Many businesses in the growth phase consider the different options for raising capital, and many opt for debt capital by way of borrowing funds from their bank. However, start-ups and small businesses are typically cash and asset poor and can struggle to obtain funds through traditional lending avenues. In recent years, crowd-sourced funding (“CSF”) has become increasingly popular as an alternative way for start-ups and small businesses to raise capital.
CSF has surged by 135% across all Australian platforms in the last 3 years to $7,000,000. Some of the very successful ones include Thrive ($3,000,000), Bubble Tea Club (11,648,055), Batch Brewing Co ($1,500,000) and Bunsters (hot sauce) ($2,000,000).
What is Crowd-Sourced Funding?
CSF is a mechanism by which proprietary companies can raise funds from a large number of investors who invest relatively small amounts of money. The investment is an equity investment whereby the company will issue ordinary shares to the investor in exchange for their contribution to its share capital.
CSF must be carried out using a licensed intermediary (the gatekeeper) whose involvements includes:
- Publishing a company’s CSF offer to the public on their online platform;
- Performing checks on the company making the offer, including the directors;
- Receiving all applications from investors; and
- Holding investor’s money until the offer is complete.
Crowd-Source Funding Regulations
CSF is highly regulated under the Corporations Act 2001 (Cth) and overseen by ASIC, the regulator responsible for fundraising activities and financial services.
Under the CSF regime, there are obligations and investor protections that apply to all CSF offers, including:
- Proprietary companies must have a minimum of two directors;
- Must prepare annual financial and directors’ reports, including having their financial reports audited once they raise $3 million from CSF offers;
- An investor cap of $10,000 per annum per company for retail investors;
- Companies must publish a CSF offer document containing minimum information including a prescribed risk warning, the rules around which are extensive;
- A five-day cooling-off period for investors; and
- Compliance with strict advertising rules.
We have assisted many companies with ensuring they comply with the CSF rules and regulations and understanding their rights and obligations in relation to CSF. If you are considering CSF to raise capital as an alternative to traditional borrowing, please contact us for a discussion.
About the Author: Kristy-Lee was admitted as lawyer in 2017 after graduating with Bachelor of Laws (Honours). Kristy-Lee joined the commercial law team at Lynn and Brown in June 2022 after practicing in tax law for almost 6 years at some of Perth’s top tier accounting and law firms, and in-house at Monadelphous.