Are small businesses able to use crowdfunding to finance their startups? What is the business selling, and what must it provide in return?  Crowdfunding is a broad term and can easily be misunderstood. There are various methods for fundraising including issuing shares (equity) in your company, selling products or services that the business will provide, and/or accepting donations.

Crowdfunding can be useful for all sorts of reasons, including funding startups, political parties, not for profit organisations, and art societies. Businesses including Kickstarter, RocketHub, Equtise and Indiegogo assist startups to raise money from the public.

How can private companies raise funds by issuing or selling shares in Australia?

Businesses that crowdfund by selling products or services must be compliant with the Australian Consumer Law. Companies that issue shares to raise funds must be compliant with the Australian Corporations Law provisions regarding fundraising. Generally speaking, the Corporations Act prohibits small businesses from approaching the public for capital without a prospectus. A prospectus can be lengthy and expensive to prepare.

Private companies can issue or sell shares to investors in the categories below, without a prospectus. Each type of investor is defined in the Corporations Act:

  1. Personal Offers – to raise up to $2 million in 12 months from up to 20 investors
  2. Business Introduction or Matching Services like the Australian Small Scale Offerings Board
  3. Placements to Sophisticated Investors who have a certificate from their accountant that their income is $250k or more and/or the combined value of their assets is $2.5 million or more
  4. Placements to Professional Investors who manage at least $10 million in funds, and/or have an Australian Financial Services License
  5. Placements to Institutional Investors i.e. offers made through financial services licensees; and/or
  6. Offers to people associated with the body corporate or currently holding those securities, such as senior company managers.

There are limits on the way in which these offers can be advertised and promoted.

Could equity crowdfunding assist start-ups in Australia?

The general perception is that it is very challenging for start-ups to get investment support.

Equity crowdfunding would benefit start-ups by giving them access to capital from the public, also known as retail investors. With equity crowdfunding, start-ups could advertise to retail investors who believe in their vision and have a desire to support them in the early stages.

If equity crowdfunding was more readily available in Australia, start-ups could be better funded. Start-ups may not have to resort to using their credit cards to raise money, or using their home as security for a business loan, or having to give up large percentages of the company and/or large amounts of control of the business to attract sophisticated, professional or institutional investors – if they are able to attract these investors at all.

Crowdfunding Risks

The key risks of relaxing the equity funding rules in Australia are that start-ups and SMEs may not be required to provide the same level of rigorous disclosure as is required in a prospectus.  The business would also not go through the same level of screening that a bank would typically require to loan money to a business.  On top of this, the business would not be required to comply with the detailed requirements to be listed on a stock exchange and the continuous disclosure requirements to maintain the listing. The general perception is that it is very challenging for start-ups to get investment support.

Development of Equity Crowdfunding in Australia

VentureCrowd is the first, and only, equity crowdfunding platform to take off in Australia. It enters the market following the recent release of a government report recommending a shake-up to the regulatory framework of equity financing in Australia. The recommendations made in the government report have not yet taken effect, making it difficult for ordinary Australians to invest in Australian start-ups.

Despite this positive development, VentureCrowd are quite selective with which start-ups they choose to work with. Only start-ups that have been privately invested into or were once part of accelerator programs are chosen. On top of this, VentureCrowd do reference checks on these investors before committing their support.

The most challenging obstacle that the legislation currently presents is that start-ups looking for crowdsourced funds must first become public companies.

In the report, the recommendation was made that smaller, newer businesses become “exempt public companies” for a period of time, with a more flexible compliance requirement. After this period of time, the companies would progress to become fully-fledged public companies; easing the transition and helping start-ups take off.

In October 2014, VentureCrowd successfully sourced $1.2M for the taxi app business Ingogo. While the majority of start-ups will struggle to attract private investment or accelerator graduation status, the round of investment is an important step in the right direction. It demonstrates how equity crowdfunding can give these technology-based start-ups the boost they need to get off the ground.

Crowdfunding Reform in Australia

Liberalising the equity funding laws would assist start-ups to fundraise and build out their business, while giving the public the opportunity to make early-stage investments. In another sense, however, the Australian Stock Exchange already provides a platform for businesses to pool funds from ‘retail’ investors.

Canada, Italy, New Zealand and the UK are leading the way towards a more liberal framework.

What level of initial information would the business have to provide to the public? How much ongoing information would the business have to provide to investors? How much influence would investors have in the big picture direction or the day-to-day running of the business? Australia needs to address these issues to balance the desire of start-ups to raise money with the requirement for investors to be fully informed as to what they’re investing in.

The government needs to act fast for Australia to secure a place in the international equity-crowdfunding arena.

Conclusion

Get in touch with LegalVision if you need a legal assistance with your startup business. Our startup lawyers are specialists in drafting loan agreements and can advise you on the most effective business structure as you continue to grow your business.

This article first appeared on Samsara Magazine, and was first published October 2014.

Ursula Hogben

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