For the past three years in Australia, proprietary companies have been able to raise capital via crowdsourced funding (CSF), in return for equity in the business. This process has enabled budding entrepreneurs across a vast range of industries, including music, fashion, financial services and fintech, property development, health and, of course, craft breweries, to realise their dreams and get their businesses off the ground.
It has all been possible courtesy of the Corporations Amendment (Crowd-Sourced Funding For Proprietary Companies) Act 2017 (Cth). Prior to this legislation, proprietary companies were only able to raise capital using CSF through either donation-based funding (from people who supported the aims and objectives of a business), or rewards-based funding, (e.g. through the pre-sale of a product, project or future service).
There are some significant benefits to CSF, compared to more traditional means of business financing. At the outset, there is scope for a much broader pool of potential investors for a proprietary company, and whilst raising capital is the primary objective, CSF can also offer a substantial boost to a company’s visibility and brand recognition.
Greater efficiencies
As anyone who has built a business will attest, it can be extremely challenging in the early stages to find the time that is required to purse financing, while also focusing on the company’s week-by-week growth.
CSF is a relatively efficient and effective method of attracting seed capital, as opposed to the process of applying for a bank loan (which may not be available to an early stage company), or if a company is not able to attract or does not have the networks to access accredited investors in the early stages.
Once the most appropriate CSF platform has been identified, the company’s journey and ambitions can be promoted via that centralised space, making it relatively simple for like-minded investors to find.
Instant feedback
CSF also provides an ideal, real-time opportunity to hear from potential investors. Their questions or suggestions can help to shape the future of the company, while also offering a sense of what is important to the people who are willing to back the business.
Feedback from potential CSF investors can eliminate the need for expensive consultation services. By hearing straight from the “crowd” that is interested in the start-up, the business can adapt and grow to suit the demands of its target audience.
CSF tends to bring a business closer to its customers than any other method of fundraising, and ensures a much more direct alignment of values and shared goals between the entity and its investors.
Grassroots loyalty
Those who contribute via CSF are usually advocates of the product or service and may become loyal, long-time brand champions.
Early adopters can drive momentum in CSF campaigns by sharing the idea through their social media networks and business contacts.
Legal obligations
While there is clearly no shortage of interest in CSF raising, the process is not without its challenges.
There are several boxes that need to be ticked and obligations that must be met by businesses embarking on a CSF raising.
Proprietary companies and potential CSF investors need to be across elements including:
- Eligibility requirements of the business in accessing CSF facilities;
- Record-keeping – including regulations covering electronic members registers;
- Shareholders’ agreements or a modified company constitution
- Potential establishment of different share classes; and
- Director appointments and provisions for a director’s removal.
For businesses, it is vital to seek out the advice of experts before embarking on a CSF round, to avoid inadvertently breaking the law. For shareholders, whether contributing to a venture is a decision led by the heart or the head, due diligence is required to ensure awareness of all obligations.
