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Crowd-Sourced Equity Funding in Australia — A Critical Appraisal

Published online by Cambridge University Press:  01 January 2025

Akshaya Kamalnath  and
Nuannuan Lin
Akshaya Kamalnath*
Affiliation:
Deakin Law School
Nuannuan Lin*
Affiliation:
Deakin Law School
*
The author may be contacted at a.kamalnath@deakin.edu.au.
The author may be contacted at n.lin@deakin.edu.au. Research focus: Financial Regulation, Alternative Dispute Resolution, and Comparative Tort Law.
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Abstract

This article reviews the equity crowdfunding law and practice in Australia. It argues that a light regulatory approach for issuers and investors is required to ensure that crowd-sourced equity funding (CSEF) is attractive enough to both investors and issuers. At the same time, it argues that regulation focused on preventing and detecting fraud is essential for CSEF to be successful. The article therefore recommends that caps on the amount each investor can invest are not desirable and, instead, suggests other means of safeguarding against fraud, like the use of whistleblower programs, investor education and reliable dispute resolution mechanisms, in addition to what the legislation provides.

Type
Articles
Information
Federal Law Review , Volume 47 , Issue 2 , June 2019 , pp. 288 - 305
Copyright
Copyright © 2019 The Author(s)

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Footnotes

We would like to thank the editorial team who worked on this article. We are also grateful to the anonymous reviewers for their comments on an earlier draft.

References

Notes

1. Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth).

2. Corporations and Markets Advisory Committee, Crowd Sourced Equity Funding Report (2014) <http://www.camac.gov.au/camac/camac.nsf/byheadline/reportsfinal+reports+home.html>.

3. CAMAC Report, above n 2, [1.4].

4. CAMAC Report, above n 2, [2.1.1].

5. See generally Mark Methenitis et al, ‘Crowdfunding: Symposium Panel II’ (2013) 16 Southern Methodist University Science and Technology Law Review 59 for examples of reward-based crowdfunding.

6. Ibid.

7. Andrew A Schwartz, ‘Crowdfunding Securities’ (2013) 88 Notre Dame Law Review 1457, 1460.

8. Financial System Inquiry, Financial System Inquiry Final Report (1997) 2 (‘Wallis Inquiry’). See also Financial System Inquiry, Financial System Inquiry Final Report (2014) xvi (‘Murray Inquiry’).

9. CAMAC Report, above n 2, [2.1.2]. See also Jason Zein, ‘Filling the Capital Gap: The Financing Case for Crowd-Sourced Equity Funding in Australia’ (2014) 25 Journal of Banking and Finance Law and Practice 102. For a discussion on the ‘capital gap’ or problems with access to funding faced by small and medium-sized companies across jurisdictions, see Alma Pekmezovic and Gordon Walker, ‘The Global Significance of Crowdfunding: Solving the SME Funding Problem and Democratizing Access to Capital’ (2016) 7 William and Mary Business Law Review 347, 366–86.

10. Department of Industry, Innovation, and Science (Cth), National Innovation and Science Agenda (2015) <https://www.industry.gov.au/data-and-publications/national-innovation-and-science-agenda-report>.

11. CAMAC Report, above n 2, [2.3].

12. Since equity crowdfunding was introduced in New Zealand, in 2015, the average capital raised has steadily increased with $16.7 million being raised in 2018. See Financial Markets Authority, (Report, 2018) ‘Peer to Peer Lending and Crowdfunding — Sector Snapshot’ <https://public.tableau.com/profile/fmaadmin#!/vizhome/Reg_returns_final_version_0/Story1>.

13. See International Organization of Securities Commissions, Crowdfunding 2015 Survey Responses Report (2015) <https://www.iosco.org/library/pubdocs/pdf/IOSCOPD520.pdf>.

14. Murray Inquiry, above n 8, xiii.

15. Ibid 144.

16. See Australian Government, Improving Australia’s Financial System: Government Response to the Financial System Inquiry (2015) 6.

17. The Act amends the Corporations Act, makes minor amendments to the Australian Securities and Investments Commission Act 2001 (Cth), and establishes a regulatory regime for crowd-sourced funding in Australia.

18. Considering public companies may involve public participation, the Corporations Act imposes a series of obligations on public companies, such as annual general meetings (s 250 N) and appointment of an auditor (s 327A).

19. CAMAC Report, above n 2, 15.

20. Corporations Act s 113(1).

21. Ibid s 113(3).

22. Corporations Amendment (Crowd-sourced funding for proprietary companies) Act 2018 (Cth). The Act amends s 45A(1) of the Corporations Act.

23. Marina Nehme, Submission No 8 to Senate Economics Legislation Committee, Parliament of Australia, Corporations Amendment (Crowd-sourced Funding) Bill 2016, 9 January 2017, 2.

24. Anecdotally, Emma Jenkin, one of the founders of DC Power Co, a start-up which successfully completed a CSF campaign in April 2018 cautioned future entrepreneurs about the costs of converting to a public unlisted company. See Dominic Powell, Solar Energy Retailing Startup DC Power Co banks $2.5 Million in World’s Most Popular Equity Crowdfunding Campaign (19 April 2018) StartupSmart <https://www.smartcompany.com.au/startupsmart/news-analysis/solar-energy-retailing-startup-dc-power-co-2-5-million-most-popular-equity-crowdfunding-campaign/>.

25. As opposed to a professional or sophisticated investor.

26. Australian Securities and Investments Commission, ‘Crowd-sourced funding: Guide for intermediaries’ (Consultation Paper No 289, 22 June 2017) 29.

