A change in the crowdfunding legislation in Australia has just changed the game for 2.5 million companies.
The long awaited legislative change in the form of The Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 (the Proprietary CSF Act) became operational in October 2018 amending the requirement for proprietary companies to have no more than 50 non-employee shareholders.
Under the new legislation proprietary companies canraise up to $ 5 million in a 12-monthperiodfrom retail investors who can invest up to $10,000 per company per 12-month periodvia a licensed crowdfunding intermediary.
In order to be eligible to use the new legislation a proprietary company must:
- Have its principal place of business in Australia
- Have at least two directors, at least one of whom must reside in Australia. Where there are more than two directors the majority of the directors must reside in Australia
- Have consolidated gross assets and annual revenue below $25 million
- Not have a substantial purpose of investing in other companies
- Not intend to use the funds raised to provide a loan to a related party
If an eligible company meets the criteria and successfully acquires crowd-sourced equity funding shareholders they will be subject to additional reporting requirements.
They will need to prepare an annual report however, this can be posted via a website and there is no requirement to make the report public.If they raise $3 million or more they will be required to have their financial statements audited.
Companies looking to raise funds will need to be accepted by a licenced platform and enter into a hosting agreement. Typically the platforms operate an up-front fee of upto around $10,000 to cover the cost of their due diligence and take a success fee of around 7% of the funds raised.
Whilst this is a game changer for the right entities, it is important to recognise that equity crowd-sourced funding will not be suitable for all proprietary companies. Even where an entity meets the criteria and is deemed to be suitable by a licenced platform there is a lot of hard work involved and there are no guarantees of success.
For some entities reward based crowdfunding may be an alternative or a first step before undertaking an equity-based crowdfunding campaign. A reward-based crowdfunding campaign can be used to test the market validity of a new product and build a crowd of customers without diluting existing shareholders.
If you would like further information about equity or reward-based crowdfunding or to understand if it may be a viable option for your business please contact us at firstname.lastname@example.org