BLO5540 Business and Company Law for Process of Crowd Funding

 

a. Define and explain the meaning of crowdfunding and how it actually works as a mechanism for capital raising.

 

b. Give at least one example of crowdfunding used in a commercial context that has led to the development of a commercial idea, product, good or service and at least one where crowdfunding was successfully used in the social or charitable context.

 

c. Research and then explain to Howard the legislative framework enacted for the regulation of Crowdfunding in Australia in March 2017 under the Corporations Amendment (Crowd-sourced Funding) Act 2017. Compare the Australian approach to the regulation of Crowdfunding with at least one international jurisdiction’s approach to the regulation of crowdfunding.

Answer

Introduction

The concept of crowd funding is gaining significant popularity during the last decade. Most of the countries have developed crowd funding legislation in order to ensure that crowd funding is conducted in a proper manner. It has been provided by Fitzpatrick that any person who has a dream in relation to starting a business can fulfill it through the process of crowd funding. Anita Sakeesian in relation to crowd funding states that, “I find crowd funding to be one of the most ethical ways to continue doing the work that we do because the idea is that I want my videos to be free and available to everybody, and that's why I use YouTube and online platforms”. This paper describes crowd funding and discusses how the process works. The paper also details about prominent campaigns of crowd funding in Australia. Finally a detailed comparison is done by the paper in relation to crowd funding legislations of New Zealand, United States and United Kingdom with that of the newly developed legislation of Australia.

Definition and process of crowd funding

When a company collects small donations from the general public in order for them to introduce a new plan of action for the business, it’s referred to as ‘Crowd Funding’. This process is organized by advertising on social, internet and other media platforms in order for it to come in contact with more potential investors. This process is used to expand the limited number of investors in order for it to grow entrepreneurship and gain new investors who would donate from other unconventional means.

As discussed previously, these projects not only expand the scope of the entrepreneurs by introducing more and more investors, but, are also able to incur more capital and fulfill their plans successfully. Such projects are often promoted by giving away rewards to the stockholders who are willing to invest on the company based on their donation. Equity Funding is popular among new companies as they prove to be a valid kick starter without giving away much control to the capital investors by providing equity positions instead.  

Crowds Funding is also done by extracting donations from the willing stockholders who are willing to invest on the company. These new investors are often provided a token of appreciation when the popularity of such donation based funding increases.

As a kick starter for the newly formed companies, this process of funding is quite useful and it successfully fulfils the purpose of it without the company losing sight of its goal. It is not at all necessary that the company has to be public; there are no strict guide lines. Even sole proprietors are allowed to be funded this way without worrying about the seven member criteria.

Successful campaigns in Australia

Although there have been a lot of accomplished crowd funding schemes in the Australian continent, here, we’re going to consider only a couple. One of them would be on business basis, the other one is on donation and charity.

It is now seen in Australia that Bee keeping has taken a revolutionary turn in the business world, and the phrase “Flow Hive” has turned famous. A revolutionary idea that changed the way of how honey was extracted from the bee hives was possible only because of the funding schemes and generated more than $16 Million as market profit. Cedar and Stuart Anderson, the father and son duo, invented ‘Flow Hive’, which later became the objective of every bee keeper. The invention constituted of plastic frames that were cut in the shape of honeycomb divisions in cellular levels. The bees were supposed to store honey and when filled, the keepers would pull a lever from the outside and extract honey, leaving a container for bees to produce more. The entrepreneurs had no idea that their invention would revolutionize the ways of bee keeping from a mere kick starter page on the internet aiming for just $96952. They had no idea that funding would exceed $2.7 Million in a matter of 24 hours. In just 8 weeks, they had over $16.8 Million and delivery orders from 140 countries around the world.

Likewise, there is another project that aimed for a social cause. CORENA (Citizen Own Renewable Energy Network Australia) was the organization that made the hopes of several a reality. It had been a goal of several men to help reshape the changing climate and help in the environmental development, but, to accomplish something this big, funding is required. The chairperson of CORENA noticed that if all likeminded people would unite and pay a significant amount for the cause, sufficient funds can be generated in order to fulfill the goal. The organization now is started its “Quick Win” by installing solar panels for several small NPO’s and other institutions. Their “Big Win” aims for the installment for a complete thermal solar power plant and aim for a better future.

