Commercial and Corporation Law: Crowdfunding Research Report, 2017

This report provides a comprehensive overview of crowdfunding, examining its role in commercial and social contexts. It defines crowdfunding, differentiates between various models (reward-based, donation-based, and equity-based), and highlights successful campaigns like Star Citizen and "An Hour of Code for Every Student." The report delves into the Corporations Amendment (Crowd-sourced Funding) Act 2017 in Australia, comparing it with New Zealand's crowdfunding regulations. The analysis covers the eligibility criteria for companies, investor protection, and fund-raising limits. The report concludes by summarizing the key aspects for individuals seeking to raise funds through crowdfunding in Australia, emphasizing the legal framework and comparisons with international practices. The report also includes a bibliography of relevant articles, books, reports, legislations and other sources.

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Introduction
Capital is a key requirement for any company as for buying the inputs, for paying
salaries, for buying land, equipments and for numerous other works of any business, capital is
needed. There are different manners in which a company can raise its capital1. The conventional
methods include issue of shares, debentures, taking loans and the like. However, the
unconventional methods of the recent time are gaining a lot of popularity and one of these
methods is crowdfunding2. Often the people have a lot of great ideas but the shortage of funds
acts as a barrier in the idea being transformed into a success. In order to solve these issues, the
crowdfunding was born. Crowdfunding is especially successful in such cases where an
innovative product is created3.
In the following parts, the different aspects associated with crowdfunding have been
highlighted so that Howard Jones can raise the capital for developing his idea and bring the
product to the market.
Crowdfunding
Crowdfunding can be defined as one of the mediums of raising capital from the general
public, without issuing any shares or without having to mortgage the property. The people who
generally invest in crowdfunding include family, friends, venture capitalists and potential
investors. This is a collective approach of the efforts of a group of people and the capital in such
1 Paul Latimer, Australian Business Law 2012 (CCH Australia Limited, 31st ed, 2012)
2 Igor Micic, Crowdfunding: Overview of the Industry, Regulation and Role of Crowdfunding in the Venture Startup
(Anchor Academic Publishing, 2015)
3 Steven Dresner, Crowdfunding: A Guide to Raising Capital on the Internet (John Wiley & Sons, 2014)

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cases is mostly raised through online mediums, particularly the social media. It is a rising
medium of raising the capital and due to these reasons, the platforms for raising money through
crowdfunding platforms are increasing on daily basis4.
Through crowdfunding, a wider pool of investors becomes available and presents
different flexible fundraising avenues. Crowdfunding helps in raising funds for entrepreneurial
undertakings, artistic and creative plans, and even for the society and not for profit oriented
social entrepreneurship projects. Through the help of this medium, a number of start-ups have
skyrocketed, which would have just been dreamy ventures if they had not got the required funds.
Through crowdfunding, the venture capitalists are also attracted towards the start-ups due to the
wide reaching internet platform and through which, the gap between the outsized and undersized
organizations is bridged at the very beginning of the businesses5.
There are different manners in which capital can be raised by using the crowdfunding
mode for raising the capital. This includes reward based, donation based, and equity based. In the
rewards based crowdfunding, the capital which the people contribute in the business of the
person asking for crowdfunding is exchanged for a particular reward, which can be in form of
services or products which the company offers6. This helps in raising the capital without
incurring more expenses or without putting the ownership at stake. Donation based
crowdfunding denotes a communal endeavour for diversified people owing to certain benevolent
reasons. And lastly, the equity based crowdfunding is one in which the people investing are
4 Alexander Pascal Borner, Crowdfunding - A successful Way of New Venture Financing? (Tredition, 2016)
5 Walter Vassallo, Crowdfunding for Sustainable Entrepreneurship and Innovation (IGI Global, 2016)
6 Thomas Elliott Young, The Everything Guide to Crowdfunding: Learn how to Use Social Media for Small-
business Funding (Everything Books, 2013)

