Howard Jones has an idea that appears to be able to double the life of batteries used for the storage of electricity in the solar energy market. He becomes aware that crowdfunding is a mechanism for raising capital to develop his idea and bring it to market rather than going down the usual and traditional corporate fundraising process under Chapter 6D of the Corporations Act 2001.
Advise Howard about the potential use of Crowdfunding to develop his idea. In particular answer the following:
Define and explain the meaning of crowdfunding and how it actually works as a mechanism for capital raising.
Give at least one example of crowdfunding used in a commercial context that has led to the development of a commercial idea, product, good or service and at least one where crowdfunding was successfully used in the social or charitable context.
Research and then explain to Howard the legislative framework enacted for the regulation of Crowdfunding in Australia in March 2017 under the Corporations Amendment (Crowd-sourced Funding) Act 2017. Compare the Australian approach to the regulation of Crowdfunding with at least one international jurisdiction’s approach to the regulation of crowdfunding.
Title: Research on different aspects and the laws surrounding crowdfunding
Capital is a key requirement for any company as for buying the inputs, for paying salaries, for buying land, equipments and for numerous other works of any business, capital is needed. There are different manners in which a company can raise its capital. The conventional methods include issue of shares, debentures, taking loans and the like. However, the unconventional methods of the recent time are gaining a lot of popularity and one of these methods is crowdfunding. Often the people have a lot of great ideas but the shortage of funds acts as a barrier in the idea being transformed into a success. In order to solve these issues, the crowdfunding was born. Crowdfunding is especially successful in such cases where an innovative product is created.
In the following parts, the different aspects associated with crowdfunding have been highlighted so that Howard Jones can raise the capital for developing his idea and bring the product to the market.
Crowdfunding can be defined as one of the mediums of raising capital from the general public, without issuing any shares or without having to mortgage the property. The people who generally invest in crowdfunding include family, friends, venture capitalists and potential investors. This is a collective approach of the efforts of a group of people and the capital in such cases is mostly raised through online mediums, particularly the social media. It is a rising medium of raising the capital and due to these reasons, the platforms for raising money through crowdfunding platforms are increasing on daily basis.
Through crowdfunding, a wider pool of investors becomes available and presents different flexible fundraising avenues. Crowdfunding helps in raising funds for entrepreneurial undertakings, artistic and creative plans, and even for the society and not for profit oriented social entrepreneurship projects. Through the help of this medium, a number of start-ups have skyrocketed, which would have just been dreamy ventures if they had not got the required funds. Through crowdfunding, the venture capitalists are also attracted towards the start-ups due to the wide reaching internet platform and through which, the gap between the outsized and undersized organizations is bridged at the very beginning of the businesses.
There are different manners in which capital can be raised by using the crowdfunding mode for raising the capital. This includes reward based, donation based, and equity based. In the rewards based crowdfunding, the capital which the people contribute in the business of the person asking for crowdfunding is exchanged for a particular reward, which can be in form of services or products which the company offers. This helps in raising the capital without incurring more expenses or without putting the ownership at stake. Donation based crowdfunding denotes a communal endeavour for diversified people owing to certain benevolent reasons. And lastly, the equity based crowdfunding is one in which the people investing are made the part of organization as they are offered the company’s equity shares for their part of contribution.
Crowdfunding is commonly used in commercial contexts for developing products, ideas goods, and services; and are even used in charitable and social contexts. The example of each one has been highlighted below.
In the history of crowdfunding done till this day, the most successful campaign, have been the one of Star Citizen. This is an online space combat and trading video game and the developers of it are Chris Roberts and Cloud Imperium Games. This crowdfunding campaign was initiated back in October 2012 on the very website of this game, through IgnitionDeck which is one of the crowdfunding plug-ins of Wordpress. Just one week since this crowdfunding campaign began; the funds were being raised through the kick-starter campaign. The first goal of this funding was attained in a swift manner. Once this was done, new associated objectives were added by the developers to this funding campaign in order to expand the targets for this crowdfunding. Due to the changed targets, the date of the campaign was also given a ten day extension so that the closing date of the kick-starter campaign could be matched and further capital could be raised.
Merely two days before this campaign was supposed to conclude, a record of the most crowdfunded gaming project was attained by this game and raised more than US$4.2 million. Till the end of this first crowdfunding campaign, the company had successfully raised a sum of US$6.2 million. And the funding continued to go on even after the first campaign was concluded. During the mid part of 2013, this was declared as the most successful crowdfunding venture everywhere as a total of US$15 million was raised through this campaign. And till the present day, Star Citizen has successfully raised a value of over US$100 million by using crowdfunding as the medium of raising money and is deemed as the best example of crowdfunding in commercial context.
