Crowd-Sourced Funding for Small Business

Crowd-Sourced Funding (“CSF”) is a financial service where start-ups and small businesses raise funds, generally from a large number of investors that invest small amounts of money. It is emerging as a popular way to fund innovative business ideas.

Australia has been a fairly earlier adopter of Crowd Source Funding and currently there are the following (main) CSF intermediaries between investors and the companies seeking funds:

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.

There are also niche crowd funding sites with specific non-business target markets such as:

  • Pozible
  • Go FundME
  • VentureCrowd

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)
Pre-requisites for Crowd Source Funding

Provided those requirements are satisfied, a company can raise money from private investors. Up to $10,000 can be raised from each investor and a total of $5 million can be raised over any 12 month period.  All CSF must be conducted through licensed CSF intermediaries.

What are my obligations once I receive capital via crowd sourced funding?

Private companies wishing to use the CSF regime to raise capital have certain ongoing legal obligations, and it’s important to consider these BEFORE you raise funds:

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 254YNotify 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 319Prepare an annual financial report and directors’ report in accordance with accounting standards and lodging these reports with ASIC
Section 314Copy 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 738ZKShareholders’ approval before giving financial benefits to related parties, including directors and their spouses, children or parents
Obligations of companies once you have funding

In addition to some of the issues noted above, proprietary companies with CSF shareholders will be subject to some additional governance obligations which are not ordinarily imposed on small proprietary companies.  These include: 

  1. Preparation of financial and directors’ reports in accordance with accounting standards.
  2. Financial statements must be audited if proprietary companies raise $3 million or more from CSF offers.
  3. Shareholders’ approval is required for any related party transactions; and
  4. The company registers must include additional details including details about the CSF offer and the CSF shareholders as part of the company registers.

There are a few other things companies will need to consider after funding: such as you can’t make loans to other parties using the CSF funds and some reporting, auditing and governance obligations kick in AFTER 5 years.

Rider Accountants and Advisors as specialist accounting advisors to the NEW ECONOMY can help you raise funds via Crowd Source Funding in the following ways:

  • 1. Prepare annual financial reports including profit and loss, balance sheets, and cashflow statements
  • 2. Assist with business plans 
  • 3. Ensure tax affairs are in order 
  • 4. Manage ASIC lodgements
  • 5. Sit on an advisory board 
  • 6. Conduct performance reviews