For many not-for-profits, raising funds to meet their operational or aspirational goals can sometimes require creative thinking. Crowd funding, a term that comes up quite regularly, is one of the ways organisations can raise money. This type of fundraising is not particularly new. All kinds of organisations, including in the health and not-for-profit sector, have asked their “crowd” of supporters for donations for decades. That said, there have been recent developments in the area.
A type of crowd funding that has received quite an amount of attention recently is crowd sourced equity funding. A bill to introduce changes to the Corporations Act 2001 (Cth), which would allow small businesses and start-ups to access retail investment in order to raise capital, recently passed through the House of Representatives. It is generating quite a lively debate in the industry and some controversy in the Senate as to its potential shortcomings.
While the proposed reforms still have some way to go and may be subject to further amendments by the Senate, they are designed to drive innovation and entrepreneurialism in the Australian economy by creating greater avenues for small businesses to raise capital. The changes will allow retail investors, for the first time, to purchase equity offered by these businesses through a platform operated by an intermediary.
The main features of the changes are:
- Start ups hoping to grow and innovate, and who wish to raise equity capital, will need to transition to an “eligible CSF company”. These are public, unlisted companies but with reduced compliance requirements (for up to 5 years)
- These reduced requirements include an ability to report online, to not require an audit if raising less than $1 million dollars from a CSF offer, and no requirement for an AGM
- The total amount a CSF company can raise in one year is $5 million, subject to previous offers made in the same year that were not crowd sourced
For retail investors
- Can only invest in a CSF company through an intermediary
- Can only invest $10,000 per investment opportunity (but this does not limit the amount invested in crowd sourced equity funding opportunities more broadly)
- Have the right to a five-day cooling off period after the offer closes
- These are sophisticated investment platforms who need to hold an Australian Financial Services Licence to provide a “crowd-funding service”
- Impartial – cannot provide investment advice or lending to CSF investors
- Publish CSF offers on their platform and accept applications on behalf of the CSF company
- Have a ‘gatekeeper’ role, including responsibility for basic due diligence on CSF companies offering equity through their platforms
While the reforms have garnered significant interest and courted some controversy from industry experts, and equity sourced crowd funding is not yet law, there are still traditional forms of crowd funding that remain a viable option for this sector. These include project donation funding, gaining endorsement for DGR status, auspicing from another DGR, or reward-based crowd funding. A number of these options are available on platforms such as Kickstarter and Indiegogo, which, with the right idea or project, can be a potentially valuable source of funds.