Crowd Sourced Equity Funding is a relatively recent method of company financing.
It refers to arrangements through which a business (the issuer) seeks to raise
capital, particularly early-stage funding, by offering small debt or equity interests in
the issuer to large numbers of investors (typically retail), sourced through a crowd
funding online platform which serves as an intermediary between the issuer and
the investors/internet users.
Although Crowd Sourced Equity Funding
(CSEF) is not prohibited in Australia,
certain arrangements could require
a complying disclosure document
and licensing arrangements which are
regulated under the Corporations Act
2001 (Cth) (Act) and by ASIC. (Note:
references to provisions in this memo are
references to the Act).
Some examples of companies that have
undertaken CSEF projects are provided at
the end of this document.
Issuers would publish their equity offers
through a website (sometimes referred to
as an ‘online portal’ or a ‘funding portal’),
the operator of which would serve as
the intermediary between the crowd
investors and the issuer, for the purpose
of the equity transactions. In practice,
CSEF activities are undertaken by small
start-ups or early-stage companies for
relatively modest amounts.
The promoter of a particular project
could set up a proprietary or public
company (the issuer) for that purpose,
and with a view to investment
opportunities in that project being
publicised through one or more online
intermediaries. There are however certain
restrictions. These have been summarised
Proposed Regulatory Changes
We note that, on 9 September 2014, the
federal government announced that CSEF
would be included in the government’s
‘National Industry Investment and
Competitiveness Agenda’. The details of
the government’s response to a report
released by the Corporations and Markets
Advisory Committee (CAMAC) and the
specific details of a possible CSEF regime are
expected in the coming weeks.
CAMAC recommended Australia introduce
legislation which allowed retail investors to
invest up to $10,000 a year, across at least
four startups, in equity crowdfunding, and
allow companies to raise up to $2 million
per year on such platforms. Many think the
$2 million cap is too low and currently, CSEF
is only available to wholesale investors with
more than $2.5 million in investable assets
or annual earnings of around $250,000.
Start-up also speculates that a prominent
government source believes there’s a chance
regulation might not be in place until July 1
next year, and a small chance that it might
not happen until July 1, 2016.
Start-up has also speculated that ASIC has
the power to boost the amount of funding
available from equity crowdfunding
overnight, without any need for new
legislation. A simple change from 20 to
100 investors in small scale offerings
regulations would do 95% of the job,
allowing CSEF to become a favourable
alternative to raising capital.
This type of corporate structure generally
involves significantly less compliance
requirements. The proprietary company
structure is essentially used for private or
‘closely held’ shareholder arrangements,
not involving public participation. The
two principal restrictions for proprietary
companies to successfully undertake a
CSEF type capital raising include:
• the shareholder cap: a proprietary
company may have no more than 50
non-employee shareholders (section
• the prohibition on public offers: a
proprietary company is generally
prohibited from engaging in any
public offer of its equity or other
securities (section 113(2) –
proprietary companies are prohibited
from any activity that would require
a prospectus or other disclosure to
investors under Chapter 6D).
www.piperalderman.com.au 1 October 2014
C R O W D S O U R C E D E Q U I T Y F U N D I N G
In respect of the restriction above, there are various exemptions from the prohibition on public offers, including the small scale personal offers exemption (whereby an issuer may make a personal equity investment offer to investors, provided that no more than $2 million is raised in any 12 month period from no more than 20 Australian resident investors (section 708(1)-(7) ), and any number of offshore investors (section 708(5)(b)). However there is a ban on advertising small scale personal offers (section 734(1)).
ASIC Class Order 02/273 permits up to $5 million to be raised in some circumstances, with the restrictions on advertising a small-scale offer also being relaxed. However, the ceiling of 20 investors in any 12 month period remains.
There are also exemptions for offers to sophisticated, experienced or professional investors, overseas investors and for large offers (applicable to proprietary as well as public companies). The exemption applies where the minimum amount payable on the securities by the person to whom the offer is made is at least $500,000: s 708(8)(a), (b).
Note that a sophisticated investor is an individual with net assets of at least $2.5 million or with a gross income for each of the last two financial years of at least $250,000 (Corporations Regulations reg 6D.2.03). The exemption also applies for offers through a financial services intermediary to an experienced investor, to a professional investor, or to a senior manager of the company (section 708(8)-(12)).
However, none of these exemptions accommodate the type of fundraising involving potentially many investors which is contemplated by CSEF.
In a public company structure, there is no equivalent of the shareholder cap and prohibition on making public offers that apply to proprietary companies.
However, use of the unlisted public company corporate structure is subject to:
• fundraising disclosure requirements: An obligation to provide a prospectus or offer information statement (OIS) when seeking funding through public offers of equity in the company, with the various exemptions (small scale personal offers, offers to sophisticated investors and large offers) not sufficing for the size and type of target audience typically contemplated under CSEF.
