Introduction
The corporate financing amendment bill that started to operate in September 29, 2017 while amending the corporate act 2001 came up with a new regime that strives to minimize the regulatory barrier and cost for businesses that seek to obtain finances through crowed-sourced funding (Austin & Ramsay, 2014). Crowd-sourced Funding (CSF) is defined as the funding of business entities by a large number of people and operates as an online tool that offers organization an opportunity of seeking funds from different types of investors, both sophisticated and unsophisticated. The crowd-sourced funding Act 2017 will extend crowd source funding regime to proprietary companies thereby making new source of funding available to small entities while simultaneously maintaining the protection to investors through addition of a number of obligations on the companies. As such, the obligations are bound to have compliance cost for the proprietary companies that operate under the CSF regime albeit at lower level as in the current regime where the company transition to public company. The analysis focuses on how the CSF works while taking into account how the Corporations Amendment (Crowd-sourced Funding) Act 2017 impacts on the Australian corporate law.
How the CSF regime operates
There are several key elements of crowd-sourced funding that allow unlisted public companies to get capital from retail investors. Unlisted public companies that have gross assets less than $25 million with an annual turnover of less than $25 million and are not subsidiary of listed company will be eligible to utilize CSF regime to raise funds. In order to participate in the CSF regime, an eligible entity must prepare a crowd sourcing funding offer document that has minimal level of disclosure compared to a prospectus with an aim of reducing the time burden and cost of traditional equity fundraising and should enter a hosting arrangement with a CSF Platform that is licensed and capable of providing risk warning to the investor while continuously undertake diligence on the issuer entity. The company participating in the CSF regime is at liberty of raising up to $5 million within a period of 12 months while the retail investors can invest up to $10,000 per annum in an unlimited number of companies that are eligible for CSF (Hanrahan, Ramsay and Stapledon, 2017). For instance, the Pebble E-paper Watch was involved in crowd-funding where it raised $10, 266, 845 for the 37 days in which it solicited funding.
To access CSF, there are several structural changes that proprietary companies must undertake in order to access crowd-sourced funding. The proprietary company must have a minimum of two directors and most of the directors must reside in Australia. The proprietary company should prepare and submit to ASIC copies of director reports and annual financial report in line with the accounting standards (Australian Securities & Investments Commission (ASIC), 2018). The proprietary entity that raises revenue of more than $ 1 million should audit their financial statement regardless of the size of a firm. With regards to related party rules, the proprietary company has to adhere to the chapter 2E of the Corporation Act that stipulates rules that guide party related transactions and provide information on the transactions that benefit related parties that include the spouses and relatives. The proprietary company must have a record of CSF shareholders and this include additional information relating to date of the issue of shares, the number of shares, the date in which a CSF shareholder ceases to be a shareholder and should notify ASIC the date in which it commences to offer shares and when it ceases to have shareholders under the CSF regime. The proprietary company operating under the CSF regimes would be exempted from the takeover rules specified under chapter 6 of the corporations act as long as they provide reasonable level of the investor to participate in an exit event.
CSF Regulations and Rules
The eligibility of CSF Company in making a CSF offer is based on the CSF offer document. There are different CSF intermediary plays a critical in the implementation of the CSF and the intermediary’s role is on operating and hosting the online platform as it will necessitate publishing of the CSF document (Redmond, 2009). The role that is played by the CSF intermediary includes performing checks on the eligibility of the CSF company and its directors, conducting an assessment of the investors through ascertaining whether they are retail clients, and providing the members with the communication and application facility.
There are two distinct forms of crowd-sourced funding including reward-based and crowd source equity funding. The legalities surrounding the reward-based funding are based on the Australian Consumer Law and the Competition Consumer Act 2010 (Cth), and this applies to all the contributors that are interested in making donations (Cassidy, 2013). The Australian Consumer Law (Section 29) provides unique consumer protections that are essential in minimizing misleading representations and prohibiting false information on the products that are transacted (Federal Register of Legislation, 2018). In Section 29, the role of the enterprise is provided and this includes pre-ordering that is undertaken on the persons or individuals that are involved in the supply of commodities. As crowd-sourced funding campaigns are mainly based on the product features, users, performance characteristics, and quality standards, the prohibitions that should be followed in the promotion of the business initiatives should be accounted. The parties involved should be mindful on the legal obligations that are required when designing the promotional campaign material (Harris, Hargovan & Adams, 2015).
Crowd sourced equity funding regulations are provided in the Australian Securities and investment Commission Act of 2001 and the Corporations Act (Harris, Hargovan & Adams, 2015). The eligible entities for CSFA are essential in rising up to AUD 5 million annually, and this is through crowed-source equity funding (Federal Register of Legislation, 2018). The intention of the new part is on providing disclosure regime with the intention of crowd-sourced funding strategies that are essential in issuing securities. The crowd-sourced funding provides an opportunity for providing a framework in which small enterprises allows accessibility of the innovative fundraising and removing regulatory barriers. Also, the law and regulation supports and promotes the market participants and this is essential in facilitating the accessing of the crowd-sourced equity funding such as financial markets’ confidence level.
Benefits of CSF
The benefits of CSF are diverse with the goal of crowd-funding being on using technology in forming connections between organization seeking to raise funds, intermediaries, and the potential investors. It is through crowd-funding that the organizations are provided with the alternative of funding their operations without the use of the traditional financing methods that includes financing from sophisticated investors. According to Baxt and Fletcher (2008), crowd-funding is essential in leveraging its financial alternatives through making them attractive and legitimate. It is considered radical innovative and social character initiatives towards achieving the desired idea. The businesses that are interested in increasing their competitive edge in the industry might be interested in CSF and this can be instrumental when soliciting for additional funding.
