Crowd Funding Law in Australia

This assignment delves into the legal framework surrounding crowd funding in Australia. It compares Australian regulations with those of the USA, UK, and New Zealand, highlighting both similarities and differences. The analysis focuses on the benefits and challenges of crowd funding for Australian businesses, particularly the temporary relief measures provided to newly established public companies. The paper concludes by assessing the overall success of the legislation despite criticisms and explores potential avenues for improvement, emphasizing the importance of fraud prevention in crowd funding.

Running head: BUSINESS LAWS
Business Laws
Name of the student
Name of the university
Author note

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As provided by Jozefien Daelemans “Crowd funding isn’t about collecting money. It’s
about makig something happen with a crowd of people who believe in something. Normal
people, not rich people with a lot of power, just people like you and me”. “I find crowd funding
to be one of the most ethical ways to continue doing the work that we do because the idea is that
I want my videos to be free and available to everybody, and that's why I use YouTube and online
platforms” as provided by Anita Sakeesian. The purpose of this paper is to discuss the provisions
related to Crowd funding. The paper describes what I crowd funding, talks about successful
crowd funding in Australia ad compares the Australian law on crowd funding with international
standards.
Crowd funding is the utilization of capital collected in small amounts from many
individuals in order to support a new business plan. The concept of crowd funding uses simple
accessibility to a large number of people through various platforms like social media and other
websites for crowd funding to bring together entrepreneurs and investors. The concept has the
power to enhance entrepreneurship through the expansion of the pool of the investors who can be
utilized to raise funds outside the traditional circle of relative, venture capitalists and owners1.
Crowd funding provides opportunity to the entrepreneurs to expand and bring into
existence their business idea by raising large amount of money from anyone who has money and
is willing to invest. Most of the crowds finding projects are based on rewards which investors are
entitled to for participating in the project. Another form of crowd funding is which is also
popular is the equity based crowd finding project. This project has become popular as startup
1 Fitzpatrick J, Symes C, Veljanovski A, Parker D. (2017) Business and Corporations Law, (3nd Ed., Lexis Nexis
Butterworths. Chapter)

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companies are making money without having to give the control of the project to capital
investors by given them equity position in the project2.
Another form of crowd-funding is the donation based crowd funding project. In this kind
of crowd funding ask the investors to donate a small amount where the number of investors are
large. In consideration the investors are only entitled to token rewards along with increase in the
popularity3.
This process is a very useful method of raising capital especially for a startup venture.
Crowd funding works best for startup businesses which need control over their activities and do
not want to lose out on the control their have over the idea. The fund raisers do not have to
follow strict process which is required to raise find from the public by the formation of a public
company. Through the use of Crowd funding a sole proprietor of a business may also raise fund
and does not have to meet the minimum seven directors required for the formation of a public
company4.
There have been several successful crowd funding projects in Australia in the past few
years. However thus part of the paper only discusses about two successful crowds funding
projects one in the commercial context and other for the purpose of charity and social fund
raising.
The Flow hive is now a very popular phrase in Australia. The owners of the company
have become millionaires from mere bee keepers by using brining in their idea to existence
through the help off crowd finding. An Australian beekeeper provided an idea which changed the
way in which the extraction of honey was assumed by the people and generated over $16 million
2 Bennett, Lucy, Bertha Chin, and Bethan Jones. "Crowdfunding: A new media & society special issue." (2015): 141-
148.
3 Ralcheva, Aleksandrina, and Peter Roosenboom. "On the road to success in equity crowdfunding." (2016).
4 Moritz, A., & Block, J. H. (2014). Crowdfunding: A literature review and research directions.

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of profit. Cedar Anderson along with his father Stuart Anderson discovered the “Flow hive”
which ultimately became the dream of the bee keepers. The million dollar idea of the flow hive is
made up of a plastic frame having honeycomb dimensions where the bees work and fill up every
cell with fresh honey. Once the cells are full, the honey can be extracted through a liver outside
the hive. The honey is extracted directly into a container outside which leaves the bees to make
more honey and fill the cells again. The owners of the company did not have any idea that their
idea would become so popular. The invention started to come into existence when they had
placed it in a kick starter website for crowd funding for getting the product to fellow beekeepers
and consumers. At the beginning of the project the entrepreneurs were looking to merely raise
$96952 through the crowd funding project so that they could purchase a new tool to be used in
the factory. However the campaign went viral and they had received over $2.7 Million in only a
day. After eight weeks the entrepreneurs were able to raise a staggering $16.8 Million. They had
received over 24000 orders which had to be supplied over 140 countries5.
Another successful crowd funding project which has been carried Australia which is
known as the CORENA (Citizen Own Renewable Energy Network Australia) the organization is
funded totally through the process of crowd funding. It had initiated out of a sense of frustration
as there are numerous people who want to make contribution towards the betterment of the
climate by reducing carbon emission and promoting renewable energy. Such people did not have
the money to fund a project on their own however they want to make a contribution towards
climate change. It was realized by the chairman of CORENA that if these people pool up
individually they would be able to add up enough money to achieve tangible results. Currently
the organization is raising funds for a project known as “quick win”. The project is in relation to
5 'The Flow On Effect': Flow Hive Founders Talk About Their Success (2017) ABC News
<http://www.abc.net.au/news/2016-09-12/australian-story-flow-hive-family.../7828436>.