• compliance requirements: The ongoing corporate governance and financial reporting requirements for public companies, extend well beyond those applicable to proprietary companies.
An unlisted public company could offer its equity through CSEF by publication of an OIS if the amount of capital to be raised by issuing the equity, when added to all amounts previously raised by the body or other related bodies, does not exceed $10 million (section 709(4)).
In other circumstances, an unlisted public company could offer its equity through CSEF by publication of a prospectus.
Any prospectus or OIS that investors would receive if they directly acquired equity in a public company would have to be prepared by the issuer, with liability for misstatements attaching to the issuer and others referred to in those documents.
The operator of a CSEF website acting only as an intermediary would be subject to the same liability for a defective disclosure document if it was involved in the contravention.
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Managed Investment Scheme
As an alternative, investors may be invited to buy interests in a managed investment scheme, which would acquire those securities. The scheme, in effect, would be an interposed legal arrangement between the issuer and the investor.
Under one approach, the responsible entity (RE) of the scheme would use the funds raised from the investors to acquire either equity in a particular issuer, with the acquired equity being scheme property and therefore being held by the RE on trust for the investors who are scheme members.
Under another approach, a scheme could be structured so that investors can elect which from a number of projects they want to support. They would then acquire a specific class of interests in the scheme for each project or enterprise chosen. Again, all equity acquired would be held by the RE, on trust for the investors who are scheme members.
A benefit to an issuer of CSEF under a managed investment scheme arrangement is that an issuer incorporated as a proprietary company could receive investor funds, but without the shareholder cap problem that would arise if investors themselves could acquire equity in the company in their own name.
In addition, as the scheme (not the proprietary company) would be making offers to investors of interests in the scheme, the prohibition on proprietary companies making public offers of their own securities would not apply.
This arrangement would allow an issuer that is a public company to have fewer shareholders, given that all equity acquired under the investor pooling arrangement would be held by the RE.
Under a managed investment scheme arrangement, it is the RE of the scheme (or other operator if the scheme is not a registered scheme, for example because it comes within an exemption), not the issuer, that has the legal obligation to prepare a Product Disclosure Statement (PDS) for investors. That difference has the potential to reduce the level of disclosure, and therefore the protections, for investors.
A PDS prepared by an RE must contain any information of which the RE is aware that might reasonably be expected to have a material influence on the decision of a reasonable retail client whether to acquire the interest in the scheme, assuming that the scheme is not a simple managed investment scheme.
Depending on the circumstances and the CSEF services offered by intermediaries or funding portal operators, under current Australian law a CSEF intermediary operating in Australia may be required to hold an Australian Market Licence (if the website operator offers or makes invitations to acquire financial products, such as a share, debt security or interest in a scheme) (section 791A) or an Australian Financial Services Licence (if the intermediary is carrying on a financial services business) (section 911A).
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www.piperalderman.com.au 4 October 2014
A number of Australian companies have
used CSEF projects to raise equity finance
within the existing regulatory regime
provided under the Corporations Act. As
a result, existing CSEF examples within
Australia tend to be of a relatively small
scale. These include:
• Five Lives Studio - Brisbane-based
company Five Lives Studio has
raised over £460,000 through UK
crowdsourcing platform Kickstarter
UK, for the development of a realtime
strategy game for a number of
computer platforms. The company
has over 15,000 participating
investors in the scheme, who each
receive a number of digital content
and physical merchandise ‘rewards’
depending on the amount of funding
they contribute to the scheme. The
company was ranked as the top
Australian crowdsource funding entity
• Ninja Blocks - Australian-based Ninja
Blocks raised over $700,000 on
crowdsourcing platform Kickstarter
Australia for the development of
an integrated device management
appliance, the Ninja Sphere. The return
on a participating investor’s investment
varied according to the amount
pledged, ranging from regular updates
on the progress of the venture ($5 -
$25 pledge) to a Ninja Sphere itself
(pledge of $199 or more).
• Blood Moon - On 13 August 2014,
Australian drinks manufacturer Blood
Moon raised almost $20,000 from
crowdsourcing activities through
Australian CSEF platform Pozible.