Furthermore, crowd-funding demonstrates a positive value to the innovative and entrepreneurial needs and this can be influential in increasing the capacity of the organization to raise funds (Parker, 2012). As the crowd-funding facilitates dynamic relationship between the company seeking funds and the contributor of the funds, this improves the image of the company on the investors and financiers. Crowd-funding allows the leveraging of the company’s social capital with the available crowd connections and this provides interplay with the relevant authorities and the capital providers, and this is leads to an understanding of the market trend. The expansion of the business entity is based on the relationship between the crowd connections parties, which is influential in increasing the profitability of the organization (Harris, Hargovan & Adams, 2015). In the case of OUYA, for example, the company relied on crowd-sourced funding and it raised over $8.5 million for the 29 days that it kick-starts the funding process[2].
Also, fintech platforms are the basis for conducting crowd-funding. With the use of fintech platforms as intermediary in the crowd-funding transactions, innovativeness is assured in its operations (Federal Register of Legislation, 2018). With fintech companies they offer the fledgling companies with services including providing the preliminary legal requirements in the sector. The platforms are mobile-enabled or web-based platforms and they are essential in disseminating information regarding crowd-sourced funding opportunities that are available. Potential investors tend to appreciate the role that they play in the web-based ecosystem, and they can influence the investment portfolio that characterizes the company. The project that is developed is pitched on the app of the platform and it is designed as a visual format that enables the investors and other parties to review the mission and vision of the organization before investing on them.
Considering that at the early stages of the entrepreneur, access to capital is a requirement and the owner might not think beyond the financial lending network and the fintech firms plays an important role in accumulating equity required in the start-up of business initiatives (Ciro, 2013). The reward-based crowd funding strategy that can be employed by the new business owners ensures that they raise funds from the society through simply providing their tangible products of gifts. It is worth noting that the crowd-sourced funding initiatives ensure that hedging of risks is realized. The nature of business environment and the economic conditions prevailing in the environment can be challenging, and finding sufficient capital or funding in the economy can be impossible as it requires market validation, but the crowd-sourced funding facilitates the distribution of funds to the company with minimal regulations.
According to Dundas Lawyers (2018), crowd-sourced funding campaign that the organization undertakes serves to promote the products and services that are offered by the organization. During the crowd-sourced funding campaign, the mission of the company should be clear, and it can be accessible to the public in different channels and platforms that have been utilized in the organization. Most of the crowd-sourced funding platforms that are utilized by the organization incorporate social media strategies, and this can be instrumental in improving the interaction process and allowing joint venture initiatives (McKenzie, 2018). The constant improvement in the economic conditions and the determination of the potential funders can be influential in addressing the competitiveness in the dynamic industry and improving the capital outlay of the company.
Observations on the new law
Crowd-sourced funding has been influential in allowing small business or even companies to increase their capital outlay. From the analysis, I think the largest and the best crowd funding site is the Kickstarter, and it has been influential in acting as middleman between the investors and the business owners. Crowd-sourced funding has changed the landscape in which funds can be solicited in the industry, and this has included sourcing funds from overseas. However, crowd-sourced funding has faced some criticisms as it is considered as part of equity-financing. For instance, the investors to the company would want to be involved in the strategic decision-making of the company. In the case of small businesses that have used crowd-sourced funding, they do not have the necessary resources in conducting annual general meeting for the stakeholders. Crowd-sourced funding law conflicts the copyright and trademark laws as the investors would be interested in using the name of the company in their operations.
Conclusion
In conclusion, the implementation of the Corporations Amendment Act 2017 outlines the importance placed by the Australian legal system on the funding of the new businesses. The crowd-sourced funding offers an organization with the opportunity of seeking funds through soliciting the funds from sophisticated and unsophisticated investors. In this analysis, the focus is on providing a detailed analysis of the impact of the crowd-sourced funding on the corporate law. It outlines the way in which CSF operates and the regulations and legal frameworks that surrounds this regulations. Finally, an assessment of the benefits of using CSF as a way of financing operations of the new corporations is provided.
References
Austin, R.P. & Ramsay, I. (2014). Ford’s Principles of Corporations Law, 16th Edition. Butterworths: Australia
Australian Securities & Investments Commission (ASIC). Crowd-sourced funding Act.
Baxt, R., and Fletcher, K. (2008). Corporations and Associations Cases and Materials, 10th Edition. Butterworths: Australia
Cassidy J. (2013). Corporations Law Text and Essential Cases, 4th Edition. Federation Press: Sydney.
Ciro T. & Symes C. (2013). Corporations Law in Principle, 9th Edition. LBC Thomson Reuters: Sydney.
Dundas Lawyers. (2018). The crowd-sourced funding bill 2016.
Federal Register of Legislation. (2018). Corporations Amendment (Crowd-Sourced Funding) Act 2017.
Hanrahan, P., Ramsay I. & Stapledon G. (2017). Commercial Applications of Company Law, 18th edition. Oxford: London
Harris, J. Hargovan, A. & Adams, M. (2015). Australian Corporate Law, 5th edition. Lexis Nexis: Butterworths.
McKenzie, B. (2018). Crowd-sourced funding for proprietary companies. Lexology.
Parker, C. & Veljanovski, P. (2012). Corporate Law, 1st edition. London: Palgrave.
Redmond, P (2009). Companies and Securities Law – Commentary and Materials, Law Book Co., Sydney.
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