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Crowdsource funding allows startups and medium-sized companies to access capital from a large pool of investors that may otherwise not be available. Equity-based crowdsourced funding enables emerging companies to offer ordinary shares to retail investors, using licenced intermediary platforms and offering documents. This article will explain what crowdsourced funding is and any obligations it may place on your business.

What Is Crowdsourced Funding?

Crowdsourced funding (CSF) allows private companies to raise funds from the public through an online intermediary. As a startup or emerging company, you are able to raise from a large number of individual investors. These investors can make relatively small investments in your company in exchange for equity.

If a proprietary company wants to raise capital, it can do so from existing shareholders and its employees. However, they usually cannot raise funds from the general public unless the fundraising does not require a disclosure document. Although, this will be the case when taking on investment from:

  • sophisticated investors: people with income of $250,000 or more per annum for the last two years or with net assets of at least $2.5 million; or 
  • professional investors, like venture capital funds. 

CSF offers an alternative way of raising capital as it allows eligible private companies to raise from the general public. This is commonly known as ‘retail investors’. 

Eligibility of Proprietary Companies

To be eligible for CSF, private companies (excluding investment companies) must have:

  • less than $25 million in consolidated assets and annual revenue; and 
  • their principal place of business and a majority of directors in Australia.

Restrictions and Obligations 

When raising capital by issuing equity through CSF, it is essential to understand that this will impose several restrictions and obligations on your company. 

Fundraising CapThe cap restriction limits companies to raising a maximum of $5m in any 12-month period by way of CSF.
Share ClassOffers must be for fully paid ordinary shares in the capital of your company.
Investor CapRetail investors have an investment cap of $10,000 per company in any 12-month period. There is also a cooling-off period allowing investors to withdraw up to five days after making an application.
OffersCSF offers are made using an offer document which must be published on a licensed CSF intermediary’s platform. The offer document must expressly state that the offer is under the CSF regime. You will be required to enter into a hosting arrangement to appoint your chosen CSF intermediary. 
Risk WarningYour company must provide a general risk warning statement in the CSF offer document and the CSF intermediary’s platform. Retail investors must acknowledge that they have read and understood the warning before investing. 
Withdrawing OffersIf an offer document is defective, your company must publish a supplementary or replacement offer. Likewise, the defect is materially adverse from the point of view of an investor. Each investor will have 14 days to withdraw their application and be repaid their application money. 
AdvertisingAdvertising of CSF offers is permitted. However, certain rules direct investors to the general risk warning and CSF offer document for the offer. This is something companies need to be wary of when advertising CSF offers. 
Use of FundsYou cannot invest the funds your company raises through CSF offers in other companies, entities or schemes. Likewise, you cannot loan these funds to related parties (other than wholly-owned subsidiaries).

CSF Intermediary

There are now several CSF intermediaries that your company can choose if you are looking to raise through a CSF offer. Keep in mind that the CSF intermediary: 

  • must hold an Australian financial services (AFS) licence with an authorisation to provide a crowdfunding service; 
  • performs checks on the offering company, its directors and the CSF offer document; 
  • performs checks on investors, including assessing whether an investor is a retail client, 
  • holds investor money on trust; 
  • operates a platform for CSF offers; and 
  • has an obligation to suspend or close a CSF offer in certain circumstances, such as where the CSF offer document is defective.

Key Takeaways

Crowdsourced funding is an extremely exciting avenue for emerging companies to gain access to retail investors. If your company meets the eligibility requirements, you will need to make sure you have taken all the necessary corporate governance steps to ensure your company is eligible. You must also ensure you obtain all required consents to crowdsource, such as from shareholders. Further, it may be the case that you need to amend your company’s constitution and shareholders agreement. Importantly, you must ensure your company is compliant with all its obligations under the Corporations Act 2001.

If you would like more information about equity-based crowdsourced funding, contact LegalVision’s capital raising lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is equity-based crowdfunding?

Equity-based crowdsourced funding enables emerging companies to offer ordinary shares to retail investors, using licenced intermediary platforms and offering documents.

Who are retail investors?

As an alternative to raising capital from existing shareholders or employers, a proprietary company can raise funds from the general public, known as retail investors.

How does crowdsourced funding work?

Crowdsourced funding allows private companies to raise funds from the public through an online intermediary. This intermediary will perform checks on the offering company and holds onto investor money when the offer is complete.

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