By Trent Le Breton
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 examples).
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 a media release to provide guidance to crowd funding promoters.
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 obligations.
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.
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