Crowd-sourced funding – What does it mean for your business?
In September 2017, new crowd-sourced funding (or crowdfunding) laws were introduced. These were designed to help unlisted public companies raise funding from the public. The legislation has recently been extended to allow proprietary limited companies to access crowd-sourced funding as well. This acknowledges that the majority of businesses and startups operate through a proprietary limited structure. According to the Startup Muster 2016, 84.5% of startups operate through a proprietary limited company.
Proprietary limited companies can now raise up to $5 million in 12 months from the public. This means you don’t need to rely on bootstrapping, seed or venture capital funding to get your idea off the ground. You may be able to attract funding from retail investors who are allowed to invest up to $10,000 per year in your company.
Strict rules apply to crowd-sourced funding
A crowd-sourced funding offer must be made through a qualified intermediary. A crowd-sourced funding intermediary must have an Australian Financial Services Licence and may also have an Australian Market Licence. The intermediary is like a gatekeeper for the offer and makes sure that investors are protected.
To be eligible your company must:
- Have its principal place of business in Australia
- Have a majority of its directors ordinarily residing in Australia
- Have less than $25 million in consolidated annual revenue and gross assets
- Not be listed in Australia or overseas
- Not have a substantial purpose of investing in other companies or schemes
This gives you the opportunity to find your supporters. Good investors will help you build brand awareness and support your company as it grows.
The crowd-sourced funding scheme has several factors that you must meet when making an offer for funding. These include:
- Providing a crowd-sourced funding offer document. This must expressly state that it’s an offer under the crowd-sourced funding regime and include a range of information about your company and the offer. It must also be published on your crowd-sourced funding intermediary’s website. Some things it must include are:
- A general risk warning to investors. The wording of this must be very specific and is designed to highlight the potential risks of investing in early-stage companies.
- Information about your company including its organisational structure, business strategy, business model, main risks and financial statements. It must also include information about the company’s directors and senior managers like their experience and any legal or disciplinary action they’ve had.
- Information about the offer including how the funds raised will be used, what rights will attach to the shares and any payments to related parties.
- Information about investor rights under the offer including the cooling-off period of five days, communication facilities and the reporting and corporate governance obligations of the company.
- Making sure that the offer is only advertised in line with the legislation. Any advertising must include specific disclosures about the offer and there are specific restrictions around the use of phone calls and other forms of advertising for a crowd-sourced funding offer. Advertising must also not be misleading or deceptive.
- Making sure that every director and person named in the document has consented to the publication of the offer document.
It’s also important to know that any funds that are raised under the offer can not be used to invest in other companies, entities or schemes. They also can’t be loaned to related parties. Your company is also restricted to having one crowd-sourced funding offer available at any time.
Crowd-sourced funded businesses also have special obligations
Once you raise funds under the crowd-sourced funding scheme, there are very specific requirements that your business must comply with. These include:
- Having at least two directors.
- Preparing financial and directors’ reports each year that meet accounting standards.
- Once you’ve raised $3 million or more from crowd-sourced funding you’ll need to have your financial reports audited.
- Getting shareholder approval for certain related party transactions. These rules also apply to public companies under the Corporations Act.
- Maintaining a comprehensive company register that includes details about crowd-sourced funding offers and all crowd-sourced funding shareholders.
- If your company is a large proprietary company, it must also pay a flat annual levy to ASIC under its Industry Funding model. Small proprietary companies only have to pay their annual review fee.
There are also some specific exemptions that will apply to your company once it raises crowd-sourced funding. These include:
- The number of shareholders through crowd-sourced funding will not count when considering whether the company is still a proprietary company. Generally, proprietary companies that have more than 50 non-employee shareholders are required to convert into an unlisted public company, but an exception is made for any crowd-sourced funding shareholders. However, if a crowd-sourced funding shareholder sells their shares, the new shareholder will not fall within this exemption. So it’s important to keep track of all your shareholders.
- Unlisted companies with more than 50 shareholders are subject to the takeover rules under the Corporations Law. These rules restrict how the company can raise funds, and affect the control and voting rules for the company. They can also add to the cost of compliance for your company. Companies that have crowd-sourced funding will be exempt from these rules.
Crowd-sourced funding is a good opportunity for your business to access new investors, but it also has many obligations. If you’re thinking about crowd-sourced funding for your business it’s important to think carefully about whether it’s best for your business. This may include considering who your target investor market will be and preparing all your materials to suit their needs. If you do receive funding, you’ll also need to make sure that you’re able to deliver what you promise. This may require you to put in place a plan and the necessary infrastructure to meet your reporting requirements.
If you’d like some help setting your business up for crowd-sourced funding, get in touch.