6 takeover rules, subject to additional conditions that may be applied to protect investors.
If these additional conditions are followed, the changes imposed by the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017 mean that investors who acquire shares in a private company by CSF will, crucially, not count towards the 50 non-employee shareholder max limit imposed by the Corporations Act section 113.
This cap on non-employee shareholders was a primary obstacle in private companies obtaining CSF from a large number of potential investors.
This is important to many small private businesses that would otherwise benefit from CSF but were previously unable to obtain it due to a small employee and capital base and the impracticability of converting to a public company.
Now CSF is more readily available for technology and ‘Fintech’ start-ups, among others, as an alternative to the usual start-up funding appeal to venture capitalists or angel investors.
Any Downsides of CSF Being More Accessible?
However, the changes to make CSF more readily accessible must be balanced against the notably increased risk to investors.
Investing money in a small company is fundamentally more dangerous due to less statutory accountability and less transparent business practices.
Investments in small businesses also face liquidity risks if fortunes fall.
The new reporting obligations aim to at least shore up some of this risk and help provide potential investors with rights and clear information about the company seeking CSF.
How Does a Company Engage in CSF?
CSF must be undertaken through a licenced CSF intermediary.
Offerings will typically be made through an intermediary’s online crowdfunding platform.
There is a cap of $5 million per year that can be raised.
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