Crowd-sourced equity funding (CSF) unlocks new investment potential with retail investors for your startup or small business.
What is Equity Crowdfunding?
Equity crowdfunding (or crowd-sourced equity funding (CSF)) is a relatively new funding alternative available to startups and smaller companies. CSF allows companies to raise funding by issuing shares to a “crowd” of non-professional or retail investors via an online CSF platform (i.e. Birchal, Equitise, etc).
Legislation to enable equity crowdfunding was first enacted in Australia in early 2017 (subsequently amended in late 2018) and contains the rules that govern who can access CSF, the amount that can be raised and the supporting regime. Guidance can be sought from the ASIC Regulatory Guide RG261 “Crowd-sourced funding: Guide for companies.”
The Overall Crowdfunding Framework
- The CSF legislation sets out the framework under which a CSF can be undertaken;
- Eligible companies can undertake a CSF up to a prescribed cap of $5m a year
- The company must prepare a CSF Offer document with prescribed minimum information
- A CSF can only be undertaken via an authorised intermediary (i.e. Equitise, Birchal, etc.) who must check;
- the company, its directors and the Offer document and
- prospective investors for their eligibility
The intermediary is then responsible for managing the flow of funds between the investors and the Company and ongoing communications.
What are the Benefits of Crowdfunding?
CSF provides companies with access to a broad new audience of investors due to the wide promotion and low investment minimums.
Additionally, CSF platforms provide a streamlined investment process – reducing the cost and time taken to raise funds.
Who can raise funds using CSF?
ASIC mentions that CSF entities can include “unlisted public companies and proprietary companies (excluding investment companies) with less than $25 million in consolidated assets and annual revenue that have their principal place of business and a majority of directors in Australia”
How much can I raise with Crowd-sourced Funding?
Eligible companies can raise up to $5 million in any 12-month period (the ‘issuer cap’). Funds should be raised through the issue of Ordinary shares to retail investors. Retail investors can buy up to $10,000 of shares in a company over a 12-month period.
The largest equity crowdfunding in Australia to date has been for ride-share platform Shebah which raised over $2.5m.
What are the requirements for a Company crowd sourcing funds?
- A company raising funds has several responsibilities;
- To prepare an Offer document containing the prescribed information including
- Company structure, risks and financial information
- Details of the offer
- Investor rights
- To comply with reporting and disclosure requirements after the offer has been completed – these obligations differ somewhat between public and proprietary limited companies.
When is a Company ready for Equity Crowdfunding?
While a CSF intermediary has an obligation to check a CSF Offer document, these checks are largely compliance checks.
- Whether a Company is ready for CSF is really a question of whether the business is sufficiently attractive to raise investment funds. Each CSF intermediary uses its own criteria to assess whether a company is suitable to list on their platform. The criteria may include;
- The industry and competition
- Business model and structure
- Length of time in business
- Sales or revenue history
- Profit and Loss history
- Growth prospects
- Performance forecasts and dividend potential
- Team and Board members
- The valuation of the business and the amount of capital being sought
Marketing your Crowdfunding campaign
- Probably the most important aspect of equity crowdfunding is the marketing campaign. Considerations to help a campaign run successfully include;
- Reaching out to friends, family and customers who may be interested in supporting the offer;
- Preparing high quality and appealing presentation materials;
- Providing incentives to invest like product discounts or shareholder events; &
- Pricing the issue fairly and competitively.
Several of the CSF platform providers will run a “soft launch” or “private launch” aimed at existing shareholders, customers and network contacts to gauge interest before launching to the general public.
Costs of equity crowdfunding
- The cost of equity crowdfunding in Australia via a CSF platform provider may include;
- An administration or document preparation fee of approx. $2,000
- A Success fee or Fundraising fee of 5% to 7.5% of the amount raised
In addition to these costs, there may also be fees paid for legal advice, preparation of offering materials, business advice, etc.
Crowd sourced equity funding offers companies an exciting new avenue to raise capital from retail investors.
If your business needs support or guidance raising funds, reach out for our seasoned VCFO services.