Business and Company Law: Analysis of Australian Crowdfunding Methods

This report examines the modern method of crowdfunding, analyzing its benefits and drawbacks for businesses, particularly in the context of Australian law. It explores how crowdfunding enables small businesses and entrepreneurs to secure funding directly from the public, contrasting this with traditional investment methods. The report delves into the different crowdfunding methods, including reward-based, charity, equity, and lending-based models, and emphasizes the importance of providing accurate project information to potential investors. It highlights the role of platforms like Indigogo and Kickstarter in Australia and the impact of the Corporations Amendment (Crowd-sourced Funding) Act 2017. Furthermore, it compares Australian regulations with those of the United States and the United Kingdom, discussing the implications of investment limits and the potential for entrepreneurs like Howard Jones to utilize crowdfunding. The report concludes that crowdfunding presents a viable and beneficial option for small businesses seeking capital.

Running head: AUSTRALIAN CROWDFUNDING
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Business and Company Law

AUSTRALIAN CROWDFUNDING 1
Table of Contents
Introduction................................................................................................................................2
Crowdfunding- A Modern Way of Funding..............................................................................3
Conclusion..................................................................................................................................7
Bibliography...............................................................................................................................8

AUSTRALIAN CROWDFUNDING 2
Introduction
Crowdfunding is a modern method for small businesses to collect funding for their ideas
through the public. Usually, corporations collect funding through investment firms such as
banking corporations, investment firms, and venture capitalists, but these firms did not invest
in small businesses. Crowdfunding enables small businesses or entrepreneurs to directly
collect investment from people who are interested in their ideas. The investment provided by
the public to a small business helps them start their operations and provide the profits back to
investors. To promote crowdfunding in Australia, the government has passed a new act which
provides a new structure for generating investment through crowdfunding. This essay
analyses the benefit or drawback of crowdfunding method of investment, to give advice to
Howard Jones regarding his new project. The essay will evaluate crowdfunding from the
perspective of companies who use it to generate their capital. Further, the essay will compare
legislation of Australia with other countries.

AUSTRALIAN CROWDFUNDING 3
Crowdfunding- A Modern Way of Funding
In modern times, a large number of people have access to technology; this access leads to
new innovations daily. In past few years, the number of new entrepreneurs has grown
significantly. People are using modern technology to create new products or applications
each day, but to take such products to large scale, entrepreneurs require funding1. The
traditional methods of investment which include, taking loans from banks, investment firms
or venture capitalists, are limited in numbers. A large number of the entrepreneurs were not
being able to raise capital for their project. Crowdfunding has provided hope to such
entrepreneurs by providing them funding from the public. Crowdfunding uses online
platforms to connect entrepreneurs and public to assist them in gaining investment. In
crowdfunding, the capital is provided by family, friends, small-scale investors and other
public who are interested in the idea of the entrepreneur2.
For entrepreneurs, there are four different crowdfunding methods to generate investment
from public, which includes, reward, charity, equity and lending method3. In the reward-
based method, the investors receive inventive for the capital they invested in the
entrepreneur’s project. In charity or social based method, the investment generates for some
social purpose which benefits the society. The equity-based method is most popular; financier
receives shares of the corporation for the investment provided by them. In the lending based
system, the capital is considered as a loan and the company pay it back with interest to the
financier4. Other than selecting the method of investment, there are few steps which must be
followed by entrepreneur while generating funding through crowdfunding process. The first
and foremost step is providing true and complete information regarding the project to the
financiers. The information contains project details such as funding needed, product
specification, time frame, and rewards given to the investors5.
1 Jeff Fitzpatrick, et al. Business and corporations law. LexisNexis Butterworths, 2011.
2 Ethan Mollick. "The dynamics of crowdfunding: An exploratory study." Journal of business
venturing 29.1 (2014): 1-16.
3 Alessandro Cordova, Johanna Dolci, and Gianfranco Gianfrate. "The determinants of crowdfunding
success: Evidence from technology projects." Procedia-Social and Behavioral Sciences 181 (2015):
115-124.
4 Helen G. Klaebe, and Rebecca Laycock. "How to work the crowd: A snapshot of barriers and
motivations to crowdfunding." (2012).
5 Paul Belleflamme, Thomas Lambert, and Armin Schwienbacher. "Crowdfunding: Tapping the right
crowd." Journal of business venturing 29.5 (2014): 585-609.

