Crowdfunding (also known as crowd-sourced equity funding) is a scheme where projects, ventures and start-up companies seek donations from the public, generally through the Internet. Investments and donations are usually made through public marketplaces, which co-ordinate and administer the fundraising.

Under the current investment regulations, equity funding is restricted to sophisticated investors who qualify with a minimum net worth or income, or wholesale investors, or businesses are restricted to raising up to $2 million in 12 months, by personal offers, from up to 20 investors. In the 2015 Federal Budget, the Federal Government announced new tax incentives focused on crowdfunding. $7.8 million will be spent getting the Australian Securities and Investments Commission to  implement a new regulatory framework for crowdfunding money raised by start-ups and how they might access it once it has been raised.

Types of Crowdfunding

There are three main types of crowdfunding:

  • Equity-based crowdfunding (or investment crowdfunding or crowd-sourced equity funding): Asking a crowd to donate to a project or business in exchange for equity. Whilst equity-based funding may create a shareholding in a business, dividends are rare and investments are likely to become diluted if more shares are issued.
  • Donation-based crowdfunding: Asking a crowd to donate to a project or business in exchange for non-monetary rewards. The returns can be tangible or intangible (such as the finished product).
  • Debt-based crowdfunding (or peer-to peer-lending): Asking a crowd to donate to a project or business in exchange for financial return at a later date.

Crowdfunding a Business Idea

Crowdfunding is beneficial to obtain finance by reaching out to a broad public audience, whether it be for a creative start-up or for a non-profit. Generally, funds can be sourced more quickly and efficiently compared to traditional channels. The individuals or businesses donating, also known as crowdfunders, can provide useful feedback on any project, as well as assist with your marketing interests.

Whilst crowdfunding attracts interest from the public, it also exposes your ideas to potential imitators and raises a number of legal and taxation requirements. Managing and delivering a crowdfunding campaign requires ongoing communication and maintenance. Our team of start-up and business lawyers can assist you in meeting the legal obligations of crowdfunding.

Conclusion

Crowdfunding is an excellent way to generate public interest in your product or service. The main legal obstacles for crowdfunding include the shareholder cap and the prohibition on public offers of equity under the current regulations. At LegalVision, we can assist you in ensuring your crowdfunding campaign meets the legal and taxation requirements – get in touch with us today on 1300 544 755.

Lachlan McKnight

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