Options for small businesses to access finance are set to change from 29 September, 2017 with the recent passing of crowd sourced funding (CSF) legislation. While the concept of crowdfunding isn’t a new one for many start-ups and micro businesses, from the end of September, unlisted companies with annual turnover and gross assets of up to $25 million will be able to issue shares to the general public. As this is a fairly new concept, we’re taking a look at what equity crowdfunding is and whether it will suit your business.
How is it different?
The process is similar to companies issuing a prospectus to raise capital as part of an initial public offering (IPO) but is more suited to small businesses. It’s also different to traditional crowdfunding activities, which are usually donation or rewards based, in that investors will actually buy a stake in the company. As a result of receiving shares, investors are more likely to contribute larger sums of money than they would to traditional crowdfunding campaigns. It is also more likely to appeal to regular ‘mum and dad’ investors.
Is it for everyone?
Many people assume that crowdfunding is only for tech companies but there are a number of business owners, of both established and new operations, that are considering using this method to start or grow their enterprise. However, owners need to be aware that there are detailed criteria they need to meet and they could have potentially hundreds of shareholders to deal with. There are also requirements in terms of the number of directors and compliance obligations, so businesses owners need to consider if an angel investor or private equity firm might not be a more suitable source of funds.
Business owners interested in pursuing equity crowdfunding will need to partner with a licensed intermediary or crowd sourced funding platform (Birchal and Equitise are two possible options).However, it is not up to the CSF platform operator to find investors as that will be the responsibility of the business owner. There will also need to be requisite financial reporting systems in place along with procedures for managing the large number of shareholders, as retail investors will be limited to contributing a maximum of $10,000 per company per year. Due to this limitation, the business will need to attract a large number of investors and will only have a limited time to do so as the CSF offer document is only ‘live’ for 90 days. Compare this with a prospectus for an IPO which remains open for 12 months and retail investors can put in whatever amount they desire. As a result, companies raising capital for an IPO tend to raise a lot more money.
Is it worthwhile?
Due to the amount of detail required in the CSF offer document and work involved in getting the funding, equity crowdfunding is only really cost effective for amounts of $350,000 or more. ASIC has prepared a template to help with preparing the documentation but the amount of disclosure required depends on the circumstances of each company and the directors. Companies raising funds through a CSF platform also benefit from a number of report and governance concessions including not being required to hold an annual shareholder meeting and not being audited if their capital raising is less than $1 million. These concessions only apply to unlisted public companies established after 29 September, 2017.
Steps to take:
- Get advice from your accountant or business adviser
- Partner with an intermediary
- Complete legal/financial due diligence
- Convert to public company (after 29 September, 2017)
- Appoint at least three directors
- Prepare a capital management strategy
- Identify potential investors
- Prepare a CSF offer document
- Your business must have revenue and gross assets less than $25 million
- Only ordinary shares can be issued
- CSF offer document is live for only 90 days
- Each investor limited to $10,000 pa
- Maximum raising of $5 million pa
If, after weighing up all the pros and cons, you think that you might like to explore the option of equity crowdfunding for your business, make an appointment to speak to one of our team to help you prepare for when the legislation comes into effect.