Crowdfunding, synonymous with Kickstarter and Indiegogo, is now more popular than ever. Beyond rewards-based crowdfunding, the Federal Government is now seeking also to regulate equity crowdfunding. But what is crowdfunding and should you get involved? Here’s a cheat sheet for investors and startups considering entering this complicated world (and possibly crowdfund Kanye West’s upcoming campaign for emoji autocorrect).

Lessons from Tim Minchin

Tim Minchin’s song about Cardinal George Pell, Come Home (Cardinal Pell)‘, released last month, showed us just how pervasive and impactful a crowdfunding campaign can be. When Cardinal Pell revealed he would not fly back to Australia to testify in person at the Royal Commission into Institutional Responses to Child Sexual Abuse, Minchin released his song on YouTube. Minchin’s campaign demonstrated that if you hit the right nerve and have maximum social media exposure, a cause can go viral.

On the back of Minchin’s song, a GoFundMe page was set up, raising $117,000 in just over 24 hours to send abuse survivors to Rome to appear while Cardinal Pell gives his testimony via video link. The success of the Tim Minchin GoFundMe campaign highlights the effectiveness of some crowdfunding campaigns.

Types of Crowdfunding

Given the media attention that Cardinal Pell and some other charitable crowdfunding campaigns receive, at first blush one might think crowdfunding is only for donation based moral or ethical causes. However, there are some crowdfunding models in operation, with both altruistic and commercial motivations. Common examples include:

  • Charitable (Donation): Based on a charitable/non-profit model, participants help for society’s benefit without financial reward. The Tim Minchin/Cardinal Pell crowdfunding campaign is a good example of this type of charitable crowdfunding.
  • Equity-based: Equity in a startup company is provided to crowd-funders in exchange for money. If the startup succeeds, equity crowd funders will share in the spoils of the startup’s success. Please note that equity-based crowdfunding is currently not legal in Australia and aside from some specific exemptions under Chapter 6D of the Corporations Act 2001 (Cth), advertising is prohibited;;
  • Reward based: Investors receive a reward or product in return for investing, often a product that is as-yet unbuilt; and
  • Lending based: The crowdfunding is a loan and ultimately to be repaid to the contributors as the startup company begins to make money, presumably with interest.

How to Crowdfund

From a purely practical aspect, the most common way to crowdfund is online, through social media and other platforms using crowdfunding websites such as Kickstarter and GoFundMe.

Every crowdfunding campaign has two components:

  • Raising funds: Specifying a financial goal that must be reached at the outset; and
  • Creating brand awareness/promotion: Not only raising funds but promoting the brand, so more people buy the product once it is launched.

Arguably anyone can go on a crowdfunding platform and set up a page and crowdfund in a few mouse-clicks. Community-based fundraising pages are also increasing in popularity. However, if you are considering equity-crowdfunding for a startup, it is sensible to prepare before starting the crowdfunding journey to ensure you meet your fundraising and other business goals.

The second component of crowdfunding is the creation of brand awareness. To achieve reach and marketability, you should have an existing network with which to share your crowdfunding campaign. Crowdfunding relies on viral marketing and without a broad existing network, word (or your product) will not get out there. For example, if you do not have an established social media presence, crowdfunding may not be the best idea for your startup as you will not be able to spread the word and generate the attention of potential investors or customers.

Equally, if crowdfunding is worth doing, it is worth devoting time to your crowdfunding campaign. To put it bluntly, no one will invest in a startup company that puts forward a half arsed pitch. Investors want to see passion and a clear vision in addition to the real possibility that they will make money investing in your company. Make time. Clear your schedule and work hard with the end goal in mind. Most crowdfunding campaigns are short but intense.

Finally, crowdfunding requires a certain type of personality – a gregarious type who is not afraid to ask for money and promise the success of a startup company in return. This means that if you intend to launch a crowdfunding campaign for your startup, prepare yourself to get out there and sell your product – hard and often. Explaining why people should surrender their hard earned coin will need to become second nature. You should also expect curly questions and prepare to give well-thought out answers.

The Pervasiveness of Crowdfunding

It’s not just tech startups raising through crowdfunding. The practice is becoming widespread in Australia in other sectors such as property development.

Crowdfunding is marketed to small investors in a way that encourages them to pool together to invest in big end property developments and share in the resulting profit. Much like Uber and Airbnb have moved towards small operators in the taxi and accommodation industries.

The Singaporean crowdfunding platform CoAssets is crowdfunding real estate developments in Asia and is looking to expand to Australia, having already funded development in Sydney. This resonates with millennials who are unable to afford increasing property prices in residential and commercial markets. Crowdfunding property development projects could sidestep this problem and pave the way for future property owners. Younger investors who view tech disruption as the norm in society may be more receptive to such investment methods.

