Crowdfunding Laws Bring an Exciting Change

Last year, the Federal Government announced it would introduce new laws to enable “Mum and Dad investors” to invest directly in start-up companies.

Some of the changes to existing laws include:

  • a 5 day cooling off period;
  • an increase in the allowable cap on funds to be raised;
  • a higher level of money to be held, up to $5 million.

The Corporations Amendment (Crowd-sourced Funding) Bill 2015 aims at allowing small companies to attract investment in their business by the public injecting equity via “crowdfunding” as an on-line method.

This is a revelation in the prior laws and runs against the regulations and political background which have resisted this method of capital raising.

The key amendments are to the Corporations Act 2001 and will provide for a large number of shareholders to apply for shares in return for share capital in the start-up companies.

Despite this forward thinking development in the law there are some sections of the business community that have expressed frustration with the proposed laws on the basis they do not go far enough and impose too many restrictions. The experience in other countries, such as Israel, point to alternative methods which are faster and less regulated in the process of raising essential capital for these new companies.

As a form of consumer protection, the Australian legislation now requires that investors must go through appropriately licenced crowdfunding procedures.

These procedures require a high level of due diligence on the proposal, to avoid likely misleading or deceptive conduct by company promoters.

The public as investors are “consumers” under the Act and are strongly encouraged to seek their own independent advice on the potential investment. The requirements include investors confirming they make their own decisions on the level of risk in losing their investment, by an acknowledgement statement required to be signed as part of the investment process.

It is interesting to note that the Prime Minister, Malcolm Turnbull, previously stated the preferred model is that adopted by New Zealand in 2014. That model allows the number of potential investors to be unrestricted (not limited to 20). A larger number of investors can purchase smaller amounts of shares, without a Prospectus. This resulted in 21 companies raising $12.1 million with an average investment of $4,100.00. Let’s wait and see what happens over the coming months.

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