Congratulations if you have a new and innovative business concept! Do you have big dreams but a small budget? How can you bring this vision to life?

We’re often asked for help with financing a business. We suggest five key paths: 1. Loans, 2 Grants, 3 Convertible Notes, 4. Equity funding and 5. Crowdfunding.

This article is one of a five-part series on how to finance your business. This article focuses on crowdfunding.

Crowdfunding

Crowdfunding is a way for businesses to engage with the public to raise funds. A common path is through websites such as Kickstarter or RocketHub. Many businesses use crowdfunding to sell products or services and accept donations. Crowdfunding allows members of the public to contribute money to a product or service that has yet to be implemented. This contribution is typically in exchange for the promise that they will be one of the first to receive it once the business raises enough money to finalise the product or service.

At this stage, equity crowdfunding is not legal in Australia. Equity capital raising is restricted to specific categories of investors. Businesses looking to raise funds this way must comply with the Corporations Act’s advertising prohibitions. One example is unlimited issues to sophisticated investors who meet a new worth or income test (earn at least $250,000 or have $2.5 million in assets). However, these people are not the general public. Another option is through personal offers to raise a limit of $2 million in a 12-month period, with a maximum of 20 investors. These caps mean that this is not genuine unlimited crowdfunding.

Advantages

In the 2015-2016 Budget, the Government announced its plans in conjunction with ASIC to implement a regulatory framework for crowdsourced equity funding; the goal being to make it easier for small businesses to crowdfund. Treasury has released a discussion paper and is creating draft legislation.

Crowdfunding is a great way for businesses to gain exposure. It is an exciting opportunity for ordinary members of the public to support an idea or business model in which they believe. It may be one of the only sources of funds for a new business. Your business may receive funds quicker and more efficiently than through more traditional sources of funding. Your business will likely receive invaluable market information from seeing who is interested in crowdfunding your business. You may receive marketing tips and feedback from individuals and businesses interested in the development of your vision.

Disadvantages

Currently, it is difficult in Australia to raise equity in a company through crowdfunding because of the restrictions on unlisted public companies and private companies. The most common way of crowdfunding in Australia is by pre-selling goods or services, or seeking donations. The Competition and Consumer Act 2010 (Cth) applies to sales of goods or services, particularly Schedule 2 the Australian Consumer Law. Please seek legal advice on the issues and compliance.

Conclusion

Is crowdfunding right for you? It may be your best option to gain vital early stage funds without giving up equity or taking on debt.

You need to understand the relevant law, which depends on what you are offering. Please obtain legal advice on your proposed crowdfunding offer and what you need to do to comply with the law, from a lawyer that understands startups and crowdfunding.

LegalVision can help you crowdfund, including understanding and complying with the law. LegalVision provides businesses and individuals with tailored online legal advice, including drafting legal agreements. We have experienced startup and crowdfunding lawyers who can help you. Call LegalVision on 1300 544 755.

Ursula Hogben

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