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By Gianvito Grieco
Many of the innovative inventions, technologies and other projects that have found business finance on popular crowdfunding websites in the U.S. and Europe would have been deemed too risky for traditional funding methods. The need for a non-traditional source of business funding for such projects is strong, and crowdfunding has filled this gap. In Australia, however, legislation to enable crowdfunding for business finance failed to pass earlier in the year, was re-introduced in late November 2016 – but remains controversial.1
Even outside Australia, a recent survey shows that only 2 percent of business owners have used a crowdfunding platform to finance businesses. One of the most common reasons for not using crowdfunding is a lack of understanding about how it works.2 This post aims to explain crowdfunding and where it stands in Australia.
There are at least four distinct types of crowdfunding: reward, donation, equity and lending.3 All can be used for business finance, though the latter two are most appropriate. Each type has its own different set of risks and benefits for campaigns and their backers.
Today, the most common form of crowdfunding is rewards-based. These campaigns set various levels of rewards incentivising backers to donate more money. For example, for an AU$10 donation a business may choose to include a backer’s name on the list of donors on its website; AU$1,000 may buy the donor a personal tour of the factory. It’s all up to the creator. A common business financing approach on the most popular rewards-based sites is to offer yet-to-be-built new products for an upfront price. That’s what Cedar Anderson and his father Stuart, of Byron Bay, did last year after they designed a tap that harvests honey without disturbing the beehive. They hoped to raise AU$95,000 in their eight-week campaign on rewards-based crowdfunding site Indiegogo, but instead the Andersons raised more than AU$15 million from more than 35,000 investors.4
Backers funding donation campaigns don’t seek anything in return. Though this type of crowdfunding can be used for business finance, it’s much more common for individuals with an immediate personal need, charities supporting worthy causes and artistic endeavours. The Arts Law Centre of Australia points out that donation-based crowdfunding is particularly well-suited to artists but warns that the donations are not tax-deductible for donors but may (depending on circumstances) be considered income for the artist and also subject to GST.5
Equity crowdfunding allows backers to take an equity stake in return for providing business financing. Several countries have equity crowdfunding as a new business financing source, and have introduced laws to regulate crowdfunding platforms while opening up investment opportunity more widely. The challenge for these laws is to balance investment opportunity and the protection of “unsophisticated” investors – essentially, anyone over the age of 18. For example, the new bill introduced in late November 2016 restricts business finance through crowdfunding to unlisted public companies, protecting investors from private companies not subject to public reporting requirements.6
Because Australian crowdfunding legislation has yet to pass, Australian citizens who wish to participate in crowd-sourced equity financing (CSEF) at present must be “sophisticated or wholesale” investors, meaning they must have had income of AU$250,000 or more for two years running or minimum net assets of AU$2.5 million.7
While CSEF platform Equitise says it has raised AU$30 million for Australian and New Zealand businesses, it operates out of New Zealand, where crowdfunding legislation already exists.8
Looking to the future, equity crowdfunding has the potential to expand significantly. Equity investments that in the past may have been available only to a select group of investors, such as venture capitalists and private equity firms, could be open to a much wider group of people. Continued development of regulatory frameworks will provide investors with protections and companies with innovative ways to raise funds, providing new and small businesses with a potentially important new business finance tool.
Unlike the crowdfunding types discussed above, business funding raised through lending crowdfunding is paid back in a set amount of time, with interest. Crowdfunding platforms provide investors with the opportunity to make money on a wide array of loans. Stapleton International, consultants to the engineering and construction industries, obtained the first crowdfunded loan offered by NSX-listed CoAssets earlier this year, for AU$105,000.9 Many lending crowdfunding platforms also serve as currency transfer platforms, so that lenders can execute foreign exchange when lending their currency to a recipient in a foreign country.
Projects are started for a variety of reasons other than raising money. Crowdfunding is regularly cited as a way of getting direct feedback from the public about how to improve a new or existing idea.10 This can save a business a great deal of money by testing for public demand before rolling out a product or providing a proof-of-concept.
Businesses also sometimes utilise a crowdfunding campaign as a marketing tool. Occasionally, crowdfunding campaigns go viral and are rapidly shared on social media outlets by millions of users. While there are some characteristics commonly shared by viral campaigns, like the fact that many feature a tabletop game or physical product, the phenomenon is generally unpredictable.11 Carefully crafted campaigns featuring celebrities and expensively produced videos can flop while shockingly simple concepts become overnight sensations.
The benefits of a successfully funded campaign extend past the campaign’s formal end date. A successful campaign can provide proof of market demand that helps new ventures win further business financing. Additionally, the sense of community built by passionate backers during the campaign remains as the funded enterprise grows.
The opportunity to take advantage of international crowdfunding for business finance is still being developed, but even now there are promising opportunities. There may always be a use for crowdfunding in a business. Crowdfunding campaigns have been utilised to provide marketing, proof-of-concept for new ideas, feedback from the public and even cut costs when dealing with a supplier.
Gianvito Grieco has served in a variety of roles in investment banking, financial services, and law. Gianvito holds a Bachelor of Science in Finance from the University of Florida, and a Juris Doctor from Stetson University College of Law. He is also fluent in English, Italian, and Spanish.
1. “New equity crowd-funding bill faces delay”, The Australian; http://www.theaustralian.com.au/business/technology/new-crowdfunding-bill-faces-delay/news-story/7e0bd475ab3519829d3f7814341850ca
2. “Small Business Owners Haven’t Caught the Crowdfunding Craze”, MarketWired; http://www.marketwired.com/press-release/small-business-owners-havent-caught-the-crowdfunding-craze-2003155.htm.
3. “Types of Crowdfunding”, Fundable; https://www.fundable.com/crowdfunding101/types-of-crowdfunding.
4. “This amazing new beehive design has now raised $15 million from crowdfunding in just two months”, Business Insider; http://www.businessinsider.com.au/this-amazing-new-beehive-design-has-now-raised-15-million-from-crowdfunding-in-just-two-months-2015-4
5. Crowdfunding, Arts Law Centre of Australia; http://www.artslaw.com.au/images/uploads/Crowdsourcing_funding_info_sheet_19_01_15.pdf
6. “New equity crowd-funding bill faces delay”, The Australian; http://www.theaustralian.com.au/business/technology/new-crowdfunding-bill-faces-delay/news-story/7e0bd475ab3519829d3f7814341850ca
7. “Should you raise capital using an equity crowdfunding platform?”, Business IT; http://www.bit.com.au/Guide/440183,should-you-raise-capital-using-an-equity-crowdfunding-platform.aspx
9. “Can crowdfunding help your business grow?”, Business IT; http://www.bit.com.au/News/418704,can-crowdfunding-help-your-business-grow.aspx
10. “6 Ways to Use Crowdfunding for Product Development”, Entrepreneur; https://www.entrepreneur.com/article/247668
11. “Things Almost Every Viral Kickstarter Has in Common”, PC World; http://www.pcworld.com/article/2924327/web-social/6-things-almost-every-viral-kickstarter-has-in-common.html