Equity Crowdfunding for Companies
*Please note that this article provides general information only and will not be applicable in all circumstances, nor should it be relied upon as legal advice. Should you wish to obtain legal advice, we recommend that you get in touch with us.
What is crowdfunding?
Equity crowdfunding is a way in which unlisted companies (typically start-ups and small businesses) can raise capital, through selling small amounts of equity to a large number of investors. This method of fundraising, which is conducted through an intermediary platform, has been available to private companies since 2018 when amendments to crowdfunding legislation took effect.
Equity crowdfunding provides small companies with an alternative to raising funds through venture capital or loans (which the company may be unable to access), while it allows retail investors greater scope to buy into early-stage companies, provided they are happy to accept the risks that come with what may be a speculative investment.
Eligibility?
There are several requirements which must be satisfied by businesses seeking to raise funds through equity crowdfunding. These include:
Structure – the fundraiser must be a proprietary company with a minimum of two directors, or a limited liability public company.
Location – the fundraiser’s principal place of business must be in Australia, and the majority of the fundraiser’s directors must reside in Australia.
Size – the fundraising company and its related parties (together) must not exceed the cap of $25m on consolidated gross assets and annual revenue, respectively.
Unlisted – the fundraising company must not be listed on any financial market either in Australia or overseas (e.g. the Australian Securities Exchange (ASX) or New York Stock Exchange).
Prepare for crowdfunding?
In addition to satisfying regulatory requirements, a company considering crowdfunding needs to ensure it will comply with its internal rules, including its constitution or shareholders agreement. For example, there may be provisions in the shareholders agreement which requires approval of the shareholders or specific shareholders prior to raising capital.
If a shareholders agreement is in place, a company will need to consider the rights that shareholders have, and whether these allow for a crowdfunding campaign to take place. Once crowdfunding is on foot, the shareholders agreement will need to be terminated due to the large number of members joining the company and the impracticality of having all these individuals execute such an agreement.
Conducting crowdfunding
To conduct a crowdfunding campaign, companies must utilise an intermediary with the proper licences and approvals (such as an Australian Financial Services Licence). The purpose of an intermediary is to check that a company complies with the regulations, and to facilitate the investment into the company by advertising it to investors and dealing with funds. For an example of an Australian equity crowdfunding intermediary, see Birchal.
A core component of the crowdfunding campaign is the preparation of an offer document which must include minimum information such as company details, details of the offer and investor rights and a risk warning associated with crowdfunding. The offer document must be accurate, clear, and concise and there are penalties for misleading or deceptive offers.
Reporting obligations
Financial and other reporting obligations will differ depending on whether the fundraiser is a public or proprietary company. Proprietary companies will need to (among other things):
record details of shareholders in their share registers and shares issued pursuant to crowdfunding campaigns, as well as changes to the share register and share structure;
prepare annual financial and directors’ reports and lodge these with ASIC; and
appoint an auditor to audit their annual financial reports.
How we can help
Merton Lawyers has strong experience assisting clients with conducting equity crowdfunding campaigns. Please get in touch to book a complimentary meeting and discuss how we can help your company grow.
Author, Darcy Keogh.
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