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Australia has been slow to recognise and adapt to the phenomenon of crowdfunding, despite its increasing prevalence across many global markets. While crowdfunding is not illegal in Australia, there is currently no specific legislation governing equity crowdfunding in the country. However, Australian regulatory bodies such as the Australian Securities and Investments Commission (ASIC) have sought to apply existing regulatory frameworks to crowdfunding models. The Corporations Amendment (Crowd-sourced Funding) Act 2017 amends the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001, providing a legislative framework for crowd-sourced funding. This legislation reduces regulatory requirements for public fundraising while maintaining appropriate investor protection measures.
| Characteristics | Values |
|---|---|
| Current legislation | There is no specific legislation governing equity crowdfunding in Australia. |
| Regulatory bodies | Australian Securities and Investments Commission (ASIC) |
| Requirements | An Australian Financial Services Licence (AFSL) and in some cases, an Australian Market Licence (AML) |
| Obligations | Gatekeeper obligations, ensuring communication facilities, notifying investors of CSF risks, rights, fees, and interests |
| Investor protections | $10,000 cap per investor in a 12-month period |
| Types of crowdfunding | Equity-based, reward-based, donation-based |
| Risks | Failure, dilution, intermediary platform operator accountability |
| Government support | The government seeks to reform the law to help private companies raise capital by equity crowdfunding |
| Eligibility | Incorporated in Australia, at least two directors, total assets < $25 million, not investing in other companies |
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What You'll Learn
The Corporations Amendment (Crowd-sourced Funding) Act 2017
In Australia, crowdfunding is not illegal, but it is a highly regulated space. The Corporations Amendment (Crowd-sourced Funding) Act 2017 amends the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001, providing a legislative framework for crowdfunding.
The Act received Royal Assent on 28 March 2017 and took effect on 29 September 2017. It establishes a separate regime for CSF (crowd-sourced funding) offers, allowing companies to make CSF offers of securities without preventing them from making offers of the same class in reliance on other provisions.
The Act aims to reduce regulatory requirements for public fundraising while maintaining investor protection. A provider of CSF services must hold an Australian Financial Services (AFS) licence. The intermediary, or platform operator, is responsible for complying with the relevant financial services licensee provisions and has several obligations, including gatekeeper' duties and ensuring the provision of necessary communication facilities.
The CSF regime also includes a $10,000 cap per investor over a 12-month period, providing further protection for investors. This legislation demonstrates Australia's recognition of the increasing prevalence of crowdfunding and its potential benefits for small businesses and start-ups seeking alternative funding arrangements.
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Risks of crowdfunding
Crowdfunding is a financial service where start-ups and small businesses raise funds from a large number of investors who invest small amounts of money. While it offers accessible capital to businesses that might not qualify for conventional loans or investments, it is not without risks.
Firstly, there is a risk of not succeeding. If the fundraising target is not met, the money collected during the campaign must be returned to investors. This may also indicate that there is a lack of interest in the product or service, which could be a sign of future failure.
Secondly, crowdfunding campaigns often require creators to publicly share detailed information about their projects, which can expose unprotected intellectual property (IP) to theft, infringement, and misuse. Failure to address these IP risks can lead to costly legal battles, brand damage, and potential project abandonment.
Thirdly, dealing with a large and potentially diverse set of backers brings different issues, expectations, and demands. Not understanding a contributor's rights can create problems, particularly with equity crowdfunding, which comes with some loss of control over your business.
Additionally, crowdfunding investments carry liquidity risks, as investors are limited in their ability to resell their investments, especially in the first year. There is also a risk of fraudulent platforms or fraudulent activities by scammers, which can lead to a loss of trust among potential backers.
Lastly, the intermediary platform operators could be held accountable for the losses incurred by investors. To mitigate this risk, intermediaries are required to hold an Australian Financial Services Licence (AFSL) and, in some cases, an Australian Market Licence (AML).
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Requirements to operate a crowdfunding platform
Crowdfunding is a way for small to medium-sized companies to raise money for their business. Typically, investors will invest small amounts of money and in exchange, they’ll receive shares in the company.
- A provider of CSF services must hold an Australian Financial Services (AFS) licence.
- The intermediary (the operator of the crowdfunding platform) must hold an AFS licence with an authorisation to provide a crowdfunding service.
- The intermediary must comply with gatekeeper' obligations, including the non-disclosure of an issuer's offer document and the obligation to notify potential investors on the platform of CSF risks.
- The intermediary must ensure the provision of the necessary communication facilities.
- The intermediary must notify investors of their rights regarding cooling-off periods, possible fees incurred, and interests in an issuer company.
- Retail clients must be covered by the relevant investor protections.
- The platform must adhere to reporting and corporate governance requirements, including continuous disclosure, AGMs, audited financial reports, and half-yearly reporting.
