There’s no doubt that the speed of doing business continues to accelerate.  Increasing numbers of entrepreneurs, social, artistic and not for profit groups are turning to crowdfunding as a new avenue that bypasses traditional, time consuming and often arduous capital raising efforts.

Any challenge or obstacle emerging from the crowdfunding phenomenon certainly doesn’t relate to its popularity.  Recent reports from The Huffington Post highlight that over 2 million people pledged about US$310 million on the popular crowdfunding platform Kickstarter in 2010 and this is predicted to grow to $6 million in 2013.  

The main challenge is a regulatory one and it’s definitely symptomatic of the times we’re living in.  That’s because old laws and traditional regulatory paradigms are struggling to adapt to new ways of doing business.

Recent crowdfunding statistics are hardly surprising since they reflect the vehicles’ unique value proposition; that is, fundraising that derives its cost-effectiveness from smaller contributions from a dispersed (and often globally-oriented) investor community that collectively makes a better investment decision than the individuals who comprise it.  In his 2004 book James Surowiecki refers to this phenomenon as “the wisdom of crowds”.

But, while crowdfunding is an appealing and innovative way to raise funds there are also a number of legal implications that must be considered and addressed prior to kicking off any campaign.

  • Guidance from ASIC, the Australian regulator, confirmed that if crowdfunding involves an offer to issue securities, or constitutes an invitation to apply for securities, then the issuer may be required to produce a prospectus or other disclosure document.
  • However, the corporations law exempts a securities offer from disclosure if no more than 20 investors participate and cumulatively the offer’s value doesn’t exceed $2 million over a 12-month period. This exemption is typically directed to fundraising in the closely-held context – such as family companies or close business ‘partners’.

In the US the JOBS Act has been enacted to facilitate equity-based crowdfunding but it will only become operative once the SEC issues its eagerly awaited crowdfunding rules to supplement the legislation.

Striking the right regulatory balance is of key importance and so it is understandable that ASIC should proceed cautiously down any path of reform.

If you’re planning on crowdfunding an idea or project, think about the legal implications of a financial reward to be offered to investors. Remember, it’s important to properly manage the commercial relationships and risks by appropriately structuring the terms of engagement between the relevant players before the crowdfunding arrangement is set up.

If you would like to have a chat about your crowdfunding project or idea, don’t hesitate to contact us.

This is an area where you get one shot to do things right.