Crowd Sourced Funding Explained

Crowd sourced funding is a way for people to raise money from a large number of individuals, typically through online platforms.

This type of funding is also known as equity crowdfunding, and it allows individuals to invest in startups and small businesses in exchange for equity.

The concept of crowd sourced funding has been around for a while, with the first platform, Lending Club, launching in 2007.

The platform allowed individuals to lend money to small businesses and individuals, and it quickly gained popularity.

Crowd sourced funding platforms typically charge a fee to the borrower, which can range from 1-10% of the loan amount.

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Crowd sourced funding is an accessible investment option, making it easy for anyone to invest through a user-friendly platform designed for retail investors.

One of the benefits of CSF is that it allows you to diversify your investments, but keep in mind that all opportunities come with risks.

CSF offers an opportunity to invest in early stage companies, which can be a great way to get in on the ground floor of a potential new business.

Do your homework as an issuer and stay informed, as clearly stated in the CSF platform, and don't hesitate to reach out for help with fundraising options and strategy.

To set up a crowd-sourced funding (CSF) regime, you'll first need to register as a company. To do this, you'll need to lodge Form 201Application for registration as an Australian company with ASIC.

Eligible companies can make offers of their shares, via an intermediary CSF service, using an offer document. Unlisted public companies with less than $25 million in assets and annual turnover will be eligible to raise funds under the CSF regime.

If you're a public company, you'll need to maintain a minimum of two directors, prepare annual financial and directors' reports in accordance with accounting standards, and have your financial reports audited once you raise $3 million or more from CSF offers.

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Here are the key requirements for using the CSF regime:

To register as a usable company, you'll need to lodge the right forms with the relevant authorities.

You can register as a public or proprietary company, but you'll need to lodge Form 201Application for registration as an Australian company with ASIC. This is a crucial step in setting up your company for crowd-sourced funding.

To start, you'll need to determine which type of company you want to register as. This will help you understand which forms to lodge and with whom.

When setting up a CSF, it's essential to establish a separate business entity to maintain personal and business finances separately. This is a crucial step in protecting your personal assets.

Choose a business structure that suits your needs, such as a sole proprietorship, partnership, or limited liability company (LLC). The LLC is often the most popular choice due to its flexibility and liability protection.

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Register your business with the relevant state and obtain necessary licenses and permits. The cost of registration varies by state, but you can expect to pay between $50 to $500.

Create a business bank account to manage your CSF's finances. This will help you keep your personal and business expenses separate and make tax time easier.

To prepare your offer disclosure, you'll need to publish a specific CSF offer document on a single intermediary's platform.

The document must contain information prescribed by the regulations.

ASIC has provided a CSF offer document template in ASIC Regulatory Guide 261, which can help guide your preparation.

You'll need to follow the template to ensure your document meets the necessary requirements.

Companies involved in CSF offers are eligible public companies and proprietary companies. These companies can use an intermediary CSF service to make offers of their shares using an offer document.

To be eligible, unlisted public companies must have less than $25 million in assets and annual turnover. They can then raise up to $5 million in any 12-month period.

Proprietary companies, on the other hand, are required to maintain a minimum of two directors and prepare annual financial and directors' reports in accordance with accounting standards. They must also have their financial reports audited once they raise $3 million or more from CSF offers.

Companies that registered as or converted to public after September 29, 2017, and before October 19, 2018, can benefit from temporary corporate governance concessions. They are exempt from certain reporting, audit, and AGM obligations for up to five years, as long as they continue to meet the eligibility requirements.

Here are the key requirements for proprietary companies using the CSF regime:

Crowd sourced funding is a great way to raise money for a project or business, but the funding process can be complex. The funding process typically starts with a project creator setting a funding goal, which is the amount of money they hope to raise.

Project creators can set their funding goal based on their project's costs, such as equipment, materials, and labor. According to our previous example, a project with a total cost of $10,000 might set a funding goal of $15,000 to account for unexpected expenses.

Project creators will also need to determine the funding duration, which is the length of time the project will be live on the funding platform. This can range from a few days to several weeks or months, depending on the project's needs.

When issuing new shares, companies can only offer fully paid ordinary shares through Crowd Sourced Funding (CSF).

The law currently only permits ordinary shares to be issued through CSF, but this may change in the future.

In the future, the law may permit different types of securities to be offered, but for now, ordinary shares are the only option.

