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CrowdFunding – Concept and Role

Discuss about the Corporate Law for Crowdfunding.

The technology development in the recent times has had a profound impact on a plethora of activities and fund raising by business is one of these.  Internet is widely used as a mechanism by entrepreneurs to enhance their reach to people and thereby make a request for funding and hence work out an arrangement that is mutually beneficial. Such an arrangement is referred to as crowdfunding and in the recent times has become immensely popular globally.

Crowdfunding refers to a mechanism of fund raising for undertaking various businesses with the help of a network that typically comprises of relatives, common people, friends along with investors (both retail and institutional). This method of financing is particularly popular amongst small businesses particularly startups which face difficulty in raising business funds through formal financing sources such as banks[1]. The use of this funding mechanism is not limited to startups only and even some larger companies are choosing this model. For implementing crowdfunding, the companies tend to rely either on specialised crowdfunding mechanisms and/or social media in order to enhance the reach to a host of people and thereby convince them too make contribution towards the business. In the event, that no returns are derived by the investors, then these contributions are termed as donations. The donation of money would typically happen in those cases where the firm is engaged in activities that the donor aims to promote. For example, any business which may be selling various aids to disabled people at minimal profits may attract crowdfunding in the form of donations as the business activity has an underlying noble cause. On the other hand, there is investment through crowdfunding which is prompted by the need for returns on the investment made. Besides, crowdfunding may also serve as a substitute of debt financing as interest payments may be done for money raised through crowdfunding. Additionally, crowdfunding may also be done for businesses in exchange of equity or ownership in the business and hence leads to contributors becoming shareholders[2]. 

In order to raise financing through this mechanism, crowd funding campaigns are organised on the internet. This would typically involve more information about the activities that the firm undertakes and also the tentative expansion plans with estimated returns that the contributors could hope to earn. As a result, such campaigns are essentially the test of the marketing skills of the business considering the wide array of options available to the investors[3]. While crowdfunding appeals to a host of people with lucrative business ideas but it is imperative that money must be utilised in a responsible manner. There is an attempt by certain businesses just to raise finance and then close down business.  As a result, it is imperative that effective laws should be in place so as to protect this nascent industry and also ensure that investor’s interest in not jeopardised. ASIC in this regard advocated that its’ treatment would be akin to the other management investment schemes and therefore only those firms which have s financial services license could resort to it. Further in case of equity based crowdfunding schemes, it is imperative that the firm would issue a prospectus and would also make information disclosures as per Corporations Act 2001. 

Crowdfunding Examples

Also, it is required that various laws that are related to protection of consumer and intellectual property would be applicable for crowdfunding financing. Besides, an Australian law passed in 2015 states that equity crowdfunding would be allowed for those unlisted public companies which have an asset base lower than $ 5 million[4]. 

It is expected that with a growing economy, the incidence and scope of crowdfunding would increase. However, for industry to mature, it is imperative that borrowers display a responsible behaviour and ensure that promises are not violated with actions taken in bad faith as it may lead to a tragedy of commons for the industry. Also, with regards to equity investors, it is essential to have adequate infrastructure so as to service the informational needs of the investors. Besides, it is also imperative that the inherent risk in crowdfunding especially equity financing needs to be highlighted as the investors in such schemes lack the requisite skills for risk analysis which is characteristic of conventional lenders.

Commercial Context

An example of commercial context crowdfunding is the raising of money of Singapore based business – Zookal. It aimed at the students in universities and provided them with a host of services. The firm was successful in raising $ 500,000 through crowdfunding[5]. The role of crowdfunding is apparent from the successful financing by this company which would have faced issues with raising finance through traditional sources of finance. Additionally due to the growing incidence of service oriented businesses (some of which may be based on e-commerce),the demand and popularity of crowdfunding is on the increase. It is an innovative way to offer finance to the firm and an opportunity to be shareholders to the people at large. It is imperative that government should provide support to crowdfunding as it could fund businesses which could foster economic growth and provide employment to Australian people considering their specialised skill sets. 

Social Context

One example of usage of crowdfunding in the social context is that of ASRC (Asylum Seeker Resource Centre). The organisation seeks to buy a truck which would ensure availability of grocery items to asylum seekers at reasonable prices. For buying the truck, the organisation has commenced a crowdfunding campaign by using the platform so as to make a plea to people for making donation for this noble cause[6]. These asylum seekers are majorly refugees who do not receive adequate support from the government and also are deprived of working rights and therefore are completely dependent on humanitarian aid received by organisations such as ASRC. Crowdfunding as a source of finance is critical for social organisations which require donations and hence need to widen their reach to sensitive people in the community who are willing to donate money for such causes. Thus, prudent regulation on the part of government is imperative to ensure growth of this industry while safeguarding the investor’s interest. 

Proposed Legislative Framework-Australia

 The growing size and scope of crowdfunding clearly highlights the need of regulation globally so as to ensure that the legitimate interests of both firms and investors are safeguarded. In this context, the response of the Australian government has been rather slow and hence there is no dedicated legislation in place for crowdfunding at present[7].

Present Scenario

The government presently deploys a regulatory framework which stipulates strict monitoring of the various models related to crowdfunding for ensuring that investor interest is safeguarded. The prevalent framework is related to that prescribed for managed investment schemes and ensures that intermediaries possess licence of AFS and ensuring that disclosure requirements mandated in Chapter 6D, Corporations Act 2001 are adhered to[8]. This framework is unsuitable for the growth of this industry and inhibits the realisation of its fullest potential.

