Crowd Sourced Funding – a game changer for privately held companies in Australia

In recent years crowd sourced funding (CSF) has emerged as a legitimate alternative to traditional funding methods for privately held companies. This article will look at what CSF is and what is involved in undertaking a CSF campaign.

In Australia privately held companies have generally had limited avenues from which to raise funds for growth and expansion. Traditionally one could take a loan from a bank or raise venture capital by way of a share issue to employees, professional investors or through small scale offerings (personal offers made to only 20 investors over 12 months with a $2 million cap). A key restriction being that privately held companies could not raise funds from the public at large.

What is crowd sourced funding?

CSF allows small to medium sized privately held companies to access and raise capital from a large number of investors ie from the general public. Also known as crowdfunding, it is a method of raising capital by collecting small contributions from a large number of individuals (the crowd) through an online platform and the use of an intermediary.

The CSF regime and its framework is governed by the Corporations Act 2001 (Cth) and came into play in 2018. Since then, it has slowly been gaining more attention and traction as awareness grows and more startups and growing companies turn to it, to raise capital without relying on the traditional funding sources like bank loans.

There are various types of CSF (rewards-based, donation-based, and debt-based crowdfunding) but the most common is equity based crowd source funding which has a privately held company issuing shares to investors in return for relatively small cash investment. This is because retail investors, being the general public under the CSF regime can only invest a maximum of $10,000 in any one company during any one 12 month period.

How does it work in practice?

To begin with, the issuing company needs to prepare and get its house in order. This will generally include the following run in consultation with us the company lawyers, the company’s accountants and the Intermediatory:

1. A review of the issuing company’s financial statements, share capital, share price and a company valuation to determine an offer price for the issue of new shares to CSF shareholders and to decide the level of funds that are required to be raised.
2. Background checks for directors and senior managers.
3. A corporate governance review and preparation of a CSF Constitution. Note: it is not recommended that a CSF company have a shareholder’s agreement in place (which is common practice for privately held companies) rather one governing document being a customised CSF Constitution.
4. Preparation of CSF Offer Document being the document given to potential investors which includes information on the issuing company (background, prospects, financial information) so that potential investors can assess the company and decide whether or not to invest in it.
5. Preparation of a Subscription Document being the document investors sign to buy shares in the issuing company.
6. Director and senior manager declarations signing-off on the CSF Offer Document.

The issuing company’s accountants will provide advice around financials.

For us lawyers it is important that we are involved from the outset, in particular to review company governance and give advice on how the company is to be run and managed post CSF offer. The preparation of the CSF Constitution being central to this.

The intermediary will assist and in many ways co-ordinate the above with the company’s accountants and lawyers, and when complete the offer will be made and a campaign is launched.

The campaign (there are often 2 of them)

First up most companies will usually embark on an expression of interest or “EOI” campaign before the actual public CSF offer campaign.

The EOI campaign is a 3 to 4 week marketing campaign (undertaken by the Intermediary through their online platform) which allows companies to seek non-binding indications of investment.

It is usually a targeted, private campaign and gives companies the opportunity gauge interest in their company and more importantly gauge interest in investors wanting to buy shares in their company.

Some companies may reach their maximum subscription amount during the EOI campaign, but if they don’t, then they will launch the public phase of the CSF campaign through the Intermediary’s online platform, which becomes available to the general public at large.

Obligations on a company after a successful CSF campaign

If you successfully run a CSF campaign and issue shares to CSF shareholders (via the Intermediary), then it is important to note that there are increased compliance requirements on your company for each and every year that you have a CSF shareholder.

These are summarised here:

Interested?

Crowd source funding is a new and innovative way that growing, privately held companies can access funding in Australia.

If you are a company contemplating growth and investment via a CSF campaign, we here at Roberts Crosbie Mortensen Lawyers would love to assist as legal advisors during that process.
If you have any further questions or queries, our specialist mergers and acquisitions team are more than happy to assist. And remember, our approach here at Roberts Crosbie Mortensen Lawyers is to make business happen, not to get in the way.