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made the part of organization as they are offered the company’s equity shares for their part of
contribution7.
Successful Crowdfunding
Crowdfunding is commonly used in commercial contexts for developing products, ideas
goods, and services; and are even used in charitable and social contexts. The example of each
one has been highlighted below.
In the history of crowdfunding done till this day, the most successful campaign, have
been the one of Star Citizen. This is an online space combat and trading video game and the
developers of it are Chris Roberts and Cloud Imperium Games. This crowdfunding campaign
was initiated back in October 2012 on the very website of this game, through IgnitionDeck
which is one of the crowdfunding plug-ins of Wordpress. Just one week since this crowdfunding
campaign began; the funds were being raised through the kick-starter campaign. The first goal of
this funding was attained in a swift manner. Once this was done, new associated objectives were
added by the developers to this funding campaign in order to expand the targets for this
crowdfunding. Due to the changed targets, the date of the campaign was also given a ten day
extension so that the closing date of the kick-starter campaign could be matched and further
capital could be raised8.
Merely two days before this campaign was supposed to conclude, a record of the most
crowdfunded gaming project was attained by this game and raised more than US$4.2 million.
7 Martha Damus, Online Crowdfunding Platforms: Developing Concepts for Supportive Instruments Beyond the
Funding Phase (Ikosom, 2014)
8 Laura Parker, Video Game Raised $148 Million From Fans. Now It’s Raising Concerns (10 May 2017)
<https://www.nytimes.com/2017/05/10/technology/personaltech/video-game-raised-148-million-from-fans-now-its-
raising-issues.html>

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Till the end of this first crowdfunding campaign, the company had successfully raised a sum of
US$6.2 million. And the funding continued to go on even after the first campaign was
concluded. During the mid part of 2013, this was declared as the most successful crowdfunding
venture everywhere as a total of US$15 million was raised through this campaign. And till the
present day, Star Citizen has successfully raised a value of over US$100 million by using
crowdfunding as the medium of raising money and is deemed as the best example of
crowdfunding in commercial context9.
Crowdfundings are not only successful in commercial contexts but also have shown great
results in social contexts. “An Hour of Code for Every Student” is a successful example of
crowdfunding campaigns which are started online and this campaign was started on Indiegogo
platform. The goal of this campaign was to raise a value of US$5 million. The end date of this
campaign was 15th December, 2014 and by its end date, this campaign had successfully raised
US$5,024,281 due to which, this campaign was declared as a successful one. The goal of this
campaign was to present every student in every school with an opportunity for studying
computer science10.
Corporations Amendment (Crowd-sourced Funding) Act 2017
The growing popularity of crowdfunding being used as a source of raising capital is
rising globally and it was claimed that Australia had been slow in recognizing, as well as,
adapting to this magnificent and omnipresent phenomenon. Due to this, the ASIC, i.e., the
Australian Securities and Investments Commission started its attempts towards the integration of
9 Dan Crawley, Star Citizen crowdfunding passes $100M mark with over 1M backers (14 December 2015)
<https://venturebeat.com/2015/12/14/star-citizen-crowdfunding-passes-100m-mark-with-over-1m-backers/>
10 Indiegogo, An Hour of Code for Every Student (2017) <https://www.indiegogo.com/projects/an-hour-of-code-for-
every-student#/>

