Discuss about the Crowdfunding for Understanding Company Law.
Crowdfunding is the practice of procuring funding for a project by bringing in monetary contributions from a number of sources. This form of crowd funding is considered to another angle to the crowdsourcing and it utilizes alternative finances. There are a number of sources through which the money can be collected. It could be through mail order, benefit events or through Internet mediated registries. The modern crowdfunding process enables through three stakeholders. It is the original initiator of the project, individuals who support the ideology and an organization who moderates the parities to function as a unit to launch the ideal. Crowd funding has been for entrepreneurial ventures for profit or is used for community oriented social projects that are not for profit.
The purpose of this analysis is to understand the nuances or the process involved in crowdfunding by using examples for commercial and social context and explain the regulations involved in the concept of crowdfunding in Australia. There will be the use of one international jurisdiction approach to the regulations involved in crowdfunding.
Crowdfunding and the Types
The practice of raising funds is the integral aspect of crowdfunding. There are four kinds of crowdfunding that exists in the market place. The donation based crowdfunding is when there are donations collected for a social cause. In this the donors are not given anything in return. In reward based crowd funding these donations are made for expectations of a reward in return. Debt based crowdfunding is when the donations are made where the loan is expected to be returned with interest. In the case of equity based crowd funding the parties are expected to gain equity or the loans are returns
Benefits and Issues
The concept of crowdfunding is also known as crowd sourcing. This is currently a popular practice in Australia. The venture capital is harder to find in the US markets.
Benefits of crowdfunding websites and portals is that they can get a project to commence and operate. The crowdfunding websites allows a healthy share or the funding that is processed through many portals. They charge transactional fees. They do not take any responsibility to the outcomes of the product. In 2013, Brisbane based game developers developed a newer game through the use of Kickstarter. The game had caused the renowned Sega company to close in Brisbane. They had procured funds that were more than their original objective. In NSW, there was the creation of Australian Based Organic Vodka. The reward for the investors was a bottle of vodka and a class depending on the amount of money they had invested. Protecting funders is an important factor that requires some form of governmental regulations. Investor protection is an important factor that needs to be considered. More often than not the investors do not understand the financial markets and essentially contribute to these projects. In some cases, the crowd funding platforms offers the funders part ownership of the equity.
Pozible is a Melbourne based company that is one of the important crowdfunding websites of the world. They do not take any responsibility if the project does not function. There are many success stories that have emerged from the crowdfunding. They claim to have 55% success rate when compared to rival US based company Kickstarter. These companies have enabled in garnering a lot of profits. This is not the case at all times. In the case of ZionEyez funding, it was promised to the funders that for $150 USD they should be given a pair of eve glass that records videos. This was done through the Kickstarter portal. However, the original sources disappeared causing the funders considerable losses. In this process Kickstarter did not take any responsibility even though they take a percentage cut of the funding, plus the transaction fees for each pledge that has been made.
The disclaimers in the websites are very confusing for the common people. In the Pozible site alone there are 9 pages of terms and conditions. There is a waiver at the end of the page that states that the company has no control over the safety or legality of the rewards. Essentially it means that the original sources can abscond with the money, pay back the funders or provide the services that was promised. The sites such as Pozible and Kickstarter argue that the occurrence of fraud is incredibly rare. It also states that that these portals will try to mediate but will take no responsibility for the actions.
The safety checks about crowd funding are supposed to be done by the funders. These portals and websites only takes a healthy cut from the transactions and the funding amount collected with no responsibility over the actions of the original sources.
Legislation Regarding Crowdfunding
Australian legislation has no specific legislations that governs crowd funding. The existing legislation is currently applied to the concept of crowdfunding model. In 2012, the ASIC (Australian Investments and Securities Commission) issued the guidelines on the legal implications of crowdfunding. Depending on the reward of the investors, crowdfunding I considered as a managed investment scheme or a provision of financial services. This is explained in the Corporation Act 2001 (Cth).
In the case of managed investment scheme, there is offering of reward or incentive for investing in a company that is used to managed investment scheme. The funds that are contributed as pooled for a specific financial benefit purpose. This is covered in the Corporation act. There are onerous regulatory and compliance obligations in these cases. There is the operation of the responsible entity. These obligations are currently used to deter the SME from sourcing funds from crowdfunding.
Financial service licensing is also considered in crowd funding. The ASIC has indicated that the online intermediary platforms are considered as issues of the financial products. These would require the online platforms to have Australian Financial Services License and they should also provide the investors with the disclosure documents. The ASIC has recognized that the reward based crowdfunding can involve financial services. The Corporation act does not apply for the contribution in exchange of a possible return of the value.
Fundraising is another aspect that is considered in this crowdfunding. This is covered in the 6D of the corporation act. A company can prohibit from offering of securities to the funders unless there is proper disclosure. This is only exempt in certain conditions. “20/2/12 rule” is one of the exemptions that is applied. In this the companies are allowed to raise up to 2 million dollars. Proprietary company limitation is another issues that is considered in the crowdfunding. In this case the proprietary company cannot have more than 50 non-employee shareholders. In these cases, crowdfunding will not be a viable or attractive option for the private companies. It forces the private company to become public company with additional regulations, governance and disclosure.