That aside, there are some unscrupulous players out there and finding an ethical crowd-funder may be challenging. The big four banks may turn their sights on crowdfunding to keep pace with disruptors in the investment market. After all, if investors invest small amounts, there will be no need for bank mortgages to fund the investments in crowdfunding schemes.

Australian Success Stories of Crowdfunded Product Launches

Probably the greatest Australian crowdfunding success story in recent times has been “The Flow” beehive created by Stuart and Cedar Anderson in the Byron Bay Hinterland.

Initially listing their crowdfunding campaign on the site Indiegogo with a goal of raising $70,000, the Andersons raised a staggering US $12.2 million. The Flow has gone on to thrive internationally and can show what a genuinely good idea can do if correctly marketed.

Similarly, a Melbourne company, Rapide Lite, also used Indiegogo to campaign for a $5,000 goal to develop the Rapide Lite 200xL 3D desktop printer. They ended up raising US $200,348.00 online and have since gone on to develop the product.

What Can Go Wrong?

While The Flow and Rapide Lite are fantastic examples of what is good about the world of crowdfunding, if you are looking to invest in a crowdfunding campaign, be wary. There is no shortage of scammers looking to take advantage of prospective investors, and not all crowdfunding campaigns are legitimate or going to be successful.

My advice for would-be investors? Research and carry out due diligence. For example, if an individual is buying real estate, they would engage a lawyer and have that lawyer conduct a number of searches and review a contract before acting to ensure they received good title to that property. Similarly, if a bank were providing funds for that real estate transaction, the bank, as an investor, carries out similar searches on the property with the intention of protecting the investment.

Crowdfunding is an entirely different investment model. The same type of due diligence for a bricks and mortar transaction is not present, and it involves a leap of faith, particularly when crowdfunding sites (or platforms) don’t offer guarantees for bad investments. This could culminate in leaving investors out in the cold.

Government Changes to Equity Crowdfunding

It was with these pitfalls in mind that on 3 December 2015 as part of the 2015/2016 Federal Budget, Kelly O’Dwyer, Minister for Small Business and Assistant Treasurer introduced the Corporations Amendment (Crowd-sourced Funding) Bill 2015 to Parliament.

Broadly speaking, the proposed legislation intends to:

  • Create a legislative framework to assist startup/equity based crowdfunding; and
  • Help startup companies with innovative business concepts, such as those envisioned by the “ideas boom”.

If passed in its current form, the Bill will:

  • Set out eligibility guidelines for crowdfunding, noting a public company must be established to be eligible for crowdfunding under this Bill with assets under a certain threshold ($5 million);
  • Create a firm set of rules for making crowdfunding offers, noting they will be capped at a certain level;
  • Protect investors by creating investment guidelines and providing unconditional cooling off rights to investors; and
  • Regulate reporting/taxation requirements for companies operating crowdfunding campaigns.

What Does Crowdfunding’s Future Hold?

While the Bill was introduced to stimulate investment in startups and offer protection, submissions from crowdfunding stakeholders have criticised the first version of the Bill. The loudest was that the proposed Bill required establishing a public company to raise money by crowdfunding, noting a public company has additional reporting and operating requirements. The Federal Government responded to these comments by allowing startups that incorporate later as public companies to receive up to a five-year exemption from corporate governance requirements.

Equity crowdfunding will be out of reach for most proprietary limited liability (or Pty Ltd) companies under the proposed legislation as it will only be available to any unlisted Australian public company with a turnover and recorded gross assets of less than $5 million. Surely that is not the Government’s intention. If anything, these smaller operations should be offered greater protection and an opportunity to succeed.

The Bill must pass both houses of parliament – only time will tell if it will become a reality and if so, in what form it will be passed.

Key Takeaways

When crowdfunding, prepare before starting your crowdfunding journey and remember:

  • Crowdfunding relies on getting your idea out to as many people as you can.
  • There are four distinct types of crowdfunding: (1) charitable (donation), (2) equity-based, (3) reward based and (4) loan based.
  • All crowdfunding campaigns have two parts:
    • Fund raising; and
    • Creating brand awareness.
  • Most rewards-based crowdfunding campaigns are short but intense campaigns – be prepared to get out there and sell your project, hard.
  • The Federal Government introduced the Corporations Amendment (Crowd-sourced Funding) Bill 2015 to Parliament to regulate the equity crowdfunding market. The Bill is yet to pass in Parliament but watch this space for developments.

On that note, what do you think about the Government’s proposed changes? Do you think it’s enough to bring Australia up to speed with our international counterparts? Let us know on twitter at legalvision_aus or 1300 544 755.

Emma Heuston

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