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the crowdfunding in the present regulatory frameworks of the nation. In 2012, different
guidelines were issued in this regard11. This included the kind of reward which could be offered
to the contributors and the way in which the platform has to be used. This scheme has further
been classified as fundraising or administered investment plan pursuant to the Corporation Act,
200112 Chapter 6D13.
In March 2017, a new legislative framework was enacted in the nation for the regulation
of crowdfunding and was presented under the Corporations Amendment (Crowd-sourced
Funding) Act 2017. The date of commencement of this act is 29th September, 2017 and from this
date onwards, the crowdsourced funding would be available to the companies. Though, this is
limited to the public unlisted companies. The purpose of this legislation is to extend the crowd
funding regime to the proprietary companies and to give away with the need of the proprietary
companies to make a transition into the public companies for getting access to the
crowdfunding14.
The Federal Government foreshadowed the extension of this legislation in the budget
presented in May 2017 and the Bill was even circulated to the treasurer. Through this act, the
eligibility of crowdfunding covered under section 738H of the Corporations Act, 2001 is set to
be expanded to the proprietary companies, which are able to fulfil the laid down criteria15. An
attempt has been made to add the special investor protection related provisions for the
proprietary companies which access this regime. Also, the temporary corporate governance
11 Leigh Schulz and Domenic Mollica, The regulation of crowdfunding in Australia: where are we and what’s to
come? (2015) <http://forms.minterellison.com/files/Uploads/Documents/Publications/Articles/Aus-banking-and-
finance-law-bulletin_leigh-schulz-anddomenic-mollica_aug2015.pdf>
12 Corporation Act, 2001 (Cth)
13 Corporation Act 2001, ch 6D
14 TimeBase, Proposed Legislation to Enable Crowd-sourced Funding for Proprietary Companies (08 June 2017)
<https://www.timebase.com.au/news/2017/AT04252-article.html>
15 Corporation Act 2001, s738H

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concession are attempted to be removed for the proprietary companies which register or convert
as public companies for accessing crowdfunding16.
This act also presents the limits for crowdfunding for the companies. Through this act,
the company is not prevented from raising capital form the professional investors till the time the
limit reaches the Assets and Turnover Test. A limit of $5 million has been set for raising funds
from this source and this further has a limited investment of $10,000 for each investor in a period
of twelve months17.
Comparison with Crowd funding regulations of New Zealand
This global event has been recognized in developed nations like Italy, United States of
America and New Zealand, as a rising source of raising capital. Crowd-sourced equity funding
(CSEF) is a comprehensive scheme which had been introduced in the middle of 2014 in New
Zealand and has been majorly referred to in the debates being carried on in Australia regarding
crowdfunding. The crowdfunding scheme of New Zealand provides that all of the incorporated
entities are allowed to raise capital through the use of CSEF. A reference to this can be seen in
the new regime being adopted in Australia where the attempt is made to include the proprietary
companies in the ambit of crowdfunding. In New Zealand also, limits have been imposed over
the sum that can be raised through crowdfunding and as per the provisions of New Zealand, the
issuer can raise a value of NZ$2 million during a period of twelve months18. However, an
16 At 13
17 Shannon Finch, Robert Wright, Anthony Boogert and Charles Davies, Crowd-sourced Funding Bill passes Senate
(22 March 2017) <http://www.kwm.com/en/au/knowledge/insights/crowd-sourced-funding-bill-australia-senate-
investors-public-companies-20170322>
18 Crowdready, New Zealand Equity Crowdfunding - 2nd Year in Review (16 October 2016)
<http://www.crowdready.com.au/news-1/2016/10/nz-equity-crowdfunding-2nd-year-in-review>

CROWDFUNDING 8
exception is present for this limit; and as per this exception, the capped limit is not applicable on
the contributions of the wholesale investors19.
There is also a need for signing the risk acknowledgement statement by the investors for
the CSEF scheme. The Financial Markets Conduct Act, 201320 (“FMC Act”), as well as, the
Financial Markets Conduct Regulations, 201421 (“FMC Regulations”) are two substantial
legislative frameworks in the nation which came into force on 01st December, 2014 for allowing
crowdfunding and for the peer to peer lending services. Part 6 of the FMC Act provides that
there have to be three main regulations for stating the importance regarding the crowdfunding
benefits22. And included in this are the licensing of crowdfunding service provides, the limit
imposed, the setting out of the disclosure requirements for saving the investors and the start-ups
and adoption of suitable system and standards.
The very bill on the basis of which the new legislative framework had been drawn was
majorly influenced by the legislative framework of New Zealand. This can be seen in the
inclusion of limits. However, the rules and regulations applicable in New Zealand are more
comprehensive in comparison to the new legislative framework of Australia.
Conclusion
In the preceding parts, an attempt was made to highlight the different aspects of
crowdfunding for Howard Jones so that he can take care of these regulations when he makes an
19 Duncan Cotterill, Crowd funding and small offers – what are the unintended consequences for issuers? (28 April
2016) <https://duncancotterill.com/publications/crowd-funding-and-small-offers-%E2%80%93-what-are-the-
unintended-consequences-for-issuers>
20 Financial Markets Conduct Act, 2013 (NZ)
21 Financial Markets Conduct Regulations, 2014 (NZ)
22 Financial Markets Conduct Act 2013, pt 6

