Jill Storey writes in the Australian Instiitute of Company Director’s Magazine and sets out how in this current climate of restricted lending to SMEs from traditional finance sources, crowdfunding and the new equity rules have the potential to be a game changer for Australian proprietary companies.
If you’re a director of a company with a turnover and gross assets of under $25m, the new equity crowd-sourced funding regime may be a useful fund-raising addition to current opportunities —reward-based and debt-based crowdfunding.
The Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Act 2018 (Cth) came into force in October 2018. Proprietary companies can now raise up to $5m in a 12-month period from retail investors — who can invest up to $10,000 per company over a 12-month period via a licensed crowdfunding intermediary.
This long-awaited legislative change has occurred at just the right time with the tightening of small business lending. Equity crowd-sourced funding allows a large number of individuals to make small financial contributions towards a company in exchange for an equity stake.
Top Australian Equity Crowdfund Raises
In December 2014, the Financial Services Inquiry, chaired by David Murray AO, included the introduction of equity crowdfunding as a recommendation. It took until January 2018, when ASIC granted the first crowd-sourced funding licences, for Australia to join other jurisdictions including the UK, US, New Zealand and Canada.
However, the legislation could only be utilised by unlisted public companies. Given more than 97 per cent of the 2.6 million companies registered in Australia are proprietary companies and the objective of the legislation was to improve access to finance for early-stage growth companies, the potential impact was limited.
Although restricted in its application, the first year of crowd-sourced equity finance in Australia delivered some successful raises for public unlisted companies.
One of the first campaigns was Xinja, Australia’s first neobank, which successfully raised $2.4m through crowdfunding platform Equitise.
In April 2018, solar power retailer DC Power Co raised $2.2m via the OnMarket crowdfunding platform. The campaign attracted more than 15,000 investors, making it the world’s largest equity crowdfunding offer by number of investors, according to Business Insider.
This March saw the 2018 record equity crowdfunding raise broken by women-only ride sharing start-up Shebah, raising $3m via Birchal.
Under the new regime, from October 2018, proprietary companies no longer need to convert to public unlisted companies to raise funds under the crowd-sourced funding legislation.
For directors, the first issue will be to determine whether their companies meet the eligibility requirements. A proprietary company must:
- Have its principal place of business in Australia
- Have at least two directors, at least one who resides in Australia
- Have consolidated gross assets and annual revenue below $25m
- 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.
Additional reporting requirements
If an eligible company meets the criteria and successfully acquires crowd-sourced equity funding shareholders, it will be subject to additional reporting requirements, albeit relatively light. However, the company will need to prepare an annual report, which can be posted via a website rather than mailed to shareholders. The report does not have to be made public. If a company raises $3m or more they will be required to have their financial statements audited. There is no requirement to hold an AGM.
Licensed to crowdfund
If a company meets the eligibility requirements and directors decide to raise funds, the company will need to be accepted by a licensed platform and enter into a hosting agreement. Typically, licensed platforms operate an upfront fee of $5000–$10,000 to cover due diligence costs.
They also take a success fee (five to seven per cent) from funds raised.
Equity crowd-sourced funding will not be suitable for all proprietary companies. There are no guarantees of success. Boards will want to undertake an assessment and compare the equity crowdfunding path to other options.
There are different types of crowdfunding available. Reward-based crowdfunding typically involves the presale of a product/service and assists with cashflow. It is often used to help businesses fund their minimum order quantities or to launch a new product to market.
The largest crowdfunding venture in Australia to date is the reward-based campaign for Flow Hive. Father and son, Stuart and Cedar Anderson, did not dilute their shareholding when they raised $16.9m from presales of their product. They have now sold 51,000 new beehives in 130 countries.
Some entrepreneurs are using a reward-based campaign to grow their brand and customers, then following this with an equity-based campaign. Queensland’s Urban Xtreme used the reward-based crowdfunding platform ReadyFundGo to pre-sell ski passes and lessons during the six-month phase between acquiring premises and opening. This helped with cashflow and ensured plenty of customers on opening day.
Debt-based crowdfunding, or peer-to-peer (P2P) lending, involves a business taking a loan from a number of individuals as opposed to one institution. Debt-based crowdfunding platforms such as Society One and Prospa have seen an uptake in business in the past 12 months.
Jill Storey is CEO of ReadyFundGo and a director of the Crowd Funding Institute of Australia.