In Short
- Crowd-sourced funding (CSF) allows businesses to raise funds by offering shares in the company to the public through an online platform.
- CSF is available to public companies with compliance requirements under the Corporations Act 2001.
- It provides an alternative to traditional funding methods, potentially involving lower costs and broader investor access.
Tips for Businesses
When considering crowd-sourced funding, ensure your business meets eligibility requirements and understand the responsibilities involved. Prepare a compelling business proposal to attract investors, focusing on transparency and clear communication. Engage with a CSF intermediary platform authorised by ASIC to guide you through the process efficiently.
Crowd-Sourced Funding (CSF), also known as Peer-to-Peer (P2P) finance, is a relatively new concept. Although CSF’s global origins date back to 1983, the UK first formally adopted it in 2005, and it only recently landed in Australia in 2017. CSF typically involves a company raising relatively small amounts of money from a high volume of investors. CSF provides much-needed capital to businesses who may otherwise not be able to access it, but it is subject to unique regulatory and legal requirements, which companies should consider before embarking on a CSF campaign. This article traces the origins of Crowd-Sourced Funding, examines how it is applied today, and outlines what you should be aware of before undertaking a CSF raise.
The Birth of CSF
Professor Muhammad Yunus, a Bangladeshi social entrepreneur and banker and recipient of the 2006 Nobel Peace Prize, originated the concept of CSF. Professor Yunus believes that modern economic theories do not adequately explain and address poverty. He then founded the Grameen Bank in 1983 to tackle this pressing issue. One innovative approach that the Grameen Bank adopted involved encouraging small deposits ranging from $20 to $30 and redistributing those funds to the underclass who could not obtain finance. These products not only freed those people from the exploitation of unsavoury lenders but also represented the embryonic form of CSF lending.
What is CSF and How Does it Operate in the Real-World?
CSF is a method of raising money from interested individuals (being the “crowd”) to fund a business, project, or even an idea. Third-party online platforms often facilitate this process. In Australia, approved CSF providers act as intermediaries to reach a large number of potential funders. These providers often run online “campaigns” on behalf of businesses to raise funds from prospective investors in their network.
The world’s first CSF platform was “Zopa” in the UK, founded in 2005. Subsequently, capital raising through CSF experienced rapid growth in the United States, with two flagship companies emerging: Prosper and Lending Club. Lending Club, in particular, held 75% of the market share in the United States CSF industry in 2014, with monthly loan disbursements reportedly exceeding US$200 million.
Continue reading this article below the formCSF in Australia
This innovative microfinance approach landed in Australia in 2017 through amendments to the Corporations Act. Under the Australian CSF regulatory framework, eligible companies can raise up to AU$5 million in any 12-month period through a third-party online platform (also known as a CSF intermediary). If you want to attract the general public to invest their cash in your company, the first thing you should ensure is whether your entity is eligible for CSF.
Eligibility
In order to conduct capital raising through CSF, your company must be a proprietary company (i.e., a “Pty Ltd” company with a minimum of two (2) directors) or a public company limited by shares. Your company must also:
- have its principal place of business in Australia;
- have a majority of its directors (excluding alternate directors) ordinarily residing in Australia;
- not exceed the consolidated gross assets cap of $25 million and consolidated annual revenue cap of $25 million for both the company itself and all of its related entities (such as its subsidiaries);
- not be listed on a recognised stock exchange; and
- not have a substantial purpose of investing in other companies, entities or schemes (including its related parties).
Retail investors are eligible to invest a maximum of $10,000 through CSF offers made by the same company via the same CSF intermediary in any 12-month period.
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Picking a CSF Intermediary
If your company is eligible for CSF funding, it is time to select a CSF platform. In doing so, you should consider, among other things:
- whether the platform holds an Australian Financial Services (AFS) licence;
- define the ultimate goal and purpose of your proposed capital raise clearly, ensuring close alignment with past raises supported by the platform;
- understand the structure of your ideal CSF platform, choosing between donation, equity/lending, or rewards models based on your objectives;
- consider whether the platform easy to use and navigate – an ideal CSF platform should facilitate seamless navigation for both your company and potential investors, fostering motivation rather than frustration, good examples of which could be (i) having integrated communication facilities for your company to connect with potential investors and to address their concerns and enquiries; and (ii) adopting a wide variety of payment methods, including international bank cards or even virtual currencies, to ensure a positive user experience;
- consider whether the platform provides solid customer care services, such as email, live chat, or phone helplines;
- always be aware of platform commission fees (this often ranges from 5% to 20% of the total funds raised), other chargeables, and terms and conditions regarding your fundraising and missed targets;
- whether the platform sets a minimum funding threshold and whether that aligns with your circumstances; and
- review platform restrictions to ensure compliance with laws, regulations, and policies.
CSF Offer Documents
A CSF offer document is a document that sets out the formal offer that will be presented to prospective investors via the CSF platform hosted by the CSF intermediary. Your CSF offer document must be clear, concise and honest (that is, free from any misleading, incorrect or deceptive facts and statements), and by law, your offer document will need to meet minimum disclosure requirements. Remember, offer documents that fail to meet these standards may be deemed defective and may not be processed. For this reason, it is essential that you engage an experienced lawyer to assist you with the process.
A summary of the key disclosure requirements is set out below:
If you have identified an ideal CSF intermediary, executed the hosting agreement with that provider, and completed the drafting of your CSF offer documents, your CSF intermediary will typically handle the rest.
Your Company’s Corporate Governance Documents
Before completing your CSF raise, you need to consult your lawyer to determine whether the company’s existing corporate governance documents (typically the Constitution and any Shareholders Agreement) are suitable for CSF investors, or whether you need to amend or entirely redraft them to include the appropriate clauses. In most cases, companies opt to terminate their Shareholders’ Agreement (if one is in place) and incorporate the key terms of that document in the Company Constitution.
Key Takeaways
CSF is a viable option for many startups and SMEs (small to medium-sized enterprises) seeking to secure capital to scale their businesses. This alternative financing avenue is particularly beneficial for businesses encountering obstacles when attempting to access traditional capital markets and venture capital fundraising mechanisms, but it does come with a number of legal and regulatory hurdles. By harnessing the power of CSF, entrepreneurs can tap into a broader pool of potential investors, diversifying their funding sources and increasing their chances of securing the necessary resources to fuel growth and innovation.
If you need help with raising capital, including capital raising through CSF, our experienced capital raising lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
CSF provides startups and SMEs with an alternative way to raise capital without relying on banks or venture capital firms. It allows businesses to access funds from a broad pool of investors, helping them grow while maintaining control. However, companies must meet eligibility and regulatory requirements before launching a CSF campaign.
A company must be a proprietary or unlisted public company with its main business in Australia. It must have at least two directors, meet asset and revenue caps of $25 million, and ensure its CSF platform holds an Australian Financial Services licence. Retail investors can invest up to $10,000 annually.
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