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attempt to raise funds through crowdfunding in Australia. The success of crowdfunding in the
field of social and commercial context has been highlighted through two examples. And lastly,
the new legislative framework, which is set to be applicable from this year for the Australian
nations and its comparison with the legislative framework of New Zealand, has also been made
to clarify the laws which Howard has to take special care of.

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Bibliography
A. Articles/ Books/ Reports
Borner AP, Crowdfunding - A successful Way of New Venture Financing? (Tredition, 2016)
Damus M, Online Crowdfunding Platforms: Developing Concepts for Supportive Instruments
beyond the Funding Phase (Ikosom, 2014)
Dresner S, Crowdfunding: A Guide to Raising Capital on the Internet (John Wiley & Sons,
2014)
Latimer P, Australian Business Law 2012 (CCH Australia Limited, 31st ed, 2012)
Micic I, Crowdfunding: Overview of the Industry, Regulation and Role of Crowdfunding in the
Venture Startup (Anchor Academic Publishing, 2015)
Thomas Elliott Young, The Everything Guide to Crowdfunding: Learn how to Use Social Media
for Small-business Funding (Everything Books, 2013)
Vassallo W, Crowdfunding for Sustainable Entrepreneurship and Innovation (IGI Global, 2016)
B. Legislations
Corporations Act, 2001 (Cth)
Financial Markets Conduct Act, 2013 (NZ)
Financial Markets Conduct Regulations, 2014 (NZ)

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C. Others
Cotterill D, Crowd funding and small offers – what are the unintended consequences for issuers?
(28 April 2016) <https://duncancotterill.com/publications/crowd-funding-and-small-offers-
%E2%80%93-what-are-the-unintended-consequences-for-issuers>
Crawley D, Star Citizen crowdfunding passes $100M mark with over 1M backers (14 December
2015) <https://venturebeat.com/2015/12/14/star-citizen-crowdfunding-passes-100m-mark-with-
over-1m-backers/>
Crowdready, New Zealand Equity Crowdfunding - 2nd Year in Review (16 October 2016)
<http://www.crowdready.com.au/news-1/2016/10/nz-equity-crowdfunding-2nd-year-in-review>
Finch S, Wright R, Boogert A, and Davies C, Crowd-sourced Funding Bill passes Senate (22
March 2017) <http://www.kwm.com/en/au/knowledge/insights/crowd-sourced-funding-bill-
australia-senate-investors-public-companies-20170322>
Indiegogo, An Hour of Code for Every Student (2017) <https://www.indiegogo.com/projects/an-
hour-of-code-for-every-student#/>
Parker L, Video Game Raised $148 Million From Fans. Now It’s Raising Concerns (10 May
2017) <https://www.nytimes.com/2017/05/10/technology/personaltech/video-game-raised-148-
million-from-fans-now-its-raising-issues.html>
Schulz L, and Mollica D, The regulation of crowdfunding in Australia: where are we and what’s
to come? (2015) <http://forms.minterellison.com/files/Uploads/Documents/Publications/
Articles/Aus-banking-and-finance-law-bulletin_leigh-schulz-anddomenic-mollica_aug2015.pdf>

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TimeBase, Proposed Legislation to Enable Crowd-sourced Funding for Proprietary Companies
(08 June 2017) <https://www.timebase.com.au/news/2017/AT04252-article.html>