It is important to note that the regulatory landscape for crowdfunding in Australia is evolving, and specific legislation governing equity crowdfunding is not currently in place. However, Australian regulatory bodies such as the Australian Securities and Investments Commission (ASIC) have sought to apply existing regulatory frameworks to crowdfunding models.
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Taxation of crowdfunding
Taxation consequences for crowdfunding in Australia vary depending on the nature of the arrangement, the taxpayer's role, and the individual's circumstances. The Australian Taxation Office (ATO) has outlined several scenarios to explain the tax treatment of crowdfunding.
In a donation-based model, a funder makes a payment without receiving anything in return. The promoter does not supply anything to the funder and thus has no GST liability. Acknowledging the payment, such as through a website entry, does not entitle the funder to an input tax credit. The intermediary, however, makes a taxable supply of services to the promoter and is subject to GST.
In a reward-based crowdfunding model, the promoter provides rewards such as goods, services, or rights to contributors in exchange for their payments. These rewards may vary depending on the contribution level and whether fundraising reaches certain levels. The supplies made in return for payments are taxable, and the promoter has a GST liability. If a funder acquires advertising rights and is registered for GST, they are entitled to an input tax credit if acquired for a creditable purpose.
Equity-based crowdfunding involves contributors making payments in exchange for a share or equity interest in the company undertaking the project. This share provides the contributor with rights, including participating in future profits, voting rights, and capital returns upon the company's winding up.
Additionally, crowdfunding efforts for community-based initiatives, such as drought relief for farmers, may have different tax implications. The ATO advised that when amounts are spent on deductible expenses, such as purchasing livestock feed, there may be no net taxable outcome as income amounts are offset by deductions. Income tax is only payable if a net business profit is made.
It is important to note that intermediaries facilitating crowdfunding may be required to hold an Australian Financial Services Licence (AFSL) and, in some cases, an Australian Market Licence (AML). These intermediaries have obligations, including ensuring the necessary communication facilities are provided and notifying potential investors of CSF risks and their rights.
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Types of crowdfunding
Crowdfunding is a way to finance your business through loans, donations, or exchanging money for rewards or shares in your business. There are several types of crowdfunding, each with its own advantages and disadvantages. Here are some of the most common types of crowdfunding in Australia:
Donation-based Crowdfunding
Donation or charity-based crowdfunding involves backers giving money without expecting any financial return or rewards. This type of crowdfunding is more common for social enterprises, charitable ventures, or causes and less common for commercial startups. Popular platforms for this type of crowdfunding include GoFundMe, MyCause, and Everydayhero.
Rewards-Based Crowdfunding
In rewards-based crowdfunding, supporters pledge money in exchange for products, services, or perks. This type of crowdfunding is popular for creative projects, innovative products, and small businesses seeking publicity and funding. Examples of platforms that cater to this type of crowdfunding include Kickstarter, Indiegogo, and Pozible.
Equity Crowdfunding
Equity crowdfunding, also known as crowd-sourced equity funding, involves supporters investing in your company and receiving shares (or equity) in return. This type of crowdfunding is strictly regulated in Australia by the Australian Securities and Investments Commission (ASIC) and governed by Australian crowdfunding laws. Platforms that offer equity crowdfunding include Birchal, Equitise, and VentureCrowd.
Debt-Based Crowdfunding
Debt-based crowdfunding allows businesses to raise funds by taking on debt from investors. This type of crowdfunding can provide businesses with access to early-stage capital at a low cost, helping them grow faster than traditional methods. Moneytech is an example of a platform that offers debt-based crowdfunding.
Real Estate Crowdfunding
Real estate crowdfunding platforms, such as CrowdStreet, allow individual investors to contribute funds to real estate projects. These platforms often provide additional services such as investor management and digital marketing campaigns for pitches.
Each type of crowdfunding has different tax and legal obligations, so it is important to carefully consider which type is most suitable for your business and to ensure compliance with all relevant regulations.
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Frequently asked questions
No, crowdfunding is not illegal in Australia. However, there is currently no specific legislation governing equity crowdfunding in the country.
The Corporations Amendment (Crowd-sourced Funding) Act 2017 amends the Corporations Act 2001 to provide a legislative framework for crowdfunding. It also makes minor amendments to the Australian Securities and Investments Commission Act 2001. A provider of crowdfunding services must hold an Australian Financial Services (AFS) licence.
As with all forms of financing, crowdfunding is not without risk. Some risks include the possibility of failure, where investors may not receive anticipated benefits due to the project's failure, and dilution, where the initial group of investors could be diluted by subsequent equity issues.
Crowdfunding allows businesses to nurture a large crowd of brand advocates, which can be especially valuable for consumer businesses. It also provides a low-doc and low-reg path to raise funds, with higher numbers of retail investors investing smaller amounts.
