An Analysis of Australian Crowdfunding Regulation: A Comparative Study

In recent years, crowdfunding has emerged as a popular method for small businesses and start-ups to raise investment. While Australia has implemented the equity crowdfunding regulation, its policies have faced criticisms from the start-up industry. In contrast, the United States has successfully implemented crowdfunding procedures for various organizations. The Australian government is slowly adopting more flexible policies, but there are still restrictions on single entrepreneurs. Despite these limitations, crowdfunding offers benefits such as increased control and no pressure from venture capitalists. Small businesses like Howard Jones' can benefit from crowdfunding, making it a valuable option for raising capital.

Running head: CROWDFUNDING 0
Business Law Assignment

CROWDFUNDING 1
Table of Contents
Introduction................................................................................................................................2
Crowdfunding Mechanism.........................................................................................................3
Commercial and Social Examples of Crowdfunding.................................................................4
Legislative Framework of Crowdfunding..................................................................................6
Observations...............................................................................................................................7
Conclusion..................................................................................................................................9
Bibliography.............................................................................................................................10

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Introduction
Crowdfunding is the modern way of financing new business and start-up. It helps new start-
ups by raising funds for their business operations from various sources, such as relatives,
associates, financiers and family members. These peoples prefer to invest their capital in
small finance projects. It allows small businesses to get investment without the help of any
large corporations such as banks or venture capitalists. The popularity of crowdfunding has
grown significantly in past decade and it helps finance small companies and ideas in different
fields. The essay will discuss the achievement of crowdfunding in different social aspects
such as charity, donations, and development of products and facilities. The Australian
legislative structure for crowdfunding and structure of other countries will be discussed in the
essay for evaluating various differences. Further, the essay will recommend Howard Jones
regarding funding of his idea of solar power batteries through crowdfunding method and
compare it to other traditional methods of funding.
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Crowdfunding Mechanism
Crowdfunding and crowd-sourced funding are two different methods of financing a
corporation or idea. In crowd sourced funding, the entrepreneurs received funding for their
ideas but the financiers take a certain part of their shares1. The crowdfunding is a particular
part of a crowd sourced funding, in which the funding is collected through the crowd. The
crowdfunding is separate from the traditional method of funding such as a loan from banks,
venture capitalists, and angel investors. These investors are limited in numbers and prefer to
invest in large investment projects. The crowdfunding provided the perfect platform to new
entrepreneurs to present, form and share their inventive ideas, by providing them a large
number of investors and high financing options. The entrepreneur and financiers connected
with each other through online websites and social media platforms2.
There are four types of crowdfunding option available such as reward, equity, charity and
landing based crowdfunding3. In the reward centered crowdfunding, the financiers invest in
the project of entrepreneurs because of the rewards provided by them. In equity centered
crowdfunding, the financier’s gets share of the corporation for the investment provided by
them. The charity centered crowdfunding is based on social causes; the investors did not get
any monetary benefit in this crowdfunding. In case of landing centered crowdfunding, the
investment provided by financiers are considered as a loan and entrepreneurs has to return it
with interest.
There are some steps that must be followed by entrepreneurs for crowdfunding of their ideas.
The most important step is related to providing complete and correct information to the
investors regarding their idea4. All the necessary information must be provided to the
financiers before the collection of crowdfunding. The information includes details regarding
product, facilities, objectives, required investment, the time frame for the manufacturing of
product and rewards provided by the company for their investors. Entrepreneurs can post
their business offer on various crowdfunding websites, available online to invite financiers5.
1 Paul Belleflamme, Thomas Lambert, and Armin Schwienbacher. "Crowdfunding: Tapping the right
crowd." Journal of business venturing 29.5 (2014): 585-609.
2 Helen G. Klaebe, and Rebecca Laycock. "How to work the crowd: A snapshot of barriers and
motivations to crowdfunding." (2012).
3 Jeff Fitzpatrick, et al. Business and corporations law. LexisNexis Butterworths, 2011.
4 Carol Royal, and G. Sampath S. Windsor. "Microfinance, crowdfunding, and sustainability: A case
study of telecenters in a South Asian developing country." Strategic Change 23.7-8 (2014): 425-438.
5 Franck Juredieu, and Sébastien Mayoux. "Crowdfunding Legal Framework: An International
Analysis☆." International Perspectives on Crowdfunding: Positive, Normative and Critical Theory.

