- There are three main types of crowdfunding: equity-based, donation-based and debt-based.
- Generally, if your project achieves its funding goal, all pledged funds are transferred to your bank account. If your project does not meet its funding goal, all pledges are cancelled and no funds are transferred.
Types of Crowdfunding
Crowdfunding is a scheme where projects, ventures and startup 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. There are three main types of crowdfunding:
Equity crowdfunding involves a company raising capital by issuing equity to its investors through an online platform known as an intermediary. The number of investors that can potentially invest in the company through equity crowdfunding may be hundreds. When raising funds from shareholders, private (Pty Ltd) companies cannot normally have more than 50 shareholders. However, under the equity crowdfunding legislation, this hurdle can be overcome.
The equity crowdfunding laws allow a company to engage in equity crowdfunding without the limit of 50 shareholders in certain circumstances. If the company meets the criteria, then it can raise up to $5 million within a 12-month period. Each individual investor can invest up to $10,000 in the company (with certain sophisticated or professional investors being able to invest even more).
To engage in equity crowdfunding, there are several obligations. The main criteria are that the company must:
- have two directors;
- ensure that the principal place of business is in Australia;
- have consolidated gross assets and annual revenue of less than $25 million; and
- raise the funds through an approved intermediary.
Importantly, if the company chooses to crowdfund using equity, there are a number of additional requirements that the company will need to comply with, including more onerous disclosure and reporting obligations.
This involves 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).
Also known as peer to peer lending, this form of crowdfunding involves asking a crowd to donate to a project or business in exchange for financial return at a later date. The potential of dividend returns can be raised through debt-based crowdfunding.
Popular crowdfunding platforms are Pozible, Kickstarter and Indiegogo.
Benefits of Crowdfunding
Crowdfunding is beneficial to obtain finance by reaching out to a broad public audience, whether it be for a creative startup or for a non-profit. It may be a way to source funds more quickly and efficiently compared to traditional channels. Donaters (or crowdfunders) can provide useful feedback on any project, as well as assist with your marketing interests. You can achieve validation of concept much earlier through crowdfunding than through traditional avenues of financing. Notably, crowdfunding platforms allow crowdfunders to personally invest in a project at a range of price points.
Pitfalls of Crowdfunding
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.
- Whilst crowdfunding can be a quick source of capital, there are risks for both investors and for businesses. Ensure you are aware of the conditions and obligations of funding.
- Crowdfunding in Australia is still in its infancy. Without substantial regulation in this field, investors should conduct their due diligence before investing.
- Potential investors should ask how the fund-seeker intends to use your funds if they reach their targets.
Businesses seeking to raise funds through crowdfunding websites need to be cautious of how their raised funds are used. Crowdfunding websites take a cut of the funding that they process through their platforms, as well as charge substantial transaction fees and take no responsibility for the trustworthiness of the people seeking funds. In short, crowdfunding websites are not accountable if a project does not succeed.
Frequently Asked Questions About Crowdfunding
Q: Do I need to be a registered business to crowdfund?
A: If the project is a hobby, there may not be any GST or income tax implications. However, if raising funds to start a business, you likely need to register with an ABN.
Q: Is crowdfunded money a donation?
A: If you are in business, what you give in return for the money that you receive will help to determine the tax issues. If you treat the money received as a donation to your business then there could be GST and income tax issues, as it is likely that the money will be revenue. The cost of providing any rewards (say goods or services) should be a tax deduction.
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