Despite a significant drop in funding, equity remains stable in many organizations. This is because equity is often calculated as the difference between an organization's assets and liabilities, and changes in funding typically affect liabilities more than assets.

In fact, a recent study found that organizations with lower funding levels still maintained a stable equity-to-asset ratio, averaging around 20%. This suggests that equity is a more resilient metric than funding levels.

Organizations with stable equity often have a strong financial foundation, which can help them weather funding fluctuations. This is especially true for those with a low debt-to-equity ratio, which averaged around 1.5 in the same study.

By focusing on equity, organizations can better manage their financial risks and make more informed decisions about funding and resource allocation.

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Finding the right intermediary for your crowd-sourced funding needs is crucial. To make a CSF offer, you'll need to work with a licensed intermediary that holds an Australian Financial Services License expressly authorising it to provide CSF services.

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A CSF offer may only be made through a dedicated CSF intermediary, so make sure to find one that meets this requirement. You can search online or ask for referrals to find a licensed intermediary.

Here are some key things to look for in a licensed intermediary:

By working with a licensed intermediary, you can ensure that your CSF offer is handled efficiently and in compliance with the relevant laws and regulations.

To find a licensed intermediary, you'll want to look for one that holds an Australian Financial Services License expressly authorising it to provide CSF services.

A CSF offer can only be made through a dedicated CSF intermediary that is a licensed operator of a CSF platform.

Make sure the intermediary you choose has adequate arrangements in place to manage conflicts of interest, as required by the Corporations Act.

The intermediary should also have adequate financial, human, and technological resources to provide the financial services, unless they are a body regulated by APRA.

Additional reading: Comparison of Crowdfunding Services

You can check if an intermediary meets these requirements by looking for their AFS licence obligations under the Corporations Act.

Here are some key AFS licence obligations to look out for:

Beware of Retail Investment Cap and Cooling-Off Period. A fundraising company can only raise up to $5 million in any 12-month period via a particular CSF platform from retail investors.

Retail investors have a cooling-off period of five business days to withdraw their acceptances under the CSF offers.

Finding a good lawyer as your trusted adviser is crucial, as they will guide you through the detailed rules and procedures both fundraisers and intermediaries must follow when conducting CSF offers.

A good legal adviser will help you comply with the offer period and limit, advertising and publishing rules, and other important provisions of the Corporations Act and other legislation.

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Crowd sourced funding is a rapidly growing industry, with $34 billion raised in 2020 alone. This trend shows no signs of slowing down.

The most popular platforms for crowd sourced funding are Kickstarter, Indiegogo, and GoFundMe. These platforms have successfully facilitated the funding of over 1.5 million projects.

The success of these platforms can be attributed to their ability to connect creators with a large and engaged audience.

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Crowd-sourced funding (CSF) has gained significant traction in Australia since the Corporations Amendment (Crowd-sourced Funding) Act 2017 was passed. This legislation created a framework for CSF, which has made it easier for companies to raise funds from the public.

The CSF regime has undergone changes, with the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 extending the regime to eligible proprietary companies. This has opened up new opportunities for companies to access funding.

To provide CSF services, intermediaries must hold an Australian financial services (AFS) licence. This licence requires intermediaries to act efficiently, honestly, and fairly, and comply with the conditions on the licence and the financial services laws.

Intermediaries must also have adequate arrangements to manage conflicts of interest, maintain the competence to provide financial services, and have adequate risk management systems. They must also have an internal and external dispute resolution system in place for retail clients.

The Australian Securities and Investments Commission (ASIC) has published regulatory guidance for companies seeking to raise funds through CSF and for intermediaries providing CSF services. This guidance includes templates and information to help companies prepare their CSF offers and intermediaries understand their obligations.

Here are some key considerations for companies and intermediaries:

By understanding these market trends and considerations, companies and intermediaries can navigate the CSF regime effectively and access funding opportunities.

Crowd-sourced funding allows start-ups and small businesses to access funds from a large number of investors investing small amounts of money.

The types of crowd-sourced funding include donation, reward and equity-based, with this article focusing on equity-based which involves a company offering investors an opportunity to invest in its shares for a relatively small investment.

Eligible entities can raise up to $5 million from investors in any 12-month period.

Retail investors have an investment cap of $10,000 per company in any 12 month period.

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