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funding installation of solar panels for various nonprofit organizations. Another project which
has been initiated by the organization is the “Big win” project which aims to fund a project for
developing solar-thermal power plants from community funding.
Both the projects had been offered by the organization to national as well as international donors
and had also established a sub-community which would be able to handle situations outside the
state. The organization two years latter has almost received $60000 in relation to the quick win
project and $41000 with respect to the big win project. The organization till date has been able to
use crowd funding to fund solar installation for Gawler Community House, Tulgeen Disability
Services, Camden Community House and Tulgeen Disability Services6.
This part of the paper compares the Australian approach in relation crowd funding
through Corporations Amendment (Crowd-sourced Funding) Act 2017 and few other approaches
of international jurisdiction in relation to crowd funding.
Following the United States, New Zealand and the United Kingdom Australia has also
enacted a legislation in order to set a proper Framework for crowd funding in the country. The
new legislation came into effect in Australia in March 2017 and is known as the Corporation
Amendment Crowd sourced Funding Act 2017. The new law applies to small proprietary
companies to raise public funds from a large number of investors by issuing them with equity
shares. Certain barriers which start ups and small businesses face when wanting to raise capital
including corporate governance and onerous disclosure requirement under the Corporation Act
2001 have been removed by the new amendment. It is predicted that the new amendment is
going to open up innovative and new sources of capital funding with respect to Australian small
businesses.
6 Citizens Own Renewable Energy Network Australia Inc (CORENA) Media Releases | CORENA Fund (2017)
Corenafund.org.au <https://corenafund.org.au/media/>.

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A company is enabled by the crowd funding sources to raise funds with respect to a huge
number of investors by providing them consideration in form of equity in the company. Small
business and start-ups in Australia presently face difficulties of making offers in relation to
equity to investors. This was because compliance under the onerous fundraising laws with
respect to Chapter 6D of the Corporation Act 2001 along with other reporting obligations which
are required for making such types of offer7. It is not easy for small businesses to comply with
requirements as they are too restrictive and prohibitively expensive for them. This feature leads
to finding up with respect to small business in Australian start-up. There is a legislative
framework supporting crowd source equity funding which already exists in over 10 countries
which include USA, UK and New Zealand. While the Framework in Australia is increasingly
restrictive with respect to type of businesses gaining access to crowd source equity funding it is
anticipated by the Federal government that such rules would be able to reduce competitive
disadvantage which is faced by Australian start-ups as compared to the international counterparts
in relation to funding. It is also hope by the Federal government that the new legislation would
be able to figure Innovation and growth for small businesses in Australia. The crowd funding in
UK is governed by the UK Crowd funding association and Financial Conduct Authority.
The bill is applicable on companies which are not listed and have an annual turnover
along with gross assets of less than 25 million. Such companies must also not be subsidiary of
any listed public company. Up to $5 million can be raised through crowd funding within a period
of 12 months by an eligible company. New disclosure regimes has been established by the
amendment which may be used by the companies to offer shares to the investors. The new
requirements are certainly less restrictive and less onerous than the previous requirements related
7 Corporation Act 2001 (Cth)

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to disclosure under the Corporation Act such as issuing prospectus along with other disclosure
documents.
There are a few challenges which have been proposed by the bill in relation to crowd
funding in Australia. Only proprietary companies having two or more directors can use the
provisions of CSF. In addition a proprietor company unlike previously can now have more than
50 shareholders and there is no prescribed limit set on the number of members being a part of
such company through the new enactment. The proprietary companies who have CSF
shareholders will now have to make annual financial reports along with director’s reports in
compliance with the accounting standards. The annual financial reports of those proprietary
companies who have more than $1 million from CSF would be audited.
The new legislation have specific provisions for the protection of investors in relation to
crowd funding. The provision prescribe rules that an investor is only allowed to invest up to
$10000 in an offer in a period of 12 months with respect to crowd sourced equity funding.
Investors also have to abide by the obligation to accept a risk acknowledgement before they
make and crowd sourced equity funding application. Cooling off period of 5 days is also
applicable with respect to each investment made by an investor. Just like in the case of USA and
UK the bill only restrict the amount one person can invest with respect to the crowd source
equity funding however it does not put any restriction on the total amount which an investor can
make in relation to search funding every year. And there are no small caps start-ups in small
businesses would have a very good access to funding.
However unlike USA, UK and New Zealand the new Australian region excludes private
companies from the advantages of the legislation8. The decision of the Parliament to limit the
8 Moritz, Alexandra, and Joern H. Block. "Crowdfunding: A literature review and research directions."
Crowdfunding in Europe. Springer International Publishing, 2016. 25-53.

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resign only to unlisted public companies has been subjected to high criticism by stating that it is
an additional administrative burden and unnecessary restriction on small businesses.
In order to address these concerns the bill attempts to provide temporary relief to the newly
established public companies which are eligible companies with respect to corporate government
requirements and reporting requirements in relation to the Corporation Act 2001. For the purpose
of being eligible for such concessions an organization has to complete a crowd sourced equity
funding transaction within 12 months of registration all been converted from a proprietary
company to a public company.
An offer document has to be published by an organization for the purpose of taking
advantage of crowd funding source which would comply with all requirements prescribed in the
legislation. It would be done that an offer document is effective for instance it has a receipt about
misleading statement. Criminal sanctions are also applicable to the companies under the bill
offering securities in relation to a defective of a document in case there's a material that was
defect with respect to the investors. This feature is also similar to that of UK and us with respect
to crowd funding resigns.
Thus it can be said that the legislation has similar features as compared to its international
counter parts. The contrary features have been added to suit the business situation of Australia. It
can therefore be conceded that in spite of its criticism the legislation and the new legal regime in
relation to crowd funding in Australia is going to be successful. There have been various projects
which have been successfully carried on in Australia. However the concept would be more
beneficial if the law would be able to prevent any fraud in relation to crowd funding. “Success
yourself with people who believe in your dream”- Wade Dokken.

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