In 2017, the Corporations Act 2001 (Cth) (Corporations Act) was amended to introduce an alternative method for private companies to raise capital. Crowd sourced funding (CSF), more commonly known as ‘crowdfunding’, is a regime that allows start-ups and small-to-medium-sized companies to raise capital via this cost-effective mechanism. While there are various types of crowd sourced funding, this article focuses specifically on equity-based crowd sourced funding, which involves companies offering their ordinary shares to potential investors in return for a relatively small cash investment.

What is crowd sourced funding?

Crowd sourced funding enables companies to raise capital from a large number of investors. This method of raising capital is becoming increasingly popular, as it allows companies to engage and reach a wider number of investors via CSF intermediaries. 

CSF intermediaries are Australian Financial Services Licence (AFSL) holders that provide crowd-funding services to companies as ‘gatekeepers’ via an online platform.  CSF intermediaries are bound by certain gatekeeper obligations under section 738Q of the Corporations Act and are the link between the company and potential investors.

How do you know if your company is eligible for crowd sourced funding?

In order to be eligible to raise capital via crowd sourced funding, the company must comply with the following requirements of section 738H of the Corporations Act:

Corporations Act

Requirements

Section 738H(1)(a)

Proprietary company with a minimum of two directors

Section 738H(1)(b)

Principal place of business in Australia

Section 738H(1)(c)

A majority of the company’s directors ordinarily residing in Australia

Section 738H(1)(d)

Assets and annual revenue do not exceed cap of $25 million (including the assets and revenue of its related parties)

Section 738H(1)(e)

Not be listed on a financial market in Australia or overseas

Section 738H(1)(f)

Not have a substantial purpose of investing in other entities or schemes (including its related parties)

Limitation on CSF capital raise

Under the crowd sourced funding regime, companies may offer shares to investors, with an issuer cap of $5 million within any 12-month period.  Although retail investors are also able to reap the benefits, the issuer cap applicable to them is $10,000 within any 12-month period.

Your company can raise up to $3 million by offering shares in the company without any need for financial statement disclosures.  

Takeover rules

Unlike a standard capital raise of a private company, which is bound by a limit of 50 non-employee shareholders, under the CSF regime the limit of 50 shareholders does not apply.  This means that the company can have more than 50 CSF shareholders on the condition that the company does not exceed its limit of 50 non-CSF shareholders.

Company’s obligations to raise capital via crowd sourced funding

Private companies wishing to use the CSF regime to raise capital have certain legal obligations, which include:

Corporations Act

Requirements

Section 169(6AA)

Record details of the shares issued under the CSF offers and CSF shareholders in its share register

Sections 178A, 178C, 254X and 254Y

Notify ASIC of changes to its share register and share structure, including issue of shares under a CSF offer

Section 201A(1A)

Minimum of two directors with a majority of the directors ordinarily residing in Australia

Sections 292, 296(1A), 298(3) and 319

Prepare an annual financial report and directors’ report in accordance with accounting standards and lodging these reports with ASIC

Section 314

Copy of its annual financial report, directors’ report and auditor’s report (if applicable) or a concise report readily accessible on its website

Chapter 2E and section 738ZK

Shareholders’ approval before giving financial benefits to related parties, including directors and their spouses, children or parents

Want to get started with crowd sourced funding?

If you think your company would be suited to raise capital by way of a crowd sourced funding offering, or you would like more information on your legal obligations and strategies available to your business, Ivy Law Group’s highly experienced team of Commercial and Business Lawyers are here to assist.

For a confidential discussion, please call us on (02) 9262 4003 or submit an online enquiry.

The content of this article is intended as a general guide to the subject matter. For specific legal advice about your individual circumstances, please contact our experienced lawyers.

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