AUSTRALIAN CROWDFUNDING 4
Crowdfunding has been used by several organisations as a method for generating funding for
their operations. Indigogo and Kickstarter are two most popular sites of crowdfunding in
Australia6. These websites along with various others help many entrepreneurs to generate
funding for their businesses. Small Australian technology corporations such as Ninja Block
and KoalaSafe have been successfully used crowdfunding website Kickstarter to raise
funding. Another organisation called Satellite Reign has raised capital for their real-time
action video game through Kickstarter. More than 3.3 million people invested their money in
twenty-two thousand crowdfunding projects using Kickstarter in 2014. Pozible, a website for
crowdfunding projects, has launched more than eight thousand entrepreneur’s projects and
generated investment of $25 million7.
With commercial purpose, crowdfunding is also used by charitable organisations to generate
funding for social causes. It is a modern way of donating money to charitable causes8. For
example, four years old girl named Eliza had Sanfilippo syndrome which is a neurological
disorder. Due to symptoms of this disease, Eliza was not able to eat, walk or even talk.
Eliza’s treatment requires $2.5 million, but her parents did not have that money. Eliza’s
father creates a homemade video of Eliza’s condition and uploaded it over the internet. The
mainly raised through such video was not enough for the treatment of Eliza. That video was
seen by a filmmaker named Benjamin Von Wong who made a short film over Eliza. The
filled was named ‘Saving Eliza’ and along with such film, a crowdfunding page was also
established to raise funding for Eliza’s treatment. The camping for saving Eliza has raised
more than $1.8 million for her treatment through crowdfunding9.
Due to its popularity, the Australian government decided to establish regulations regarding
crowdfunding procedure in Australia. The government enacted Corporations Amendment
(Crowd-sourced Funding) Act 201710 to promote and regulate the process of crowdfunding.
The act amended various regulations of Corporations Act 2001 and provides new policies for
small corporations to raise funding through crowdfunding. Many policies of Australian
Securities and Investments Commission Act 2001 have also been altered due to new
6 Rick Wash. "The Value of Completing Crowdfunding Projects." ICWSM 13 (2013): 7th.
7 Amir Manzoor. "Crowdfunding for Non-Profits." Handbook of Research on Emerging Business
Models and Managerial Strategies in the Nonprofit Sector(2017): 152.
8 Julie S. Hui, Michael D. Greenberg, and Elizabeth M. Gerber. "Understanding the role of community
in crowdfunding work." Proceedings of the 17th ACM conference on Computer supported cooperative
work & social computing. ACM, 2014.
9 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.
10 Michelle Eastwell, Jessica Dale, and Felicity Dunstone. "Crowd-sourced equity funding is coming to
Australia." Governance Directions 69.7 (2017): 411.

AUSTRALIAN CROWDFUNDING 5
crowdfunding policies. Many new exemptions have been provided to many market operatives
to promote the usage of crowdfunding in Australia. The policies of Australian market license
have also been amended to provide various exemptions to the corporation11.
The crowdfunding act provided that small sector organisation can spend ten thousand dollars
on the crowdfunding project in a year. The wholesale investors with annual revenue more
than $250,000 and assets value more than $2.5 million are able to invest in crowdfunding
projects. The limits provided by crowdfunding act restrict the opportunity for entrepreneurs
to generate funding. Many market experts criticised the crowdfunding policies and stated that
the limits provided by the law are against the basic nature of crowdfunding principles. Other
countries such as the United Kingdom and the United States have also provided legislative
policies regarding crowdfunding method but there is no limit provided by them over the
funding.
Observation
In the United States, the Jobs Act 2012 enables corporations to raise funding through online
websites for their projects. The Securities and Exchange Commission regulates the policies of
crowdfunding and in 2016 it amended the act by introducing equity crowdfunding for the
companies12. Most of the entrepreneurs in the United States use crowdfunding websites such
as Kickstarter to generate investment for unique and original business ideas. The lack of
investment limit allows entrepreneurs to generate high investment which assists in the growth
of their corporations13.
There are several organisations that used crowdfunding as a primary method for generating
capital for their operations. One of the successful examples is Oculus Rift. Oculus Rift used
crowdfunding to generate investment for their virtual reality kit which was significantly
successful and it raised more than $2.5 million. The company uses such money to advance
their virtual reality technologies and in 2014 they were bought by Facebook for $2 billion14.
In 2015, more than $34.4 billion was generated by entrepreneurs throughout the world using
crowdfunding procedure. Even with all the limitations, Australian entrepreneurs have the
option to raise capital through crowdfunding process which can be beneficial for them. The
11 Tony Stumm. "The rebirth of crowd funding in Australia!." Governance Directions 69.2 (2017): 96.
12 Ross S. Weinstein. "Crowdfunding in the US and Abroad: What to Expect When You're
Expecting." Cornell Int'l LJ 46 (2013): 427.
13 N. Khadem. "Crowdfunding in Australia a step closer." The Sydney Morning Herald (2014).
14 Michael A. Stanko, and David H. Henard. "How crowdfunding influences innovation." MIT Sloan
Management Review 57.3 (2016): 15.

