What is Crowd-sourced Funding (CSF), and why should your business consider it?
One of the many challenges you may face as a small business or start-up is raising sufficient capital to grow and develop your company. If this is the case, then crowdfunding might be an effective way for your company to raise finance through independent investors. Crowdfunding enables start-ups and businesses to approach a large number of investors who will invest small amounts of money. It is emerging as a popular way to fund innovative business ideas.
In 2016, the government drafted the Corporations Amendment (Crowd-sourced Funding) Bill 2016 (the Bill) relating to Crowd-sourced Funding (CSF) enabling certain unlisted public companies to raise capital from retail investors through an online platform in return for equity in the company. This fundraising method is useful for small companies or start-ups who often find it difficult to access traditional sources of finance. CSF is particularly attractive as it addresses two financial investment issues – the first being that the previous regulatory regime made it difficult for small businesses and start-ups to access affordable finance options, and the second being that previous retail investors did not have access to early stage investment opportunities in emerging companies. The CSF regime aims to address these issues by encouraging investment in innovative ideas, whilst providing a level of protection for retail investors.
What are the legal requirements under the CSF regime?
Following the introduction of the Bill, the Corporations Amendment (Crowd-sourced Funding) Act 2017 for unlisted companies came into effect in September 2017. With ASIC now accepting applications for potential CSF intermediary platforms, eligible companies will soon be able to raise up to $5 million in any 12 month period, with retail investors able to invest up to $10,000 per offer per year, in an unlimited number of businesses.
In order for your company to be eligible to raise capital under the CSF framework, your company must satisfy the following requirements:
- It must be a public company with its principle place of business in Australia;
- The majority of directors must ordinarily reside in Australia;
- It must have less than $25 million of gross assets and less than $25 million annual turnover, and must not be subsidiaries to a listed entity; and
- Both your company and any related party must not operate as an investment business.
If your company is eligible to participate in the CSF regime, it will be required to implement the following:
- Enter into a hosting arrangement with a licensed CSF platform, where CSF platforms undertake due diligence on issuer companies and provide risk warnings to investors; and
- Prepare a CSF offer document, which will have a reduced level of disclosure compared to a prospectus, and is intended to reduce the cost and time burdens of traditional equity fundraising.
A participating company may take offers of ordinary shares to raise up to $5 million in any 12 month period, and retail investors can invest up to $10,000 per offer per year, in an unlimited number of eligible companies whilst having the benefit of a five day cooling-off period with a right to unconditionally withdraw their investment.
CSF is an exciting development in Australia’s fundraising landscape. Commentators have suggested that it will offer many companies an alternative source of capital, and allow them to tap directly into the retail equity market without the pressures and cost of offering securities under a prospectus.
How can we help your business?
We can help your business with the following:
Assess your company and advise whether it is eligible to apply for investment through CSF
- Advise whether CSF is an appropriate fundraising option for you, and if not, propose alternative options
- Provide guidance and advice with regards to obligations for CSF platforms
- Provide advice and assist with the implementation of an appropriate structure to comply with the CSF regime.
This is general advice only. Liability limited by a scheme approved under Professional Standards Legislation.
Published Jan 24, 2018
Jessica Kerr is the Director of Sinclair + May, a female-led, boutique commercial law firm based in Melbourne’s inner north. Sinclair + May work with small businesses to ensure their legals are in order. Book a free 15-min chat here to talk with one of our solicitors.Go back