Equity crowd funding in Australia
Is it your golden ticket?
October 23, 2018
What is equity crowd funding?
A new form of online crowd funding available in Australia where people invest money in exchange for equity in a company.
It differs from traditional “reward-based” crowd funding where people invest money in exchange for products, experiences or recognition.
Who can use it right now?
Unlisted public companies?1 Yes, they have been able to utilise equity crowd funding since 2017.
Private companies? Yes, they have been able to utilise equity crowding funding since mid-October 20182
Why equity crowd funding?
Because raising money is bloody hard!
We get it. You’ve got an innovative business concept and put in the hard yards to get it going.
However… you need funding to take it to the next level. So far you are up to 57 cold calls, 85 emails, 64 networking events and your old school buddies have stopped returning your calls.
Equity crowd funding may be your ticket to raising money.
So who do we think will use it?
Start-ups and SME’s who want to bring their followers, customers and friends (a.k.a would-be investors) to one place.
It can also be a great way to market your brand as campaigns are online and open to the public. This is something you don’t get from traditional private forms of capital raising which often happens behind closed doors3.
It’s great! But not your golden ticket….
Yes, equity crowd funding is the shiny new toy.
However… just like traditional forms of capital raising, it is heavily regulated.
The Campaign: The Corporations Act prescribes the types of offers you can make, where and how the campaign is run, the information you need to disclose in an offer document and how much money you can raise4. It also contains eligibility criteria that you must meet before making an offer, such as asset and turnover tests and minimum numbers of directors5.
The Aftermath: A successful campaign will likely leave you with a lot of shareholders. As shareholder numbers grow, so too do your administrative cost6. You will need to track the shares issued and sold under your crowd funding offer as well as updating ASIC. You will also need to comply with Chapter 2E of the Corporations Act before entering into any related party transactions.
Perhaps more importantly, it is not your “golden ticket” to success. A good business is a good business, regardless of where the money comes from.
We look at two overseas equity crowd funding campaigns; a success story and a not so successful story.
A success story
Yeastie Boys raised $500,000 in less than 1 hour! What a success!
The Wellington craft brewer sought to raise $500,000 to expand into the UK market.
Shares were sold at $1 each (with a minimum investment of $5007, valuing the company at $4 million dollars.
Importantly, Yeastie Boys followed the rules and flagged risks for potential investors in its offer document which included:
- lack of cashflow;
- foreign exchange volatility; and
- loss of key staff.8
Despite these risks, retail investors saw potential and invested.
A not so successful story
Upper Street raised £200,000 through its 2015 equity crowd funding campaign.9
The UK company launched in 2010 with the unique selling proposition of customers designing their own shoes.
Despite reaching a valuation of £2.8 million and enjoying a successful equity crowd funding campaign, Upper Street closed its doors in 2015.
Co-founder, Julia Elliot Brown, cited the continuous need for marketing expenditure for the closure, (particularly when competing with powerhouses of the fashion industry).10
What can we learn?
Equity crowd funding is heavily regulated and is not your golden ticket to success.
Follow our Golden Rules of capital raising for the best chance to succeed.
How to comply:
- TALK to your advisors before you start;
- ENSURE your company is properly structured;
- EXPLORE different ways to raise capital and understand their pros and cons;
- MONITOR your shareholder register; and
- COMPLY with the law.
If you want to discuss the content of this article or have any questions about raising capital for your business, give us a call.
1 “Unlisted public companies (excluding investment companies) with less than $25 million in consolidated assets and annual revenue that have their principal place of business and a majority of directors in Australia are eligible”, Regulatory Guide 261 Crowd-Sourced Funding: Guide for Public Companies. Also see s 738H of the Corporations Act 2001 (Cth).
2 Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2018.
3 Unless a company incurs the cost of a prospectus it normally cannot make offers of investment to the public.
4 “…make offers of ordinary shares to retail investors, through a licensed CSF intermediary’s platform, using a CSF offer document. Eligible companies can raise up to $5 million in any 12-month period under the CSF regime”, Regulatory Guide 261 Crowd-Sourced Funding: Guide for Public Companies. Also see Part 6D.3A of Corporations Act 2001 (Cth).
Section 738H of the Corporations Act
5 Section 738H of the Corporations Act
6 You should consider/keep in mind:
- each time the company’s shareholder structure changes, the company’s register (and for private companies, the ASIC register) need to be updated;
- whether to have a shareholders’ agreement prepared to deal with corporate governance matters for a proprietary company, or if one already exists, getting new shareholders to agree to its terms; and
- the amount of on-going communication and consultation that having numerous shareholders will require.