It has been identified as an alternative means for raising capital, in particular as a source of ‘scarce’ capital for early stage and start-up companies, from a large number of small investors. It has been used successfully and most commonly for creative projects such as music, film and mobile apps.
However, the next stage of crowd funding’s evolution, involving the issue of securities in return for funds and the accompanying regulatory framework, is still in its infancy in Australia.
What is it?In its guidance released in August 2012, Australian Securities and Investments Commission (ASIC) defined crowd funding as ‘the use of the internet and social media to raise funds in support of a specific project or business idea. Project sponsors or pledgers typically receive some reward in return for their funds. In some cases, the reward expected may be of minor value and is merely incidental rather than the purpose of the contribution’.
Essentially, it involves advertising an idea online through an intermediary crowd funding platform (usually a website) to allow for the dissemination of the idea to a wide audience. This can result in significant funds being raised, typically in small individual quantities from a large number of participants.
The most common forms of crowd funding in Australia have been donation funding for charitable causes or pre-payment funding (an investment in return for the promise of a product or service that is produced / provided if sufficient funding is raised).
A more complex area now being considered, including in a Corporations and Markets Advisory Committee (CAMAC) paper in September 2013, is the concept of crowd sourced equity funding (CSEF). As with other means of capital raising, this would involve the issue of securities in return for funds. It is this that has caused the most concern for ASIC and other regulators.
Regulator concernsASIC has indicated that crowd funding is an area that is to come under increased surveillance, having regard to its consumer protection mandate (with concerns that persons may make an investment or payment based on limited or potentially misleading information, or possibly even fraud).
ASIC has also made it clear that various crowd funding arrangements, particularly CSEF, will be caught by the fundraising and/or financial service licensing provisions of the Corporations Act 2001 (Cth), which could give rise to penalties for persons seeking to raise the funds and/or the operators of the crowd funding websites. Another potential consideration is whether the crowd funding amounts to a pre-purchase arrangement of a product or service (under the Competition and Consumer Act 2010 (Cth)).
These concerns are potentially exaggerated by the borderless nature of crowd funding, often making it available to investors in any country, so the number of affected persons can be significantly greater than with other means of fundraising. Retail investors are the most likely target, emphasising the need for proper legal protections. That said, CAMAC acknowledges that, with modest investments across a range of opportunities, the perceived risk to such investors is likely to be reduced.
This has been acknowledged in other jurisdictions, such as New Zealand, where new legislation has been introduced to facilitate CSEF, as an initiative to support early-stage and growth companies.
Next steps as an alternative means of raising capitalAt this stage, there have been no indications for a change to applicable Australian law (e.g. to modify the relevant fundraising exemptions) to allow for CSEF.
Some other practical considerations in seeking funds through crowd funding include ensuring compliance with the laws of applicable foreign jurisdictions (where the website is accessible) and that a bona fide website operator is used.
If CSEF does arise as a means of raising funds, a company issuing securities would also need to consider the practical implications of a potentially large shareholder base with unmarketable parcels of shares and the relevant regulatory and administrative costs which may arise.
It may take some time for more varied forms of crowd funding, particularly CSEF, to emerge in Australia, but it is certainly something to continue to watch.