In return for their investment,
shareholders are entitled to receive the
first batch of Blood Moon tonic syrup, in
• JetSetGo - JetSetGo is currently in the
process of raising $50,000 through
CSEF platform VentureCrowd.com.
au. Co-founder Peter McWilliam has
said that his company had chosen to
raise capital through CSEF activities
to capture investors unwilling to
commit tens of thousands of dollars
but who are keen to speculate. The
company is seeking to raise $50,000
in exchange for 6.3% of equity in the
Examples of existing CSEF projects
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Below are examples companies who have raised capital within, or from investors based in, the United States from crowdfunder.com:
• Go Coin - Go Coin is an international payments platform which is currently seeking to expand their operations in the trade of virtual currencies, such as Bitcoins, Litecoins and Dogecoins. The business model of the company involves accepting virtual currencies from retail customers on behalf of retailers and, for a 1% fee, settling payment with the retailer in US dollars. After successfully raising US$1.5 million through an equity offering in March 2014, Go Coin is currently in the process of raising another US$1 million through US based crowd source funding platform, crowdfunder.com.
Under the terms of the new offering investors are able to purchase a convertible note issued by the company, for a minimum investment of US$20,000. The convertible note will generate a 6% per annum return on the investment’s face value, for an initial term of 12 months. The convertible note can then be converted into an equity interest in the company, at a 20% discount on face value.
• Pono Music - Pono Music is a portable music device manufacturer which has conducted a number of CSEF offerings to finance the marketing and development of their product, the ‘Pono Player’. Musician Neil Young is the founder of Pono Music.
Pono Music is currently seeking to raise US$4 million from a CSEF offering through US crowd source funding platform crowdfunder.com. After raising US$6.25 million in CSEF funds in April 2014, the company is now offering crowd source investors equity in the company’s capital with a minimum investment of US$5000. Pono Music is currently exceeding their funding target of US$4 million, reaching almost US$6 million in funding commitments as at 22 September 2014.
• SatNav Technologies Pvt Ltd - SatNav Technologies is an Indian based company which specialises in proprietary cloud-based IT and custom mapping solutions.
SatNav Technologies has conducted a number of CSEF offerings through US crowd source funding platform crowdfunder.com, including two equity raisings in May 2008 and August 2014 for US$3.5 million and US$2 million respectively.
The company is now seeking to raise an additional US$1.35 million by offering investors an equity interest in the company for a minimum investment of US$25,000. As at 22 September 2014, SatNav Technologies exceeded their funding target with over US$1.75 million in funding commitments.
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US Regulatory barriers
The United States has provisionally enacted new legislation to regulate the public offering of securities in relatively small amounts, known as the Jumpstart our Business Startups Act (JOBS Act) . At present, companies are prohibited under the Securities Act 1933 from soliciting offers of securities to the public otherwise than in accordance with the rules and regulations monitored by the SEC. While an exemption to these rules currently applies to offers made to ‘accredited investors’, the relatively high income and asset thresholds required to qualify as an accredited investors largely excludes the possibility of CSEF activities for more modest capital raisings.
However when in operation, Title III of the JOBS Act will amend the current ‘accredited investors’ exemption to also permit companies to raise capital funds through CSEF activities.
Broadly, a company will be entitled to raise funds from public investors who do not qualify as accredited investors in the following circumstances:
• Where the offer or sale of securities by the company results in the aggregate amount raised through CSEF activities being less than US$1 million within the previous 12 month period.
• Where the aggregate amount sold to an investor during the preceding 12 month period does not exceed:
- in the case of investors with annual income or net worth under US$100,000, the greater of US$2000 or 5% of the annual income or net worth of that investor
- in any other case, 10% of the investor’s annual income or net worth, capped at a maximum amount of US$100,000 within the 12 month period.
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For more information, please contact:
David Cornwell, Partner+61 2 9253 3809
David is a Corporate partner based in the Sydney office. He is a highly experienced corporate lawyer, who has practised in Australia, New Zealand and Asia over his 30 year career.
From his time both in private practise and in house, he has gained significant experience in relation to corporate advisory, joint ventures, project finance, capital markets, IPOs, banking and finance, privatisations and M&A.
David has particular expertise and experience in international corporate and capital market transactions. He has been involved in Asian cross border transactions and formerly lived and worked in Asia as a partner on an international firm. His practice encompasses a range of corporate and commercial transactions on a national and cross border basis. He also has experience in managing large and small teams of junior and senior lawyers.
Bahar Agar, Lawyer
+61 2 9253 3822
Bahar is a lawyer in the Corporate division of the Sydney office. She has been involved in a wide range of corporate and commercial legal matters including assisting on advice to the State Government and working on capital markets transactions including initial public offerings.
Chris Davies, Law Clerk
+61 2 9253 3862
Chris is a law clerk in the Sydney corporate practice. He has a Bachelor of Commerce (Accounting and Management) and Diploma in Global Issues from the University of Melbourne, and is about to complete his Juris Doctor degree in law at the University of Sydney. He works with a range of partners within the firm, undertaking legal research and assisting in the preparation of legal advice. Chris has a strong interest in capital markets and corporate law, and has been involved in a number of corporate transactions at Piper Alderman over the past two years.
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