Crowd-Sourced Funding: eligibility and considerations

The Corporations Act 2001 (Cth) (Act) generally limits the number of shareholders for a private corporation to 50.

However, there is an exemption in Part 6D.3A of the Act which allows private companies with less than $25 million in consolidated gross assets and less than $25 million in consolidated annual revenue (including related parties) to use crowd source funding (CSF) to raise up to $5 million a year.

Those shareholders which are sourced using CSF are not counted towards the 50-shareholder limit.

Below, we discuss the various requirements for companies to access these exemptions:

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Crowdfunding eligibility requirements

The company must:

• be a private company with a minimum of two directors;
• have its principal place of business in Australia;
• have a majority of directors ordinarily residing in Australia;
• not exceed the assets and annual revenue caps of $25 million (including any assets and revenue of related parties);
• not be listed on a financial market in Australia or overseas; and
• not have a substantial purpose of investing in other companies, entities or schemes (including related companies).

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The offer must:

• be made by an eligible company (i.e. meet the requirements in the table above);
• expressly state that the offer is made under the ‘CSF regime’;
• be an offer for the issue of fully-paid ordinary shares;
• not be used to raise funds to: (a) invest in other companies, entities or schemes; or (b) loan to related parties (other than wholly-owned subsidiaries);
• not be an offer to raise more than $5 million in any 12-month period; and
• be limited $10,000 for each retail investor in any 12-month period.

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The offer document must contain:

• particular risk warnings;
• information about the company, such as the company name, ACN, registered address, etc;
• information about the offer itself – a description of the securities on offer, the minimum subscription amount, etc;
• a description of the cooling off rights; and
• a description of a communication facility for people to make and see posts about the offer document and ask questions.

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Potential risks of CSF

CSF can be attractive for companies which are struggling to obtain funds from traditional sources. However, there are some potential issues which should be considered before jumping in:

• there will be more people to keep updated with the operations of your company and CSF shareholders may be less sophisticated than those who invest in a traditional capital raising;
• completing further rounds of raising can be complicated by the presence of CSF shareholders on your company register because not all CSF shareholders will qualify participate in such further rounds; and
• there will be a greater amount of company secretarial work to keep the company register updated.

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If you would like more information on how your business can take advantage of the rules for crowd-source funding, our team would be more than happy to assist.

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This article includes general information only and is not specific to your situation.

If you require assistance in relation to anything contained within this article, please contact us.