From set up to shareholders- understand your legal obligations to ensure success.

Part 1 of 5: an overview of crowd-sourced funding

Since October 2018, the Corporations Amendment (Crowd-Sourced Funding For Proprietary Companies) Act 2017 (Cth) has allowed proprietary companies to raise capital through crowd-sourced funding (CSF) in return for equity in the company.  Prior to these amendments, proprietary companies were only able to raise capital using crowd-sourced funding, through either donation-based funding (from people who supported the aims and objects of a business), or rewards-based funding, through for example, the pre-sale of a product, project or future service.  

Since the amendments came into force, we have been monitoring a number of CSF campaign trends, and there is no shortage of interest, and success, in the use of CSF by entrepreneurial developers working across a range of sectors. In particular this trend is common amongst  medical, music, fashion, financial services and fintech, property development, health industries and, of course, craft breweries seeking to raise capital.

In this five part series, Ben Wood, Partner and start-up expert at McCullough Robertson, shares his insights into some of the hurdles faced by early-stage proprietary companies who have undertaken an equity CSF capital raise and opportunities to get the most out of this style of funding.

Cake Equity, Australia’s leading online capitalisation table (cap table) provider for start-ups, will also provide comments on how companies can best manage their equity and their cap table before, during and after a CSF raise. Cake has helped countless companies to streamline their cap table for a CSF raise, and in doing so, removed a significant amount of administration for founders so that they can do what they do best.  

Who can use CSF and what are their requirements?

Eligibility

In order to be eligible to undertake a CSF raising, proprietary companies must ensure that they meet the following requirements.  They must:

  • have at least two directors, the majority of whom ordinarily reside in Australia;
  • have their principal place of business in Australia;
  • have less than $25 million in both gross assets and annual turnover; and
  • not have a substantial purpose of investing in securities or interests in other entities or schemes.

If all these boxes are ticked, the company can then choose an intermediary platform (an Australian financial services licensee whose license expressly authorises them to provide a crowd-source funding service) to facilitate the raising of funds, using a CSF offer document hosted by the platform.  The offer document details the structure, business plan, and financial records of the company for potential investors to consider.   

Obligations

Certain statutory obligations are imposed on companies that raise funds through CSF, in order to protect their investors and allow them to make informed decisions.  The key obligations proprietary companies need to be aware of include:

  • preparing annual financial and director’s reports, to be prepared in accordance with the accounting standards;
  • having their financial reports audited if they raise $3 million or more from CSF offers (this is a cumulative amount, not per CSF round); and
  • complying with existing related party transaction rules under the Corporations Act, which have previously only applied to public companies.

Additional comments from Cake Equity

A great way to prepare for increased governance obligations can be to streamline your processes before the obligations start.

For example, if the company keeps clear and detailed company records of all transactions during and following a CSF raise, it will have no trouble to demonstrate their compliance with the rules if they are ever queried. On Cake, all equity transactions can be recorded in a clear, chronological order. This way, there’s no need to keep track of random emails and spreadsheets, and the company founders can focus on what they do best.

In the next article, Ben will examine methods that may assist a company handle the increased corporate paperwork that comes with a potential influx of new shareholders.