Crowd-Sourced Funding and Private Companies: Selling the Dream in Fragments

Last month, the Australian Parliament passed the Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017, enabling Australian proprietary companies (with less than $25 million in gross assets and annual revenue) to access crowd-sourced funding (CSF). The Bill received Royal Assent on 21 September and took effect from 19 October.

Equity crowdfunding usually happens online, through platforms such as Birchal and Equitise. It enables a large number of people (the ‘crowd’) to make small monetary contributions to a company in exchange for equity. Unlisted public companies have had access to CSF in Australia for over a year now.

In the past, private companies who wanted to access CSF had to convert to public company status to do so. Now, technology and start-up ventures which often encounter difficulty attracting pre-revenue capital from investors who might fit the company well stand to benefit from the inclusion of proprietary companies in the regime.

The CSF regime will assist the competitiveness of small to medium-sized companies, who can now use CSF to access funding streams of up to $5 million annually. Individual contributors cannot contribute more than $10,000 annually, so a large and diverse “crowd” may form around the venture. Some of these investors may seek a measure of control: it pays to consider this in advance.

In practice, many Australian SMEs will be excluded from the new regime by the $25 million ceiling for assets and income. It’s also important to realise that fundraising via crowd-sourcing entails tougher accounting standards than would otherwise apply to a proprietary company, and a range of structural changes become necessary: for instance in directorships and auditing. However, on the plus side, CSF investors who take up shares won’t be counted towards the fifty shareholder limit for private companies.

CSF won’t suit every company, and for some it will seem too much like life as a public company. The choice is theirs – stick with the private networks, selling the company’s dream to those elusive ‘sophisticated investors’ or take a chance and reach out to the crowd.