Startup Law
The regulation of crowdfunding in Australia: where are we and what's to come?
By Leigh Schulz & Domenic Mollica, Minter Ellison
Small and medium-sized enterprises (SMEs) often struggle to source affordable debt financing through traditional lending channels. Many of these difficulties are unavoidable and intrinsic to the nature of SMEs. When compared with larger corporate operations, SMEs particularly those in the "start-up" phase are typically viewed by lenders as a higher credit risk by virtue of their speculative earnings potential and smaller (if not totally absent) pool of securable assets. It is for these reasons that SMEs have in recent times started to explore alternative funding arrangements.(1)
This article examines one such source of alternative funding, the raising of capital through "crowdfunding". We explain the concept of crowdfunding, provide an overview of the current state of the regulation of crowdfunding in Australia, and outline recent moves by the Australian Government and industry bodies towards the development and adoption of a new, bespoke regulatory regime.
What is crowdfunding?
The term "crowdfunding" refers to the practice of raising funds through the pooling of relatively small financial contributions from a large number of investors to finance a business or to fund the commercialisation of a new product, usually facilitated through an online platform.
The types of crowdfunding
There are four generally accepted types of crowdfunding:
- reward-based crowdfunding, where financial contributions are made in anticipation of a benefit incurrent or future goods;
- donation-based crowdfunding, where contributions are pooled in support of a social cause;
- equity-based crowdfunding, where financial contributions are made for or in anticipation of a stake in a growing company; and
- lending-based crowdfunding, where discrete financial contributions are collected and offered as debt repayable with interest.(2)
Risks associated with crowdfunding
Like all forms of financing, crowdfunding is not without risk. Common risks associated with crowdfunding include:
- fraudulent dealings -- the risk that funds sourced by a platform operator or the issuer may be misappropriated or mismanaged.(3) These risks are arguably greater when models that do not provide for immediate financial or other benefits (such as the donation-based crowdfunding model) are employed;
- meeting of the minds -- the risk that, in the absence of clearly defined investment terms, those who source crowdfunding may deny investors their expected share in returns;(4)
- failure -- the risk that investors may not receive anticipated benefits (financial or otherwise) due to the failure of the project, idea or cause;(5)
- dilution -- the risk that the initial "crowd" of investors could be diluted by subsequent equity issues;(6) and
- broader risks to intermediaries -- intermediary platform operators could be held accountable for the losses incurred by investors.(7)
Existing regulation of crowdfunding in Australia
Despite the increasing prevalence of crowd-sourced funding across many global markets, Australia has been slow to recognise and adapt to the phenomenon.
Australian regulatory bodies (such as the Australian Securities and Investments Commission (ASIC)) have sought to apply existing regulatory frameworks to crowdfunding models.(8) In 2012, ASIC issued guidance to this effect,(9) stating that a number of factors, including the type of "reward" offered to investors and the mode of platform used, could lead to a scheme being classed as either a managed investment scheme, the provision of financial services requiring an Australian financial services (AFS) licence, or fundraising according to ch 6D of the Corporations Act 2001 (Cth).
(1) Jason Zein "Filling the capital gap: the financing case for crowdsourced equity funding in Australia" (2014) 25(2) Journal of Banking and
Finance Law and Practice 102.
(2) PricewaterhouseCoopers, Crowdfunding -- sourcing financial backing to drive digital innovation, 2014.
(3) Parliament of Australia Corporations and Markets Advisory Committee Crowd Sourced Equity Funding: Report (May 2014) p 13.
(4) Ibid, pp 43-6.
(5) Ibid, p 159.
(6) Ibid, p 46.
(7) Australian Securities and Investments Commission "ASIC Guidance on Crowd Funding" media release, 12-196MR (13-August 2012).
(8) Terence W Wong "Crowd funding: regulating the new phenomenon" (2013) 31(2) Company and Securities Law Journal 89 at 93-4.
(9) Above n 7.
Note: This is an extract from Australian Banking & Finance Law Bulletin, August 2015, Volume 31 No 7 and also uploaded here.
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