John Lennon sang “Power to the People” way back in 1970. Today, with the global reach of the internet and social media, the ability for companies to access the power of the crowd is greater than ever before. And this extends to raising capital, an avenue that was boosted in September 2018 when the Australian Government changed the game completely, passing the Corporations Amendment (Crowd Sourced Funding for Proprietary Companies) Bill 2017.
FUNDING CAN MAKE ALL THE DIFFERENCE
So, you’ve got an idea for an absolutely killer product that you know can take off like wildfire, if you can just get some capital together to bring your baby to life. But you don’t have any rich family members, no wealthy friends, no big business network, no assets to borrow against and no access to venture capital funds. What to do? One option that is now much more readily available than ever before is Crowd Sourced Funding (CSF), also known as Equity Crowd Funding.
HOW DOES IT WORK?
The recent CSF rule changes mean that Australian private companies can raise capital through CSF. Previously, companies needed to be listed public companies or unlisted public companies in order to raise capital this way. The principle of CSF is that you can attract a small investment from many people rather than needing to attract a big investment from a few people. If your idea is compelling enough to attract interest from members of the public who may just be small investors, then you could answer your funding question that allows you to bring your product to market.
The CSF amendment changes the Corporations Act 2001 to allow CSF for private companies. There are requirements for additional reporting, disclosure, asset limits, revenue limits, accountability standards and such, but these requirements are not onerous and very achievable for companies with a good management structure in place.
Under the CSF rules, up to $5M per year can be raised by private companies and they allow a “retail investor” (i.e. those that do not have to meet the “sophisticated investor” test) to invest up to $10,000 in a company over a one-year period.
If a company goes down the CSF path, they must utilise the services of a licensed crowd sourced funding provider, also known as an equity crowd funding platform. The CSF provider must hold an Australian Financial Services Licence (AFSL) that specifically allows them to provide CSF services.
There are a number of CSF providers in Australia such as Birchal, Venture Crowd, Equitise, Pledge Me and more. The CSF provider holds the licence that allows investors to buy shares in a private company, and they provide the online platform that connects companies to investors.
The equity crowd funding campaign lasts for a limited time, generally up to a maximum of three months. This allows the company to create a proper campaign, with a fixed start and end date. In the pre-investment stage before it opens, the company can generate interest and drive engagement with potential investors. If you’re a customer-facing business, a great place to start for potential investors is your customer base. Letting them know you’re doing a capital raise and that they have an opportunity of owning a slice of a company that they already know and do business with can be a great incentive.
The company must set a target for the equity raise, with a minimum and maximum limit. If the minimum amount is not reached, the equity raise does not proceed, and no funds are invested. If the maximum is reached, the capital-raise closes earlier than the planned finish date. So, it’s important to do your homework and get a solid handle on these upper and lower limits.
Companies doing equity crowd funding must prepare a detailed offer document, which explains the company, structure, management system, market, advantages, risks, potential, financials and other important elements of its function and operation. This is the key selling tool to attract potential investors.
In the early stages, potential investors can provide an expression of interest for the campaign, which puts them on the list of people for the company to keep informed about progress and for follow-ups. Once the campaign goes live, people can pledge an amount that they intend to invest in the company, which gives a running total of funds raised as the campaign progresses.
Effective communication is key to a successful campaign. Getting your message out to as many people as possible as efficiently and effectively as you can could be the difference between a successful raise and a flop. CSF is not to be taken lightly – there’s a great deal of time and effort required to go down this path, so it’s critical that you make an informed decision and go all-in on the process.
The power of the crowd has opened up a whole new opportunity for companies to access a new source of capital that could take your business to the next level. It’s definitely worth a look.