Corporate and Markets Advisory Committee, a division of the Australian Government, has recently conducted a review into issues arising out of the use of Crowd Sourced Equity Funding in corporate fund raising situations.
Crowd sourced funding in its simplest form, soliciting small financial contributions from a large number of people, is not new. Charitable bodies, for instance, have been doing this for many years, in various ways. However, during the last decade the internet and social media have created or enhanced the means by which individuals and entities can draw their requests, ideas or proposals to the attention of large numbers of persons who may have some funds they are prepared to donate or invest. Those contributions are sought through an online crowdfunding platform, while the offer may also be promoted through social media.
Individuals may be invited to contribute to a project, cause, or venture (project):
- for its intrinsic social, artistic, philanthropic or other worth, not in exchange for anything of tangible value: donation funding
- in exchange for a future financial reward (such as a share of profits resulting from the sale of a good/service, the production/delivery of which the funding enabled): investment funding
- in return for profit on funds lent through one-to-one lending arrangements: peer-to-peer (P2P) funding. These can range from person-to-person loans, to arrangements that look in many respects like standard business lending except that a financial institution is not involved
- in exchange for equity or other securities in a company or other entity (if permitted): equity funding. This is what is referred to as Crowd Sourced Equity Funding (CSEF).
- in exchange for some existing or future tangible reward (such as an existing or future consumer product or a membership rewards scheme): reward or pre-payment funding
In a relatively short time, crowdfunding has become a new method of raising capital for a broad range of purposes using the internet. To date, it has mainly been used by people seeking to raise money for a specific project and does not generally involve the issuance of securities. However, in some jurisdictions, crowdfunding is emerging as a way for businesses, particularly start-ups and small and medium-sized enterprises, to raise capital by issuing securities.
Internationally, CSEF is receiving increasing attention as an alternative form of corporate fundraising for start-up or other small to medium companies. To date, some jurisdictions, notably the United States, Italy and New Zealand, have enacted legislation dealing with CSEF (though the US and New Zealand legislation is not yet in force), while some other jurisdictions, such as Canada, France and the United Kingdom, are giving consideration to this form of fundraising.
The various forms of contemporary crowd sourced funding, including CSEF, have the same basic elements.
A person (the promoter) may have a project but insufficient funds to bring it to fruition. The promoter may decide to raise some or all funds through an intermediary crowdfunding platform which (for a fee) creates a page on its website for the promoter. The promoter may also create a video or other promotional material on the website page, explaining the project and asking for funds in exchange for an immediate or future product or other reward. People interested in contributing may be able to engage with the promoter and with each other, on a chat room or chat board provided by the website platform. The project and its fundraising are also typically promoted via social media, email to friends and associates and other websites with a web-link to the fundraising page.
Crowd funding platforms may require a specified target amount to be reached before contributions are passed to the promoter ('all or nothing' funding), or have those funds passed on without any target threshold ('keep it all' funding).
The operators of a crowdfunding platform may engage in vetting of projects to be included on their website, to maintain the reputation of the website. However, this due diligence may be well short of taking any legal responsibility for the accuracy of the information provided by promoters of projects or for the proper use by promoters of the contributed funds.
There are risks for persons providing funds through this medium. They include:
- Fraud – misappropriation of funds either by the project promote or the website operator and false websites being used to attain credit card details.
- Failure – of the project being completed, or rewards/returns not being generated as predicted.
To consider the full review from the Corporate and Markets Advisory Committee on Crowd Source Funding, please click here. For accounting advice pursuant to raising capital from all sources, be it, equity, debt or a hybrid of solutions, please speak to your Hanrick Curran advisor or ask for Matthew Beasley on 07 3218 3900.