Crowdfunding: What Should Businesses and Investors Consider?

The Federal Government recently unveiled proposed spending of $1.1 billion over the next four years to promote business-based research, development and innovation. While the package includes significant tax incentives for high-net-wealth investors and professional investors, we need legal reform to boost small scale investment, including by friends and family. Parliament is currently considering draft legislation for Crowdsourced Equity Funding (CSEF).

In the interim, non-equity crowdfunding is alive and well. Non-equity crowdfunding means supporting a business by typically pre-purchasing a good or service to help bring to life the business’ product or service.

What Should a Potential Crowdfunding Supporter Consider?

If you are considering investing in a startup through crowdfunding in 2016, ensure that you take some time and research the following:

• What are your rights as a funder? You should check the platform’s terms and conditions and understand what you are paying for and whether your money is returned if the project is cancelled. 
• What’s the risk? Be mindful that experimental prototypes primarily make up crowdfunded projects. The prototype may not be viable and may never launch to the general market.
• Is the company trustworthy? The crowdfunding platform does not vouch for the business’ reliability seeking funding, and you will need to spend time researching this yourself.
• What law applies? In Australia, general laws can protect you including the Australian Consumer Law that covers consumer purchases of products and services, and laws prohibiting misleading and deceptive conduct.

What Should a Business Seeking Crowdfunding Consider?

Australian companies should know that it is not yet legal to raise capital by issuing shares through crowdfunding to a large number of public investors. Australia’s proposed crowdfunding framework aims to facilitate equity crowdfunding and to mitigate against losing projects to countries that permit equity crowdfunding, such as the United States and New Zealand.

Under Chapter 6D of the Corporations Act, private companies can, however, raise equity investment from up to 20 retail investors, investing up to $2 million in total, in a 12 month period.

Non-equity crowdfunding platforms permit companies to raise funds by offering a good or service, including a pre-order. A recent example involved two NSW based founders seeking to crowdfund a brand of Australian-made organic vodka, using the platform Pozible. Depending on how much an individual invested, the pair offered bottles of vodka, an invite to the launch party, and an Australian spirit tasting and cocktail making master class.  They reached their funding target.

Businesses also need to research the crowdfunding platform’s rules. Recently, Kickstarter froze the Anonabox privacy router project because Anonabox did not comply with Kickstarter’s rules. Crowdfunding in Australia presents an exciting new playing field for investors and businesses alike. But both parties need to ensure that they put aside some time to read and understand the rules of this rapidly changing game.

Changes to crowdfunding in Australia presents an exciting new playing field for investors and businesses alike. But both parties need to ensure that they put aside some time to read and understand the rules of this rapidly evolving game.

Questions? Get in touch on 1300 544 755.