CROWDFUNDING 4
Commercial and Social Examples of Crowdfunding
As per David Murray, to support and promote entrepreneur’s small business ideas and start-
up, the crowdfunding options is significantly useful in the Australian economy. The reward
based crowdfunding attract a large number of small financiers to invest in the ideas of
entrepreneurs6. In this method, the company gives a guarantee to its investors that they will
receive rewards one the company started operating and start generating profits. The
entrepreneurs and small financiers both get benefit such way because the financier invests a
small amount which does not carry large risk and entrepreneurs gets their idea funded.
Indiegogo and Kickstarter are the two largest online platforms for entrepreneurs to fund their
ideas through crowdfunding process7.
In 2016, an Australian game developing company called ‘Satellite Reign8’ raised a funding of
$461,333 for their real-time strategy game, through crowdfunding website Kickstarter. In
case of equity based crowdfunding, the financiers get shares of the organisation for their
investment. According to Tim Heasley, who is a partner of Artesian Venture Partners, only
the wholesale financiers investing 2.5 million in real estate or earning an income of $250,000
are considered in the Australian legal system. In 2013, thousands of small financiers raise a
funding of $2 million, for technology corporations such as Fame & Partners and
CrowdMobile9. In 2014, more than 22 thousand projects were funded through crowdsourcing
on the Kickstarter website and the financiers contribute more than $500 million for a new
project. Various small Australian companies such as Ninja Blocks and KoalaSafe raised their
funding through crowdfunding from Kickstarter website.
Crowdfunding is also a popular method for raising funds for social and charitable causes.
Many people donate online for different social and charitable causes. The money donated by
people used by entrepreneurs into charitable work. There are several crowdfunding websites
that support charity investments to help different charities of the world. Various charitable
caused are funded due to such crowdsourcing websites. There are several examples of online
charitable crowdsourcing campaigns that assist in raising donation for various social causes.
For example, Sanfilippo syndrome is a neurological illness which tears brain cells of the
Emerald Group Publishing Limited, 2016. 81-97.
6 Loreta Valanciene, and Sima Jegeleviciute. "Valuation of crowdfunding: benefits and
drawbacks." Economics and Management 18.1 (2013): 39-48.
7 Matthew Vitale. "Crowdfunding: Recent international developments and analysis of its compatibility
with Australia's existing regulatory framework." (2013).
8 Rebecca English. "Rent-a-crowd? Crowdfunding academic research." First Monday 19.1 (2013).
9 Toney Featherstone. "Creating opportunity." Company Director 30.9 (2014): 18.

CROWDFUNDING 5
patient suffering from such disorder. The patient suffering from the syndrome cannot walk
and talk or eat their food themselves.
Eliza, a four-year-old girl, was suffering from such disorder. The treatment for such disorder,
which only performed in Ohio, costs more than $2.5 million. Eliza’s parents made several
videos about the condition of their daughter and upload them on the internet to seek help for
fighting such disease. The money they raised was not enough for the treatment of Eliza. A
professional filmmaker named Benjamin Von Wong saw the story of Eliza and created a
short video on her condition. He titled the video ‘Saving Eliza’10, who became significantly
popular over the internet. In few months, Eliza’s parents received a donation of $380,000
through crowdfunding donations. Currently, the campaign has raised more than 1.8 million
for the treatment of Eliza’s disorder.
Another example is of Melissa Smith, she was 22 years old and suffering from a dangerous
disease called Hodgkin's lymphoma. While she was suffering from Hodgkin's lymphoma she
diagnosed with cancer twice. Melissa faced another life-threatening disease when she was 29
years old, called Transverse Myelitis. She became paralysed in few weeks and lost all the
sensational from her limbs. Melissa’s sister started an online campaign for raising fund for
treatment of Melissa’s diseases. The story of Melissa was noticed by a popular website called
Chive and they decided to help Melissa for her treatment. The company started an online
campaign for crowdfunding called ‘Hope for a Home11’ and raised more than $413,000 in 14
months. More than twelve thousand people contributed for the treatment of Melissa.
Legislative Framework of Crowdfunding
In Australia, the crowdfunding is a new concept of raising investment for entrepreneur’s
projects. The Corporations Amendment (Crowd-sourced Funding) Act 201712 was passed to
provide various guidelines for crowdfunding in Australia. The act was accepted on 28th
March 2017 and it came into existence from 29th September 2017. It is based on providing
new guidelines and regulations for crowdfunding operations in Australia. The Corporations
Act 2001 gets amended and added various new principles of crowdfunding. There are few
changes in Australian Securities and Investments Commission Act 2001 as well. The new
10 Danielle C. Fumagalli, and Arvin M. Gouw. "Focus: Personalized Medicine: Crowdfunding for
Personalized Medicine Research." The Yale journal of biology and medicine 88.4 (2015): 413.
11 Amir Manzoor. "Crowdfunding for Non-Profits." Handbook of Research on Emerging Business
Models and Managerial Strategies in the Nonprofit Sector(2017): 152.
12 Michelle Eastwell, Jessica Dale, and Felicity Dunstone. "Crowd-sourced equity funding is coming to
Australia." Governance Directions 69.7 (2017): 411.

