The power of crowd sourcing is undeniable. From the ridiculous, $55,492 raised to make a potato salad , to the nostalgic, saving of the iconic local Canberra music venue The Phoenix.
Crowd sourcing has been used by many business ventures to raise funds, most often bootstrapping the startup phase by offering pre-sale products. Until recently private businesses could not offer equity shares via crowd funding platforms. This is about to change.
From 19 October 2018, the Corporations Amendment (Crowd-Sourced Funding for Proprietary Companies) Bill 2017 (Cth) comes into effect. This change in the law provides Pty Ltd companies with the ability to raise crowd sourced funding (CSF), previously limited to unlisted public companies. CSF is a serious form of investment which allows a large number of people to make small financial contributions in return for an equity stake in the company.
Benefits of CSF
Startup businesses, in particular, may benefit from this new source of fundraising, and no longer be dependent on bootstrapping angel investors, and loans as the sole source of capital.
However, this may also be a viable option for established businesses seeking to:
- expand operations;
- capitalise on customers’ goodwill and enthusiasm to get through tough times; or
- to build a loyal base of customers who also feel a sense of ownership, which may help drive ongoing repeat sales.
Similar overseas CSF schemes have enabled businesses in the United Kingdom to raise approximately £634 million between 2011 and 2016, and US$734 million in the United States as of March 2015.
What you need to know
Some of the conditions of Pty Ltd businesses participating in CSF include:
- Your business must be a Pty Ltd company registered with ASIC, with at least 2 directors, with the majority of directors living in Australia (or at least 1 if there are only 2 directors).
- Your business must operate in Australia and have less than $25 million in assets and less than $25 million in annual revenue.
- Shares must be issued through a licenced CSF intermediary, which currently include: Big Start; Billfolda; Birchal; Equitise; and On-Market Bookbuilds.
- You must prepare CSF offer documents which provide the investor certain information about your company and the offer, including about the risks of the investment. The CSF intermediary will review CSF documents for defects prior to facilitating the offer.
- You can’t have more than one CSF offer at a time, CSF fundraising is limited to $5 million in a 12 month period, and CSF investors can only invest $10,000 in your company in a 12 month period.
- There are certain restrictions on how the funds can be used, and additional auditing requirements if more than $3 million is raised.
- CSF shareholders do not count towards the 50 shareholder limit placed on Pty Ltd companies – even if the CSF shareholder on sells their shares, provided the company’s shares are trading on a financial market.
- Shares offered must be ordinary shares which carry rights such as voting at company meetings – you should seek advice about the risks and benefits of selling ordinary equity in your company.
Company and Director obligations
To gain access to this new form of funding, a company will be subject to some additional requirements, such as:
- preparing financial and director’s reports that must be provided to shareholders;
- maintaining a more comprehensive company register, including details about the CSF officers and the CSF shareholders; and
- keeping ASIC notified of the number of shares issued and to who.
The government has deemed these requirements necessary to protect investors, as at its core CSF is an investment activity.
But don’t forget that the company directors will also owe the same duties to CSF shareholders that they owe to other shareholders. CSF shareholders will also have equal rights to take legal action for things like minority shareholder oppression.
If you aren’t sure about how to meet you director duties, or the risks of shareholder oppression, seek advice before you think about CSF.
What to do next
CSF may not be the right fit for every business. If you think crowd-sourced fundraising might be an option for your business, you need legal and financial advice before you jump in.
Our team of experienced commercial lawyers can help:
- advise you on the legal aspects of your company’s particular circumstances;
- work with your financial advisor on the best share offer strategy; and
- prepare the governance and offer documents required to take advantage of this exciting new source of fundraising.
Contact us here.