23 October 2018

Crowdfunding Laws Changes

Nadia Sabaini
Nadia Sabaini Commercial Lawyer

What is equity crowdfunding?

Equity crowdfunding, referred to in the legislation as crowd-sourced funding or CSF, is the raising of capital via the sale of equity in a crowdfunding campaign.  It is an alternative to the raising of capital via the traditional sale of equity in compliance with the small capital raising caps and the sophisticated investor exemptions, including angels and venture capitalists.  It is important to note that it still means that the business is selling equity in itself, i.e. shares, not a future product or credit towards a future product.  It also doesn’t relate to donations or charitable fundraising.  Other laws apply to these types of crowdfunding campaigns.

What was the position before September 2018?

Back in 2017, the Federal Government recognised the impact crowdfunding was having and introduced laws which enabled equity crowdfunding by unlisted public companies.  Although these changes were welcomed as a step forward in recognising that crowdfunding was here to stay, it meant that in order to use this service, startups would need to set up as an unlisted public company, as well as satisfy some additional criteria.  There were some temporary concessions made available for private companies to convert to public companies, but the need to convert and the additional reporting requirements applicable meant it wasn’t feasible for most businesses to use this system and the consensus was that the legislative changes only had limited application.

What is the position now with the introduction of the September 2018 changes?

On 17 September 2018, the Federal Government passed another set of amendments now extending the use of crowd-sourced equity funding to private companies, effectively opening up the use of crowdfunding as a method of equity raising to nearly all startups.   This is quite significant because crowd-sourcing equity can potentially result in a company having hundreds of shareholders, whereas private companies are normally restricted to a maximum of 50 non-employee shareholders.

What is the catch?

 As can be expected there are still some limitations designed to safeguard the interests of investors, particularly consumer investors, which are of course the investors crowdfunding is aimed at.

Principally, a private company may only use crowdfunding for equity raising if:

  • it has at least two directors;
  • its principal place of business is in Australia;
  • it is not a listed company;
  • it has consolidated gross assets of less than $25 million;
  • it has a consolidated annual revenue of less than $25 million; and
  • it has a primary purpose other than investing in securities.

In addition, there is a limitation on what can be raised.  A private company raising equity via crowdfunding may only raise up to $5 million within a 12-month period. Further, retail investors (mums and dads) can invest up to a maximum of $100,000 in a crowdfunding company.  Certain sophisticated investors (those with net assets of $2.5 million or annual incomes of more than $250,000) may invest more.

Is there anything to note about the process of undertaking the crowdfunding campaign?

Nothing in these changes does away with previously introduced requirements for the running of crowdfunding campaigns, including the requirement to use of a crowdfunding platform that is licensed with ASIC.

Generally, it will be necessary to prepare an offer document that addresses:

  • the details of the investment;
  • the prescribed risk warning contained in the legislation;
  • a five (5) day cooling off period.

Are there any ongoing obligations?

Yes.  In addition to the prerequisites outlined above, there are additional reporting obligations and governance rules applicable to private companies that have raised equity via crowdfunding.

These include:

  • notification to ASIC when the private company starts or ceases to have crowdfunded shareholders and recording of crowdfunding offers and shareholder details on the company register;
  • the mandatory requirement to prepare annual financial and director’s reports in accordance with accounting standards;
  • mandatory auditing for private companies which raise $3m or more from equity crowdfunding; and
  • compliance with the related party transaction rules applicable to public companies.

It is important to note these requirements if you wish to crowd-source equity.

Private companies should also note that a private company that has undertaken equity crowdfunding will be exempt from the takeover rules of Chapter 6D of the Corporations Act 2001 (Cth) but additional conditions may be imposed by regulation.

What else do I need to know?

It is important that startups do not immediately dive into crowdfunding to raise equity simply because it is new and seemingly easy.  Each startup business should consider and take legal, financial and business advice on how best to achieve its growth targets.  Crowd-sourced equity is certainly not always the best method of raising capital.

At Bennett & Philp, we specialise in providing new and existing businesses with strategic legal advice for startup, growth and divestment.  Contact us today regarding your new or existing enterprise and your capital raising requirements.

For more information, please visit the ASIC website.


Individual liability limited by a scheme approved under professional standards legislation (personal injury work exempted).

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