CROWDFUNDING 6
crowdfunding act changed the structure of Australian market license process. There are
several new exceptions which can be applied by crowd sourced funding mediators and the
monetary market operatives. The new market operatives have the advantage to get an
exemption from the requirement of Australian market license.
The non-listed corporations with an annual turnover or market capitalisation lower than $25
million are covered under this act13. The corporations which are not subsidiary or did not
have any connection with the listed organisation also come under this act. These corporations
can raise investment through equity centered crowdfunding up to $5 million in a year.
Eligible corporations can use new amendments to create a new offering of investment under
fresh disclosure system. This system is significantly easier than old system provided under
Corporations Act. The offer for crowdfunding should include a proposal document and it
should introduce an online crowdfunding platform. The online platform must have a license
of Australian financial services. The proposal document should include all the necessary
detail of the proposal. A small scale financier can invest ten thousand dollars annually in
crowdfunding offers. The risk of investment must be recognised and approved by the
financiers in a period of five days.
The number of wholesale financiers is also limited in crowdfunding offers, but the number of
projects in which they can invest is unlimited. In case of the United States and the United
Kingdom, there is no fixed limit on the crowdfunding investment14. Without the limit, the
entrepreneurs in UK and US can easily raise more funds as compared to Australian
entrepreneurs. The option of crowdfunding is also limited for the unlisted corporation and not
available for a private organisation.
Observations
The crowdfunding is a modern concept in Australia as compared to other countries. Various
countries have adopted a legal framework for crowdfunding policies such as United States,
United Kingdom, and New Zealand, but the Australian framework is comparatively strict
than other countries15. The policies of Australian crowdfunding limit the number of
businesses which can use crowdfunding method to raise investment. The policies created by
the government of Australian have faced numerous criticisms from start-ups industry. The
13 Tony Stumm. "The rebirth of crowd funding in Australia!." Governance Directions 69.2 (2017): 96.
14 Ross S. Weinstein. "Crowdfunding in the US and Abroad: What to Expect When You're
Expecting." Cornell Int'l LJ 46 (2013): 427.
15 Niall Firth. "Crowdfunding successes show value of small donations." (2012): 22.

CROWDFUNDING 7
crowdfunding method cannot be used by start-ups or entrepreneurs in Australia; instead, this
is available for corporations with a turnover or market capitalisation of $5 million. The
United States has implemented an effective crowdfunding procedure for organisations with
different products and facilities.
For example, Oculus Rift raised $2.5 million from crowdsourcing procedure through
Kickstarter16. The company was bought by Facebook for $2 Billion in 2014. In 2015, the
worldwide crowdfunding industry has raised over $34.4 billion. Australia can adopt various
policies from other countries to improve their crowdfunding procedure, for enabling small
entrepreneurs to raise investment for their projects. The crowdfunding has numerous benefits
than compared to traditional method of raising money. Although the Australian regulations
lack several benefits of crowdfunding, it is still a better option for small corporations to raise
investment. The Australian government is slowly adopting the policies of crowdfunding but
there is still time before they developed such as the United States or United Kingdom’s
policies.
There are mixed reviews regarding the Australian crowdfunding regulation from various
market experts. According to Jo Burston, the crowdfunding act passed by the Australian
government is the right step towards the improvement of corporation’s funding situation but
the restrictions imposed by the government over small start-ups to raise funding are wrong
and against the crowdfunding objectives17. Howard Jones can use crowdfunding to raise
investment for his project, but the regulations of Australian crowdfunding act put various
restriction over single entrepreneurs. Howard Jones can open his unlisted company and then
raise investment through crowdfunding. The method of crowdfunding for raising investment
is significantly better than traditional methods because it provides large control to the
entrepreneur.
16 Michael A. Stanko, and David H. Henard. "How crowdfunding influences innovation." MIT Sloan
Management Review 57.3 (2016): 15.
17 N. Khadem. "Crowdfunding in Australia a step closer." The Sydney Morning Herald (2014).

