Many small companies reach a point where savings and bank loans will not cover the next stage of growth. Equity crowdfunding offers another path. Instead of one large investor, a company sells shares to many people who each put in a smaller amount. In Australia this is regulated under the crowd-sourced funding regime, usually shortened to CSF.
The rules sit in the Corporations Act and are overseen by the Australian Securities and Investments Commission. They cover which companies can raise money this way and how much. They also set out protections for the people who invest. Knowing the basics early helps founders decide if the option suits their plans.
How equity crowdfunding works in Australia
Under the regime, an eligible company offers ordinary shares to the public through a licensed online platform. ASIC calls the platform operator a CSF intermediary. Each offer must come with a CSF offer document that includes minimum required information and a prescribed risk warning. ASIC has published a template offer document in Regulatory Guide 261, its guide for companies.
The regime started on 29 September 2017 under the Corporations Amendment (Crowd-sourced Funding) Act 2017. At first it was open to unlisted public companies. A second Act extended it to proprietary companies from 19 October 2018. That change opened the option to many more small Australian businesses.
Which companies can use it
ASIC’s crowd-sourced funding guidance says unlisted public companies with less than $25 million in assets and annual turnover are eligible. Proprietary companies can also make offers, but they take on extra duties when they do. These duties are worth reading before you commit, because they add to the cost of running the company. The full eligibility conditions are set out in Regulatory Guide 261.
Extra duties for proprietary companies
A proprietary company that raises funds this way must keep at least two directors. It must prepare annual financial reports and directors’ reports under the accounting standards. Once it has raised $3 million or more through CSF offers, those financial reports must be audited. It must also follow the related party transaction rules that apply to public companies.
These rules mean more paperwork and higher accounting fees each year. For a small team, that is a real ongoing cost. Budget for it before you launch rather than after the money arrives. Your accountant can give you a rough idea of the yearly cost.
How much money you can raise
An eligible company can offer ordinary shares to raise up to $5 million in any 12 month period. For many early stage businesses, that is plenty for a first serious raise. It still pays to work out the real figure you need. Asking for too much can stall a campaign. Asking for too little can leave you short within months.
Start with a plain plan that shows where each dollar will go. Break the figure into stages, such as hiring, stock, equipment or marketing. Then test how long the money will last at your current spending rate. A clear use of funds section also makes the offer document easier to write. If part of the raise will pay for extra stock or equipment, know how to choose a reputable commercial storage facility before the goods arrive.
How investors are protected
Retail investors are capped at $10,000 per year in any one company through CSF. A five day cooling off period also applies, which gives investors time to reconsider. These protections limit how much any single member of the public can put at risk. They also shape how you plan your campaign.
Because of the cap, you will usually need many smaller investors rather than a few large ones. Your story has to make sense to everyday people as well as experienced investors. Plain language and honest figures matter more than polished slogans. Explain what the business does, how it earns money and what the new funds will pay for.
The role of the intermediary
A CSF intermediary must hold an Australian financial services licence that authorises it to provide CSF services. Licensees must act efficiently, honestly and fairly. They must also manage conflicts of interest and keep dispute resolution arrangements in place. ASIC describes intermediaries as having gatekeeper obligations for the offers on their platforms.
In practice, the platform will look closely at your company and your offer before it goes live. Expect questions about your directors, your financial position and the claims in your documents. Compare a few licensed platforms and ask what they charge and what support they give. Ask each one what they need from you and how long their review usually takes.
Preparing your company for a raise
Investors are buying part of your company, so they want to see that it is well run. Get your financial records up to date and reconciled before you approach a platform. Check your company constitution and any shareholder agreements for terms that limit issuing new shares. A lawyer can help you spot problems early.
Think carefully about dilution as well. Every new share you issue reduces the percentage that existing owners hold. Work out how much of the company you are willing to give up, and at what valuation. Getting this wrong can make a later raise harder.
Telling people about your offer
A crowdfunding campaign depends on reach. Your existing customers, suppliers and followers are often the first people to back you. A clear plan for email marketing to your current list can give the offer early momentum. Keep every message consistent with the offer document and avoid promises about returns.
Social media, short videos and local media can all help. Ideas from other sectors carry over well, and many digital marketing methods for real estate companies suit any business that needs to build trust quickly. Show the people behind the company and explain the plan in plain terms.
Is it the right fit for your business?
Equity crowdfunding suits some businesses better than others. It tends to work for companies with a product people understand and a community that already cares about it. It can be a poor fit when the business is hard to explain or the founders want to keep full control. Weigh it against loans, grants and private investors before you decide.
Raising money also adds pressure. It can also bring personal money worries to the surface. Looking after your own position, including the practical steps for alleviating your financial stress, makes it easier to think clearly. A calm founder makes better decisions about price, timing and terms.
Frequently asked questions
Can a sole trader raise money through equity crowdfunding?
Not as a sole trader, because the regime involves offering shares in a company. Eligible public companies and proprietary companies can make CSF offers. A sole trader would need to set up a company first. ASIC registers new companies through Form 201.
How much can one person invest?
Retail investors are capped at $10,000 per year in any one company through CSF. The cap is there to protect members of the public. If you need large amounts from a few people, other forms of funding may suit you better.
Can my company run its own crowdfunding offer without a platform?
CSF offers are made through a CSF intermediary. That intermediary must hold an Australian financial services licence authorising it to provide CSF services. So in practice your company would apply to list its offer with a licensed platform.
Will my company need an audit?
A proprietary company must have its financial reports audited once it has raised $3 million or more from CSF offers. Annual financial reports and directors’ reports are required either way. Talk to your accountant about what this means for your yearly costs.
This article is general information only and is not legal or financial advice. Rules can change, so check ASIC’s current guidance and speak with a qualified lawyer, accountant or licensed financial adviser before making an offer.