Crowdfundings are not only successful in commercial contexts but also have shown great results in social contexts. “An Hour of Code for Every Student” is a successful example of crowdfunding campaigns which are started online and this campaign was started on Indiegogo platform. The goal of this campaign was to raise a value of US$5 million. The end date of this campaign was 15th December, 2014 and by its end date, this campaign had successfully raised US$5,024,281 due to which, this campaign was declared as a successful one. The goal of this campaign was to present every student in every school with an opportunity for studying computer science.
Corporations Amendment (Crowd-sourced Funding) Act 2017
The growing popularity of crowdfunding being used as a source of raising capital is rising globally and it was claimed that Australia had been slow in recognizing, as well as, adapting to this magnificent and omnipresent phenomenon. Due to this, the ASIC, i.e., the Australian Securities and Investments Commission started its attempts towards the integration of the crowdfunding in the present regulatory frameworks of the nation. In 2012, different guidelines were issued in this regard. This included the kind of reward which could be offered to the contributors and the way in which the platform has to be used. This scheme has further been classified as fundraising or administered investment plan pursuant to the Corporation Act, 2001 Chapter 6D.
In March 2017, a new legislative framework was enacted in the nation for the regulation of crowdfunding and was presented under the Corporations Amendment (Crowd-sourced Funding) Act 2017. The date of commencement of this act is 29th September, 2017 and from this date onwards, the crowdsourced funding would be available to the companies. Though, this is limited to the public unlisted companies. The purpose of this legislation is to extend the crowd funding regime to the proprietary companies and to give away with the need of the proprietary companies to make a transition into the public companies for getting access to the crowdfunding.
The Federal Government foreshadowed the extension of this legislation in the budget presented in May 2017 and the Bill was even circulated to the treasurer. Through this act, the eligibility of crowdfunding covered under section 738H of the Corporations Act, 2001 is set to be expanded to the proprietary companies, which are able to fulfil the laid down criteria. An attempt has been made to add the special investor protection related provisions for the proprietary companies which access this regime. Also, the temporary corporate governance concession are attempted to be removed for the proprietary companies which register or convert as public companies for accessing crowdfunding.
This act also presents the limits for crowdfunding for the companies. Through this act, the company is not prevented from raising capital form the professional investors till the time the limit reaches the Assets and Turnover Test. A limit of $5 million has been set for raising funds from this source and this further has a limited investment of $10,000 for each investor in a period of twelve months.
This global event has been recognized in developed nations like Italy, United States of America and New Zealand, as a rising source of raising capital. Crowd-sourced equity funding (CSEF) is a comprehensive scheme which had been introduced in the middle of 2014 in New Zealand and has been majorly referred to in the debates being carried on in Australia regarding crowdfunding. The crowdfunding scheme of New Zealand provides that all of the incorporated entities are allowed to raise capital through the use of CSEF. A reference to this can be seen in the new regime being adopted in Australia where the attempt is made to include the proprietary companies in the ambit of crowdfunding. In New Zealand also, limits have been imposed over the sum that can be raised through crowdfunding and as per the provisions of New Zealand, the issuer can raise a value of NZ$2 million during a period of twelve months. However, an exception is present for this limit; and as per this exception, the capped limit is not applicable on the contributions of the wholesale investors.
There is also a need for signing the risk acknowledgement statement by the investors for the CSEF scheme. The Financial Markets Conduct Act, 2013 (“FMC Act”), as well as, the Financial Markets Conduct Regulations, 2014 (“FMC Regulations”) are two substantial legislative frameworks in the nation which came into force on 01st December, 2014 for allowing crowdfunding and for the peer to peer lending services. Part 6 of the FMC Act provides that there have to be three main regulations for stating the importance regarding the crowdfunding benefits. And included in this are the licensing of crowdfunding service provides, the limit imposed, the setting out of the disclosure requirements for saving the investors and the start-ups and adoption of suitable system and standards.
The very bill on the basis of which the new legislative framework had been drawn was majorly influenced by the legislative framework of New Zealand. This can be seen in the inclusion of limits. However, the rules and regulations applicable in New Zealand are more comprehensive in comparison to the new legislative framework of Australia.
In the preceding parts, an attempt was made to highlight the different aspects of crowdfunding for Howard Jones so that he can take care of these regulations when he makes an attempt to raise funds through crowdfunding in Australia. The success of crowdfunding in the field of social and commercial context has been highlighted through two examples. And lastly, the new legislative framework, which is set to be applicable from this year for the Australian nations and its comparison with the legislative framework of New Zealand, has also been made to clarify the laws which Howard has to take special care of.
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