AUSTRALIAN CROWDFUNDING 6
steps taken by Australian government will improve their economy and promote small
entrepreneur businesses15.
The project of Howard Jones regarding increasing the life of batteries can revolutionised the
industry. A large number of people will be interested to invest in the project of Howard.
Therefore, Howard should choose the method of crowdfunding to raise capital for his project.
Howard will be able to generate a large amount of investment through crowdfunding
procedure. The regulation provided by the Australian government will provide various
exemptions to Howard such as lower corporate social responsibility disclosures16. Howard
will also have the benefit of controlling the decision for his company because, in case of
traditional sources, large corporations who invest in projects prefer to create their own
policies. Due to its benefits, crowdfunding is the better option for generating investment for
Howard Jones, than compared to traditional sources.
15 Denis Frydrych, et al. "Exploring entrepreneurial legitimacy in reward-based crowdfunding." Venture
Capital 16.3 (2014): 247-269.
16 Loreta Valanciene, and Sima Jegeleviciute. "Valuation of crowdfunding: benefits and
drawbacks." Economics and Management 18.1 (2013): 39-48.

AUSTRALIAN CROWDFUNDING 7
Conclusion
From the above essay, it can be concluded that crowdfunding has gained considerable
popularity and in the future, it is going to generate more attention as well. Crowdfunding
provides a source of investment to small entrepreneurs who cannot get investment from large
corporations. The regulations established by Australian government are criticized by market
experts, but they will assist the small corporations of Australian by providing them an
investment. As compared to other countries the Australian regulations provide more limits
over organisations while investing in the crowdfunding projects. In case of Howard Jones
project, crowdfunding is a better option than compared to tradition method due to its benefits.
Crowdfunding provides various exemptions and control to Howard than other sources,
therefore, Howard should select crowdfunding as a method for generating capital for his
project.

AUSTRALIAN CROWDFUNDING 8
Bibliography
Belleflamme, Paul, Thomas Lambert, and Armin Schwienbacher. "Crowdfunding: Tapping
the right crowd." Journal of business venturing 29.5 (2014): 585-609.
Cordova, Alessandro, Johanna Dolci, and Gianfranco Gianfrate. "The determinants of
crowdfunding success: Evidence from technology projects." Procedia-Social and Behavioral
Sciences 181 (2015): 115-124.
Eastwell, Michelle, Jessica Dale, and Felicity Dunstone. "Crowd-sourced equity funding is
coming to Australia." Governance Directions 69.7 (2017): 411.
Fitzpatrick, Jeff, et al. Business and corporations law. LexisNexis Butterworths, 2011.
Frydrych, Denis, et al. "Exploring entrepreneurial legitimacy in reward-based
crowdfunding." Venture Capital 16.3 (2014): 247-269.
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.
Hui, Julie S., Michael D. Greenberg, and Elizabeth M. Gerber. "Understanding the role of
community in crowdfunding work." Proceedings of the 17th ACM conference on Computer
supported cooperative work & social computing. ACM, 2014.
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.
Mollick, Ethan. "The dynamics of crowdfunding: An exploratory study." Journal of business
venturing 29.1 (2014): 1-16.
Stanko, Michael A., and David H. Henard. "How crowdfunding influences innovation." MIT
Sloan Management Review 57.3 (2016): 15.

AUSTRALIAN CROWDFUNDING 9
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.
Wash, Rick. "The Value of Completing Crowdfunding Projects." ICWSM 13 (2013): 7th.
Weinstein, Ross S. "Crowdfunding in the US and Abroad: What to Expect When You're
Expecting." Cornell Int'l LJ 46 (2013): 427.