CROWDFUNDING 8
Conclusion
From the above essay, it can be concluded that crowdfunding is a modern method of raising
funds for small business. Crowdfunding can be used for raising fund for social and charitable
causes as well. Various countries such as US and UK have effectively implemented
crowdfunding policies which assist small entrepreneurs to raise investment for their projects.
Australia has implemented the equity crowdfunding regulation, but they lack various features
of crowdfunding when compared to other countries. Howard Jones should adopt
crowdfunding way to raise investment due to its various benefits such as more control over
operations and no pressure of venture capitalist. Crowdfunding benefits a country’s economy
and helps small entrepreneurs to raise capital.

CROWDFUNDING 9
Bibliography
Belleflamme, Paul, Thomas Lambert, and Armin Schwienbacher. "Crowdfunding: Tapping
the right crowd." Journal of business venturing 29.5 (2014): 585-609.
Eastwell, Michelle, Jessica Dale, and Felicity Dunstone. "Crowd-sourced equity funding is
coming to Australia." Governance Directions 69.7 (2017): 411.
English, Rebecca. "Rent-a-crowd? Crowdfunding academic research." First Monday 19.1
(2013).
Featherstone, Tony. "Creating opportunity." Company Director 30.9 (2014): 18.
Firth, Niall. "Crowdfunding successes show value of small donations." (2012): 22.
Fitzpatrick, Jeff, et al. Business and corporations law. LexisNexis Butterworths, 2011.
Fumagalli, Danielle C., and Arvin M. Gouw. "Focus: Personalized Medicine: Crowdfunding
for Personalized Medicine Research." The Yale journal of biology and medicine 88.4 (2015):
413.
Juredieu, Franck, and Sébastien Mayoux. "Crowdfunding Legal Framework: An International
Analysis☆." International Perspectives on Crowdfunding: Positive, Normative and Critical
Theory. Emerald Group Publishing Limited, 2016. 81-97.
Khadem, N. "Crowdfunding in Australia a step closer." The Sydney Morning Herald (2014).
Klaebe, Helen G., and Rebecca Laycock. "How to work the crowd: A snapshot of barriers
and motivations to crowdfunding." (2012).
Manzoor, Amir. "Crowdfunding for Non-Profits." Handbook of Research on Emerging
Business Models and Managerial Strategies in the Nonprofit Sector(2017): 152.
Royal, Carol, and G. Sampath S. Windsor. "Microfinance, crowdfunding, and sustainability:
A case study of telecenters in a South Asian developing country." Strategic Change 23.7-8
(2014): 425-438.
Stanko, Michael A., and David H. Henard. "How crowdfunding influences innovation." MIT
Sloan Management Review 57.3 (2016): 15.

CROWDFUNDING 10
Stumm, Tony. "The rebirth of crowd funding in Australia!." Governance Directions 69.2
(2017): 96.
Valanciene, Loreta, and Sima Jegeleviciute. "Valuation of crowdfunding: benefits and
drawbacks." Economics and Management 18.1 (2013): 39-48.
Vitale, Matthew. "Crowdfunding: Recent international developments and analysis of its
compatibility with Australia's existing regulatory framework." (2013).
Weinstein, Ross S. "Crowdfunding in the US and Abroad: What to Expect When You're
Expecting." Cornell Int'l LJ 46 (2013): 427.