Proposed Legislative Framework

The government has realised the need for a dedicated legislative framework for crowdfunding due to the rising popularity of the same. In this regard,  CAMAC (Corporations and Markets Advisory Committee) advocated that regulation mechanism needs to be introduced for governance of crowd-sourced equity funding (CSEF)[9]. As a result, the Federal Parliament in December 2015 introduced the Corporations Amendment (Crowd-sourced Funding) Bill 2015 which had the following features[10].

  • Funds could be raised only by any company which is declared as eligible CFS company. Such companies are those whose annual turnover is lower than $ 5 million and also the companies need to be public limited.
  • For availing crowdfunding by way of equity a new company needs to be created known as ‘exempt public company’. The above status may be claimed by various interested borrowing companies for a limited duration of time.
  • The intermediaries involved in raising finance and operating crowdfunding platforms in this manner must avail ASIC license and hence would be termed as “CFS Intermediary”. This would ensure better communication with the investors and also issuance of requisite warnings with respect to the issuers. Also, these online intermediaries are barred from offering investment advice due to potential conflict of interest.
  • A cap has been introduced for individual investors in order to limit their highest possible loss caused due to business failure. These investors can make a maximum investment of $ 2,500 with regards to a particular firm and also the cumulative investment made annually must not be in excess of $ 10,000.
  • Besides, for issuer firm also, no more than $ 2 million can be raise in a particular financial year using crowdfunding based equity scheme. Besides, the issuer firm cannot issue any advertisement in order to promote or inform the investors about the crowdfunding scheme.

It is expected that the above measures would introduce the requisite flexibility in regulation of the CSEF industry and ensure that the standards are in line with developed countries such as US and UK[11]. However, there are certain clauses with regards to certain disclosures and formation of exempt company which tends to enhance the overall complexity and may be counterproductive[12].

There is a variety of approaches that companies have displayed towards the regulation of crowdfunding. There are certain countries (US, France, Germany) which tend to follow a restrictive approach while is quite in contract to the flexible approach adopted by other countries (New Zealand, UK) [13]. A comparison of the UK approach and that adhered by Australia in the context of crowdfunding regulation is presented below.

As mentioned in the legislative framework of Australia, the maximum amount that could be raised annually is restricted at $ 2million and also the issuer company must adopt the status of an exempt public company. Also, the intermediaries are required to conduct due diligence of the issuers on a regular basis besides operating under an ASIC license. Besides, there is an investment cap on the individual investor which has been defined rather conservatively. Hence, the overall regulatory framework seems restrictive in scope and thus only limited financing could be raised by the interested firms[14].

UK’s Approach to Crowdfunding

However, in contrast UK follows a much liberal and flexible approach with the investment cap applicable on investors being much higher at €5 million. Besides, there is no obligation on the intermediaries involved to avail a particular license to engage in the crowdfunding process. The existing securities licence which deals with similar products is sufficient and also the funding should be raised through multiple instruments[15]. This is unlike the case in Australia where the funds need to be necessarily raised in the form of equity only. Thus, it may be inferred that in regards to crowdfunding regulation, the approach adopted by UK offers more flexibility than Australia and augers well for crowdfunding.


Based on the above discussion, it is imperative that the government needs to take prudent measures to regulate the booming crowdfunding industry so as to ensure that this nascent industry realises it true potential[16]. However, the current regulatory framework proposed in 2015 seems to restrictive and needs to made more flexible by conducting relevant discussion with the stakeholders so that a delicate equilibrium could be worked out which ensures a readily available funding mechanism for small firms and prudent investment opportunity for investors. 

References, Government Blows Its Chance With Equity Crowdfunding Laws (3 December 2015) < >

Asylum Seeker Resource Centre, Food Justice Truck (2016) < >

Australian Government, ‘Crowd-sourced Equity Funding’ [2014] Discussion Paper.

Australian Government, “Crowd-sourced Equity Funding Report” [2014] Corporations and Market Advisory Committee.

Dennis Briintje and Oliver Gajda, Crowdfunding In Europe: State Of The Art In Theory And Practice (Springer, 2016) 55

Erin Brown, Crowdfunding in Australia: A viable alternative?(24 May 2016) mccabes <>.

Kevin Lawton and Dan Maron, The Crowdfunding Revolution: How To Raise Venture Capital Using Social Media (Mcgraw Hill, 2013) 72

Legal Vision, What You Need To Know About Crowdfunding In 2016 (5 January 2016) < >

Leigh Schulz and Domenic Mollica, ‘The regulation of crowdfunding in Australia: where are we and what’s to come?’[2015] Australian Banking & Finance Law Bulletin., First Equity Crowdfunding Deal In Australia For 2016 Raises More Than $ 675000 (2 February 2016) < >

Therese Torris, Global Crowdfunding & Local Regulation: From Light Touch to Prescriptive Bespoke Rules (18 May 2016) Crowdfund Insider < >.

Thomas Elliott Young, The Everything Guide To Crowdfunding (Adams Media, 2013) 14

James Bull and Harry New, ‘New equity crowd-source funding (CSF) legislation’ (2015) (4) Butterworths Corporation Law Bulletin 7, 9.

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