In its simplest terms Crowdfunding involves using a social media platform to request relatively small amounts of money for a particular purpose. Most of us would have had some contact with crowdfunding usually in the context of a funding request for a charitable or benevolent purpose.
Overseas, crowdfunding is used for wider purposes including raising business finance. Essentially the request for finance is made by way of a “kick-start” request with the promise that those who contribute will be given the 1st opportunity to invest if the proposal comes to fruition.
Laws in Australia are beginning to catch up. In March this year legislation was approved to allow unlisted public companies with less than particular revenue and asset thresholds to raise capital via what is referred to as “crowd-sourced equity funding” (CSF).
There are quite a few conditions and restrictions that will apply to any company seeking to raise capital through CSF but the main ones are –
- All CSF offers will need to be made through a financial services licensee whose licence authorises the licensee to provide a crowdfunding service;
- There are caps both on how much can be raised (normally $5 million within a 12 month period) and how much can be invested (normally $10,000 for a retail investor);
- Funds can’t be raised for the purpose of investing in other companies or investment schemes; and
- The CSF regime does not apply to private companies.
For most of us, the last point is the most important. Overwhelmingly, new businesses start out as private companies. There is already some scope under corporations’ law for private companies to raise start-up or business expansion finance but the present provisions are complex, restrictive and can be expensive to implement.
It could be strongly argued that the CSF regime is most needed in the private company space. The government has stated that work is already underway to extend the CSF provisions to private companies. Whilst that may take some time, we will be watching those developments with keen interest.
At Everingham Solomons we have the expertise to assist businesses with questions about fundraising and business finance generally because Helping You is Our Business.
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