You may have read in the press about an increasingly popular
method of raising funds for start-ups known as 'crowd
funding'. It is particularly popular fundraising technique for
those in the IT industry, especially software designers and
developers, and is generally conducted via a web-based platform
(Pozible, iPledg and Project Powerup are a few Australian
The usual method is for the start-up to post a description of
their product, work or idea on the web and to invite
'supporters' to donate cash, often in consideration of a
promise to deliver some kind of 'gift' to the supporter
(such as sample products) in due course.
With the growth in popularity of such sites, ASIC has published
media release to provide guidance to crowd funding
It is unlikely that the standard crowd funding arrangement will
attract ASIC's attention. However, the type of 'reward'
offerred to the donor needs to be carefully considered.
For example, a software developer seeking funds to develop some
new software could offer a donor shares in the developer's
business entity. ASIC could very easily consider such an offer as
"dealing" in a financial product, and require the
individual to hold a financial services licence. Were the reward a
free licence to use the software developed, the arrangement would
be unlikely to fall wtihin the regulatory arm of ASIC.
Difficulties can also arise where supporter funds are pooled or
used in common enterprise to produce financial benefits (such as a
reward or discount on future products and/or services). ASIC may
consider such arrangements to be a managed investment scheme and
expect the promoter to comply with extensive obligations applicable
to such schemes under the Corporations Act. This can include a
requirement to hold an AFSL and to register the managed investment
scheme – an expensive exercise for a start-up.
Also, if the reward includes shares or other financial products,
the promoter will generally need to issue a disclosure document, a
process which can obviously put a significant dent in the financial
position of a start-up.
A promoter who offers shares via a crowd funding site or whose
arrangement is considered to be a managed investment scheme could
face serious penalties for failing to comply with the Corporations
Act. The maximum penalty for failing to register a managed
investment scheme is 200 penalty units ($22,000), 5 years
imprisonment or both. Offering shares or financial products without
proper disclosure has similar consequences.
The contractual relationship between promoters, contributors and
crowd funding platforms can also create problems. Many crowd
funding platforms do not involve themselves in issues that come up
between promoters and contributors. For this reason it is important
that users of such websites review the terms and conditions
carefully and ensure they are fully aware of their rights and
The Jumpstart Our Business Startups Act (JOBS Act) was
introduced in the US in April 2012. The JOBS Act provides certain
disclosure exemptions in relation to shares issued to contributors
via crowd funding platforms. These exemptions only apply if the
total value of shares issued to contributors is less than $1
million. Crowd funding platforms are also required under the JOBS
Act to register with the US Securities and Exchange Commission.
While the JOBS Act only applies to US entities, it indicates
support for the raising of venture capital via crowd funding
platforms on the international stage. It will be interesting to see
whether ASIC changes its 'wait and see' approach in
response to the developments in the US.
Steven Humphries and Trent Le Breton of McCabes' Sydney
office advise on M&A, private equity, capital raising and
general corporate law. Both Steven and Trent have extensive
experience documenting and negotiating various transaction types
including share and asset sales, acquisitions, corporate
reconstructions, as well as IPO's, placements and other public
and private capital raisings.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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This part will cover the legal position in relation to promotional materials and misleading and deceptive conduct.
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