Equity Crowd-SOURCED funding – Risks, Rewards & Regulation

The Corporations Act Amendment (Crowd-sourced Funding) came into effect in Australia on 29 September 2017. The passing of this legislation has been long awaited and is a game-changer for investors and companies alike. Globally, Crowd-sourced Funding has been increasing, dominated by the USA following a change in their legislation in 2011 to increase access to capital for new and small ventures. Crowd-sourced funding volume has experienced significant growth in the USA, estimated at US$34 billion in 2015, and China and the United Kingdom are showing similar trends.

The key drivers for the growth in alternative finance options has been largely driven by an increase in regulation, costs of raising capital and the limited activity and maturity of traditional equity markets in emerging economies. The New Zealand market, whilst in its early stages is also displaying significant growth in equity-based crowdfunding following a demand for equity and lack of access to capital.

There are 3 key players in the Crowd-sourced Funding triangle; Company, Intermediary and Investors.
Crowd-sourced Funding is an attractive way to raise capital as it allows companies to maintain corporate control without being burdened by the “one size fits all” legal and regulatory obligations of listed companies.  

A Company must pass a number of key eligibility criteria to be entitled to the various governance concessions on offer. Assuming a company and the offer meet the eligibility criteria, the key elements impacting the likelihood of success includes due diligence and disclosure in the offer documentation.

Platforms, such as Sharequity Pty Ltd, are the Intermediary, acting as a “gatekeeper” for raising capital and investing through the collective effort of the community.  The fundamental role of Intermediaries addresses a critical business problem restricting many innovative and early stage companies from breaking into the public market.

Like traditional investment opportunities, a level of risk is inherent and the onus is on all 3 parties to undertake due diligence. However, the investments offered on these platforms should be carefully vetted, in line with a mutual interest to see the company succeed.  

The opportunities are not only limited to start-ups, and it is expected that larger, more traditional companies will take advantage of the prospect to increase and diversify their shareholder structure. In particular, crowd-sourced funding is perfect for pre-IPO exploration companies as an alternative to an early ASX listing.

For more information on Equity Crowd-sourced Funding, contact Sherif Andrawes Partner Corporate Finance BDO Perth, Peter Toll Managing Partner BDO Perth or our Corporate Finance experts.

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