As a business owner, you might be at the right stage of your business to raise capital. Raising capital through crowdsourced funding (CSF) is one such method. This allows your private company to raise funds from the public through an intermediary. This article will explain what crowdsourced funding is and how it differs from a more traditional capital raise. It will also detail:
- what business structure is most suitable;
- your post capital raising obligations; and
- how to attract the right investors for your business.
Crowdsourced Funding
Crowdsourced funding (CSF) is a method of raising capital that allows private companies to raise funds from the public. Through CSF, companies can offer ordinary shares to retail investors, using licenced intermediary platforms and offering documents. This intermediary will perform several tasks, including performing due diligence on the offering company and holding onto investor capital until the offer is complete and the funds provided to the offering company. CSF can be a great way for a startup to raise capital if raising funds from angel investors or venture capital funds are not deemed suitable or possible. CSF can also result in the investors becoming ambassadors for the business and be an excellent way to market the business.
CSF is different from a more traditional capital raise as you conduct it through an intermediary. The requirements to raise funds through this method are also different. Like with any capital raise, companies need to be clear on the amount of investment they are seeking and the pre-money valuation they are proposing.
It is important to seek legal advice on the appropriacy of CSF as a capital raising method. This is because you must set up your company a certain way to raise funds through CSF, including having the required governance documents. It is also essential to understand the obligations that arise after securing the CSF. Further, as you will pitch your business through an intermediary, it is critical to demonstrate how your business is a good investment decision for potential investors.
Business Structure and Governance
You must operate your business through a company for it to be able to raise funds through CSF. A company will allow an investor to receive shares in return for their investment instead of business structures such as sole traders or partnerships. The company must have a minimum of two directors and be a small to medium-sized unlisted company. This means having less than $25 million in consolidated assets and $25 million in annual revenue.
Further, you should amend your company constitution to allow capital raising through CSF. The company constitution will usually contain most of the terms that would otherwise be in the shareholders agreement.
It is also possible that a company might end up with hundreds of investors through CSF. Consequently, you may need to terminate the company’s shareholders agreement as part of the preparation process. If there are specific arrangements such as vesting schedules with some of the shareholders, it may be worth considering a separate agreement with these shareholders to reflect their specific arrangements.
Continue reading this article below the formPost Capital Raising Obligations
There are several ongoing compliance and reporting obligations that arise following a capital raise through CSF. For example, a business must establish and maintain a CSF share register and notify ASIC of the updated share structure. A business must also comply with ongoing reporting requirements to ASIC, including annual financial and directors reports. Additionally, you may need to appoint an auditor to audit the company accounts if it is a large proprietary company or has raised more than $3 million from CSF offers.
Attractive Offering for Investors
Investors usually undertake a degree of due diligence to ensure that the business they intend to invest in is viable enough. Likewise, they want confidence that you run your business in a way that will maximise the chances of success.
Investors will often be interested in having a clear view of the company’s shareholding, ownership, talent and vision. Therefore, it is crucial for a company seeking investment to have an up-to-date cap table that shows the current shareholding plus information on any shareholders that are either also employed or advising the business. In addition, different investors will have different preferences concerning the ownership structure. Therefore, it is vital to be clear and upfront to ensure you attract the right type of investor.
TIP: Be clear about the business’ plans and vision and communicate this to prospective investors effectively. You may find your business is performing well when seeking investment. However, attracting quality investors can depend on how your growth and expansion plans demonstrate a likelihood of continued success.
The success of a business is often the result of the talent of the staff that they have employed. Investors are also interested in knowing the level of talent in the business. Likewise, they may be interested to know if your business offers any incentives to retain such talent, like an Employee Share Option Plan. It is essential to document and communicate such information to investors to add to the attractiveness of the offer of investing in the business. It will also assist potential investors in understanding the value of the talent within the organisation.
Key Takeaways
If you are looking to raise capital from the public for your private company, crowdsourced funding might be the right method for you. Importantly, it is best practice to seek legal advice when considering raising funds through CSF because there are legal requirements you just meet before your business can proceed. For more information on preparing your business for CSF, contact LegalVision’s capital raising lawyers on 1300 544 755 or complete the form on this page.
Frequently Asked Questions
Crowdsourced funding is a method of raising capital that allows private companies to raise funds from the public. Through CSF, companies can offer ordinary shares to retail investors, using licenced intermediary platforms.
Unfortunately, a sole trader company structure is not suitable. You must operate your business through a company for it to be able to raise funds through CSF. A company will allow investors to receive shares in return for their investment. Also, the company must have a minimum of two directors and be a small to medium-sized unlisted company.
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