Currently the corporation act imposes a number of restrictions on equity based crowdfunding. There has also been discussion of the securities regulations in crowdfunding in Australia.
Comparison with United States
In the United States there is Regulation Crowdfunding. In this the entrepreneurs with a business plan can raise between a hundred thousand dollars to 1 million over a period of 1 year. If the earnings of a person are less than 200000$ then they could buy stock in a public company or donate to a company such as Kickstarter. The US securities and Exchange commission and FINRA (Financial Industry Regulatory Authority) will lessor the investors with less than 100000$ annual income to invest in amount greater than 2000$ to become the crowdfunding issuer. Entrepreneurs can enlist themselves in the Reg CF offering and the investors are allowed to but through the portals that has been approved through FINRA. This means that the underserved entrepreneurs and businesses can raise capital through massive crowdfunding. The businesses and investors needs to understand the SEC compliance and legal considerations to the financial limitations, state regulations to name a few. In the Reg CF it is importnat to understand that the crowdfunding is not blank checks. There should be a clear business plan. IN states such as Indiana or Michigan there are state mandated rules. Bad actors are also defined in the regulation Reg CFThere are also advertising and marketing restrictions. In this the Reg A+ offering promotes the online marketing and social media advertising. Social media advertising cannot explain the factual information that is required to make decisions. Hence there is a need for a crowdfunding portal or dealer site to explain the detailed terms of the agreement. There is explanation of the advertising and marketing restrictions of Title 111. The crowd funding portals should have a due diligence done to explain their disclosure.
When comparing the process and restrictions in crowdfunding process of Australia and United States there are some considerable differences. There is no real legislative framework in Australia to explain the nuances of the crowdfunding. The SEC of United states has far more regulations and oversights. In the Australian government this needs to be implemented. There should be a comprehensive policy regarding the due diligence of the portals, governmental interventions and public policy to ensure that the people are protected against the bad actors in the society. However, it is important to ensure that the regulations do not stifle the growth of the company owing to excessive regulations. There is a need for a comprehensive crowdfunding policy in Australia. It has been considered that the new government would develop a policy catering to these requirements.
Crowdfunding operates on the paradigm that there many sources can contribute towards a business prospective. This concept of crowdfunding has been gaining prominence in the current times. In some of the crowdfunding portals there is a disclaimer notice that prevents the companies from being liable to the damages of the funder in cases where they are cheated by the original sources. There is a need to have oversight and regulations over these activities. The advent of social media and crowd funding portals are not regulated based on the newer dynamics. There is still the following of the older laws and regulations. In the case of United States there are more regulations and when framing the legislations for newer trends in Crowdfunding certain aspects can be used by the Australian government. Prevention of deceptive ads, due diligence should be undertaken by the portals that promote a company. It is expected that the newer government will bring a comprehensive reform in to crowdfunding.
Lipton, Philip, and Abe Herzberg, Michelle Welsh, Understanding Company Law, 18 edition Thomson Reuters 2016.
Ford, Harold Arthur John, Robert P. Austin, and Ian M. Ramsay. Ford's principles of corporations law. Vol. 12. LexisNexis Butterworths, 2005.
Baxt, Robert, Keith Lloyd Fletcher, and Saul Fridman. Corporations and Associations: Cases and Materials. LexisNexis Butterworths, 2008.
Hanrahan, Pamela F., Ian Ramsay, and Geofrey P. Stapledon. "Commercial applications of company law." Commercial Applications Of Company Law, Cch Australia Ltd, (2013).
Ciro, Tony, and Christopher Symes. Corporations law: in principle. Thomson Reuters, 2013.
Cassidy, Julie. Corporations law: text and essential cases. Federation Press, 2008.
Bohliqa, Ahmed. "A study of the US intrastate crowdfunding exemptions." In (2015) Portland International Conference on Management of Engineering and Technology (PICMET),
Latimer, P, Australian Business Law CC, 2016 Edition.
Ross Weinstein, "Crowdfunding in the US and Abroad: What to Expect When You're Expecting." (2013) 46 Cornell Int'l LJ 427.
Macht, Stephanie A., and Jamie Weatherston. "The benefits of online crowdfunding for fundâ€seeking business ventures." (2014) 23(1-2) Strategic Change 1-14.
Davenport, Shayne, and David Parker. "Business and law in Australia." (2012).
Brendan Pentony, Stephen Graw, Jann Lennard & David Parker, Understanding Business Law 5th ed Butterworths, 2013
Li, Gracie, Sophie Riley, Applied Corporate Law: A Bilingual Approach LexisNexis 1st Edition 2009.
Van Looy, Amy. "Crowdfunding." In Social Media Management, pp. 189-205. Springer International Publishing, 2016.
Fisher S, Anderson C, Dickfos, Corporations Law - Butterworths Tutorial Series, 3rd Edition Butterworths, Sydney 2009
Vermeesch, Robert Bryan, and Kevin E. Lindgren. Business law of Australia. 12th edition Butterworths,2011.