The projects mentioned above were able to successfully claim capital from both inside and outside their national boundaries. In fact, they have grown so big that sub communities are required for their management. CORENA has received a donation of $60000 for its quick win and $40000 for the big win, donations still come and new panels are successfully installed in places like the Galwer Community house and Tulgeen Disability Services.

Comparison of different jurisdictions

Here, we will study the different lawful legislations passed in relation to the scheme of crowd funding as well as study how the Corporation’s Amendment Act 2017 played its role regarding the same issue.

Inspired by the changes made on the crowd funding laws by countries like UK, US and New Zealand, Australia too decided to introduce a few amendments with the new legislation that was implemented on the March of 2017, named as ‘Corporations Amendment Crowd Sourcing Fund Act’ . It directs small startup companies to issue a large number of equity shares to an even larger number of investors in order to kick start themselves. Though, while rising capital, they often come across problem or hurdles like requirement of Onerous Disclosure, governmental boundaries and corporate governance issued strongly by the Corporations Act 2001. The law guarantees the start of several new businesses by providing them with funds from various new conventional sources.

When a huge crowd of investors provides funding to a company for it to grow and fulfill its objectives, by providing equity, a company is enabled. Though, it is difficult for the small businesses in the country of Australia to provide the investors with the required equity shares. This situation arose due to the onerous fundraising mentioned in the Corporations Act and its various compliances in the Chapter 6D. This also includes ever other obligation resulting from the act or other laws. It can also be said that small organizations find it difficult to provide equity as the process is expensive. There are legislative frameworks that support these funding procedures in more than 10 countries including the United States of America, United Kingdom and New Zealand. The rules in Australia are obviously slow paced and restrictive when done to gain funds from larger audiences of investors. Though, it is said by the government and the law authorities that they provide a long term support in reducing competitiveness in the market. The government hopes to evolve small businesses in the course of time with these laws.

The above bill and all the laws are applicable only on companies who have a yearly turnover of less than $25 million which also includes its assets. These companies are not subjected under the category of a public company. With the help of crowd funding, such companies are allowed to raise a sum of $5 million at the most in a time set of around 12 months. Such companies are now subjected to new discloser laws that will govern them on how they are to deal with the investors. The newly implemented laws can be called less restrictive compared to the previous ones of the Corporations Act 2001 which included providing documents and prospectus in order to start an issue.

The recent bill that was passed proposed lawful changes in the ways of providing crowd funding. It was decided that CSF provisions are valid only for proprietary companies with more or equal to 3 directors. It was further finalized that such companies are no longer bound to have only 50 share holders, they can have more. These companies who are now fully subjected to the CSF have to now formulate and show a full financial report respecting the standards of accounting. Companies with $1 million or more with the CSF will have their reports audited at the year end.

The new laws provide investor protection legislations that keep them safe while dealing in the crowd funding of equity shares. This includes limiting the amount of investments to a maximum of $10000 annually. They are supposed to make an acknowledgement of risk while engaging in the activity. The law allows a 5 day cool off limit after an investment is done. Such laws as in UK and US are applicable to only one person, and not the whole lot that can invest during a year. The laws don’t mention any small startups that would increase the funds.

The Australian laws exclude all the private firms from the new legislations unlike the countries of US, UK and New Zealand. This part of the law was subjected to heavy criticism as they said that the laws overburden the companies with unnecessary administrative weight and hence restrict their development and growth.

To provide relief to the newly formed public companies that fall under the above criteria of the Corporations Act 2001, it was stated that the companies will be given a time limit of 12 months to engage themselves in public funding and get funded as per the registrations.

An offer document is needed as per the amendments of the act and such a document has to comply with requirements needed for proper funding preventing it from false statements and fraudulent attempts, the document not only provides the company with security, but also provides the company with any form of protection if a certain document is found as defective respecting to a certain investors as in the UK.

Hence, it is seen that the legislations that are newly provided by the Australian law are similar with other countries and have evolved to meet with the financial play of the country. Though there is some criticism, it can be said that the law is very effective.

Conclusion

It has been provided by Wade Dokken that “Success yourself with people who believe in your dream”. The process of crowd funding is gradually but efficiently creating its place in corporate world. It can be argued that there are significant chances that the process can be utilized for the purpose of fraudulently raising money. However such defects in the process can be amended through the provisions of the crowd funding legislations. The process can be significantly beneficial to those persons who have financial support but have an idea which can potentially be worth millions. For he investors the process provides an opportunity to sit back and earn.

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