It is highly likely that you’ve heard the word ‘Crowdfunding’ used in relation to a new business concept or start-up venture, often being advertised over the internet. You may have even donated through an online platform to help kick-start a project, or you may be a small-business owner who has considered utilising this form of fundraising in order to jump-start a new venture or raise much needed capital. Crowdfunding is an emerging, innovative and rapidly evolving form of raising capital which allows ‘entrepreneurs to raise funds from a large number of investors’[i].
In December 2015, a year after first being approached by the Australian Government, the Productivity Commission released a final report that, amongst other things, highlighted a need for corporate reform to allow small businesses access to crowd funded debt or equity finance[ii]. Soon after, the Government presented to Parliament the Corporations Amendment (Crowd-sourced Funding) Bill 2015 (“Draft Bill”) with the aim of reforming the regulatory requirements for ‘crowd sourced equity funding’ (“Crowdfunding”) activities. This article will highlight the current regulatory environment and the need for adequate reform. It is clear that there is still a way to go before the implementation of law that can achieve a balance between providing protection to potential investors and creating a space for this new type of capital flow.
Crowdfunding is a form of online fundraising whereby large numbers of people invest (relatively) small amounts of money to assist small-business ventures. This is often promoted through a Crowdfunding platform, which acts as an intermediary between the potential investor and the company making the offer. Two of the major platforms in Australia are Pozible and OzCrowd.
Fundraising via this method often involves the investor being provided with a benefit of some kind, including either a future product, shares in the company (equity funding), or a loan to the company (debt funding). The regulatory reform currently taking place in Australia in relation to Crowdfunding revolves around the provision of equity finance in return for an allocation of shares.
Corporate fundraising is currently regulated by the Corporations Act 2001 (Cth). Under current Australian law, when raising capital companies are exempt from disclosure requirements (e.g. Prospectus or PDS under the Corporations Act) only if offers are made to ‘professional or sophisticated’ investors who earn $250,000 or more in a 12-month period or have $2.5 million in assets[iii], or to ‘retail investors’ where no more than $2 million is invested by no more than 20 investors in a 12-month period[iv]. With the potential of thousands of inexperienced investors making contributions through Crowdfunding platforms, it is evident that current regulation is unsuitable for crowd sourced equity funding.
However, the primary risk associated with the loosening of regulation is the possibility of inadequate protection for inexperienced investors. Crowdfunding is aimed at ‘mum and dad’ investors who are often investing for the first time and can lack the experience and knowledge required to make informed business decisions. The reforms proposed by the Australian Government are aimed at inexperienced investors being made aware of their investment options and protected from poor investment choices.
It is clear that an appropriate balance is needed in order to promote widespread, innovative business ventures, whilst ensuring adequate investor protection.
By way of summary, under the Draft Bill, public companies that have assets of $5 million or less[v] and an annual turnover of $5 million or less[vi] would be able to raise a maximum of $5 million[vii] from retail investors in one 12-month period, without the need to comply with the current disclosure required (e.g. Prospectus or PDS under the Corporations Act).
In regards to investor protection measures, investments will be capped at $10,000 per person[viii] and investors will be provided with a 5-day cooling off period[ix]. In addition, investors will be required to complete a risk acknowledgement statement[x]; a document that outlines the risks that the investor may face in relation to their investment.
The Australian Government’s draft bill has been highly criticised, in particular by the opposition government and a number of crowdfunding platforms, who have said that the legislation is too focussed on investor protection and lacks opportunity for unlocking growth and fostering innovation in small business.
The Draft Bill was referred by Parliament to the Senate Economics Legislation Committee on 3 December 2015, and the Committee’s report is due on 22 February 2016. We will watch this space for you and provide a full review of the groundbreaking legislation upon enactment and what it could mean for your innovative business ideas or investment prospects.
[i] Australian Government, Corporations Amendment (Crowd-sourced Funding) Bill 2015- Explanatory Memorandum, Final Report, 3. Available at: http://parlinfo.aph.gov.au/parlInfo/download/legislation/ems/r5588_ems_b9685ecf-94b6-4209-a42c-7e8c656ed051/upload_pdf/504355.pdf;fileType=application%2Fpdf
[ii] Productivity Commission 2015, Business Set-up Transfer and Closure, Final Report 75, Canberra, 120. Available at: http://www.pc.gov.au/inquiries/completed/business/report/business.pdf
[iii] Corporations Act 2001 (Cth), s 708(1); Corporations Regulations 2001 (Cth), r 6D.2.03
[iv] Corporations Act 2001 (Cth), s 708.
[v] Corporations Amendment (Crowd-sourced Funding) Bill 2015, s 738H(2)(b)(i).
[vi] Corporations Amendment (Crowd-sourced Funding) Bill 2015, s 738H(2)(a)(i).
[vii] Corporations Amendment (Crowd-sourced Funding) Bill 2015, s 738G(2).
[viii] Corporations Amendment (Crowd-sourced Funding) Bill 2015, s 738ZC(1)(b)(i).
[ix] Corporations Amendment (Crowd-sourced Funding) Bill 2015, s 738ZD(1).
[x] Corporations Amendment (Crowd-sourced Funding) Bill 2015, s 738ZA(3)(b).
[xi] Corporations Amendment (Crowd-sourced Funding) Bill 2015, sch 2, ss 1-9.
[xii] Corporations Amendment (Crowd-sourced Funding) Bill 2015, s 738H(1)(a).
[xiii] Corporations Act 2001 (Cth) ss 292.
[xiv] Corporations Act 2001 (Cth) ss 298, 307, 314, 319.
[xv] Corporations Act 2001 (Cth) ss 250N.
This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.