The Federal Government recently announced its intention to put in place legislation facilitating crowd-sourced equity funding, and that consultations to facilitate crowd-sourced debt funding will start soon.

Crowd-sourced funding or ‘crowdfunding’ typically involves the practice of using the internet or an online platform to raise funds through the pooling of relatively small contributions from a large number of investors to finance an enterprise, an investment or specific objective.

Models used to attract crowdfunding

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The Federal Government’s focus has been on equity-based funding and debt-based funding.

Regulatory Issues with Equity-Based Crowdfunding

The regulatory issues with equity-based crowdfunding include the following:

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Regulatory Issues with Debt-Based Crowdfunding

Debt-based crowdfunding typically sees investors contributing money to acquire rights to interest distributions and capital repayments, and may be classed as a managed investment scheme and subject to regulation under the Corporations Act. The regulatory issues here include the following:

  • the scheme may require formal registration with ASIC. Exceptions to the requirement to register as a scheme include:
    • relying on the 20/2/12 rule for small scale offerings
    • limiting offers to wholesale investors. The same shortcomings mentioned above apply.
  • the responsible entity or trustee of the scheme may be required to hold an Australian Financial Services Licence permitting it to offer interests in the scheme to investors
  • where the scheme is operated by an on-line platform operator, that intermediary may also be required to hold and obtain an Australian Financial Services Licence
  • retail investors must be provided with disclosure documents in the form of a financial services guide and product disclosure statement.

Federal Government’s approach to Equity-Based Crowdfunding

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The Federal Government has recognised that the current regulatory regime does not fit neatly with crowdfunding, and has signalled that it intends to introduce legislation to facilitate crowd funding on the following basis.

It is possible that the Federal Government may extend a modified form of this relief to proprietary companies, by increasing the number of shareholders and raising the $2 million annual cap. However, there has been no firm indication to this effect.

Federal Government’s approach to crowd-sourced debt funding

The regulation of crowd-sourced debt funding is currently being reviewed by the Federal Government and is subject to consultation. However, if the Federal Government’s approach to crowd-sourced equity funding is anything to go by, we can expect a similar regulatory regime to that outlined above to be applied to crowd-sourced debt funding, where the funding is undertaken through an unregistered managed investment scheme and interests are offered to retail investors.