Crowd-sourced funding (CSF), often referred to as crowdfunding, is a financial service that enables start-ups and small businesses to raise capital from a large pool of investors, each contributing small amounts. This method allows businesses to finance their operations through loans, donations, or by offering rewards or shares in return for investment.

Eligibility under the CSF Regime

Both unlisted public companies and proprietary companies can utilise crowd-sourced funding, to raise up to $5 million in a 12-month period.

To be eligible, the company must have at least two directors, with the majority residing in Australia. The principal place of business must also be located in Australia, and the company must comply with the gross asset and revenue caps of $25 million. Additionally, the company must not operate as an investment company, meaning it cannot derive substantial income from investing in other companies, entities, or schemes.

The Crowd-Sourced Funding Process

To begin the process, companies must launch a campaign on a crowdfunding platform, which serves as an intermediary. Investors can then support the campaign by contributing funds.

Offer Document Requirements

Eligible public and proprietary companies may offer shares to investors through an intermediary CSF platform, using an offer document.

A number of obligations and investor protections apply to CSF offers, including:

• An investor cap of $10,000 per annum per company for retail investors
• The provision of a CSF offer document containing minimum information and a prescribed risk warning
• A five-day cooling-off period.

Benefits of Crowd-Sourced Funding

Crowd-sourced funding is generally faster and more cost-effective than a traditional capital raise, which typically requires a prospectus.

With crowd-sourced funding you can expect to incur a broker fee as well as legal and accounting costs. A listing or prospectus would incur listing fees, brokers costs, underwriting fees, legal and accounting costs, typesetting fees, public relations expenses, and company secretary costs.

Risks of Crowd-Sourced Funding

Ultimately the directors of the company undertaking the crowd-sourced funding bear the majority of the risk. A degree of risk is also carried by the intermediary or broker facilitating the funding.

Investors also face potential risks. Many businesses seeking crowd-sourced funding are new or rapidly expanding start-ups. While crowd-sourced funding involves less disclosure than other types of capital raising, the offer document must clearly state that investors may lose their entire investment. Additionally, crowd-sourced funding investments are often illiquid, meaning investors may struggle to recover their funds.

Reporting, Audit and Governance

Corporate governance and reporting obligations differ slightly for public and proprietary companies, with specific requirements related to crowd-sourced funding. There is an audit obligation once a company raises over $3 million through crowd-sourced funding.

Contact Pilot

Pilot provides assistance with the preparation of financial statements and reports for crowd-sourced funding, including audited financial reports when required. We can also advise on accounting policy choices and other complex matters including taxation advisory related to crowd-sourced funding.

For more information, please contact Chris King, Josh Meggs or your Pilot advisor on (07) 3023 1300.