27. Anne Matthew, ‘Crowd-Sourced Equity Funding: The Regulatory Challenges of Innovative Fintech and Fundraising’ (2017) 36 University of Queensland Law Journal 41, 41.

28. Corporations Act s 738H(1)(e); Australian Securities and Investments Commission, Regulatory Guide 261: Crowd-sourced funding: guide for public companies (2017) [261.29]–[261.30] (‘RG 261’); Corporations Act s 738H(1)(d); Australian Securities and Investments Commission, Regulatory Guide 261: Crowd-sourced funding: guide for public companies (2017) [261.17][261.28].

29. Corporations Act s 738H(1)(f); RG 261, above n 28, [261.31].

30. Corporations Act ss 738H(1)(b), 738H(1)(c); RG 261, above n 28, [261.15].

31. Corporations Act, ss 738G(1)(d), 738G(2); RG 261, above n 28, [261.41]–[261.51].

32. Corporations Act s 740; RG 261, above n 28, [261.47].

33. Alma Pekmezovic and Gordon R Walker, ‘Equity Crowdfunding in New Zealand’ (2015) 33 Companies and Securities Law Journal 63, 67.

34. Australian Securities and Investments Commission, ‘Crowd-sourced funding — Guide for public companies’ (Consultation Paper No 288, 22 June 2017); see also Catie Moore, ‘Equity Crowdfunding in Australia: How Far have we Come and Where to Next?’ (2017) 35 Companies and Securities Law Journal 102, 119.

35. RG 261, above n 28, [261.135], [261.136].

36. RG 261, above n 28, [261.137]–[261.168].

37. RG 261, above n 28, [261.169]–[261.170].

38. Corporations Act s 738ZA(5).

39. Ibid s 738U; RG 261, above n 28, [261.181]–[261.191].

40. Corporations Act s 738 K; RG 261, above n 28, [261.176]–[261.178].

41. See Andrew Schwartz, ‘The Gatekeepers of Crowdfunding’ (2018) 75 Washington and Lee Law Review 885, 920. See also Trish Keeper, ‘Equity Crowdfunding in New Zealand: A Progressive Experiment’ (Working Paper No 103, Victoria University of Wellington, 21 September 2016) 16 <https://papers.ssrn.com/sol3/papers.cfm?%20abstract_id=2844948>.

42. Schwartz, ‘Gatekeepers’, above n 41, 920.

43. Corporations Act s 738ZC(1); Australian Securities and Investments Commission, Regulatory Guide 262: Crowd-sourced funding: Guide for intermediaries (2018) (‘RG 262’).

44. Corporations Act s 738ZC(1).

45. Explanatory Memorandum, Corporations Amendment (Crowd-sourced Funding) Bill 2016 (Cth), 72 [6.17].

46. Corporations Act ss 738ZD(1), 738ZB(4)(a).

47. Keeper, above n 41, 9.

48. Ibid.

49. RG 262, above n 43, [262.31].

50. See Schwartz, ‘Gatekeepers’, above n 41, 920.

51. Corporations Act s 738C. The seven CSF intermediaries were licensed by ASIC in January 2018. Since then, they have been authorised to provide crowd-sourced funding services to eligible public companies and investors. See Australian Securities and Investments Commission, 18-004MR ASIC licenses first crowd-sourced funding intermediaries (11 January 2018) <http://asic.gov.au/about-asic/media-centre/find-a-media-release/2018-releases/18-004mr-asic-licenses-first-crowd-sourced-funding-intermediaries/>.

52. Corporations Act s 912A(1)(aa); RG 262, above n 43, [262.33]–[262.38].

53. See Birchal, Financial Services Guide (10 October 2018) <https://www.birchal.com/financial-services-guide>.

54. Corporations Act ss 912A(2), 912A(1)(g); RG 262, above n 43, [262.78]–[262.85].

55. Corporations Act s 912D.

56. See Keeper, above n 41, 8–16 for a detailed discussion of obligations of CSF intermediaries in New Zealand.

57. Ibid 8.

58. See CSF Act sch 1 items 14, 34; Corporations Act ss 738Q(3)–(4).

59. RG 262, above n 43, [262.127]–[262.139].

60. Corporations Act s 738Q(5)(a).

61. Corporations Act s 738Q(5)(b). Although the CSF Act does not define the phrase ‘good fame or character’, Corporations Act s 913B(2) states that one of the preconditions to being granted an ASF license is that natural persons or officers of companies making the application must be of ‘good fame and character’. Corporations Act s 913B(4) provides guidance for making this determination by stating that matters like criminal convictions, cancellation or suspension of AFS license held by the person, disqualification from serving as a director or banning order against the person must be considered.

62. Corporations Act s 738Q(5)(c).

63. Explanatory Memorandum, above n 45, 33 [3.44].

64. Corporations Act s 738Q(5)(d).

65. RG 262, above n 43, [262.192]–[262.193]. See also Corporations Act s 1311(1).

66. Pekmezovic and Walker, ‘Equity Crowdfunding in New Zealand’, above n 33, 65. See also Lloyd Kavanagh, ‘New Zealand: The Equity Crowdfunding Revolution’ on Minter Ellison, Our View (11 October 2017) <https://minterellison.co.nz/our-view/new-zealand-the-equity-crowdfunding-revolution>.

67. Keeper, above n 41, 14–16. See also Pekmezovic and Walker, ‘Equity Crowdfunding in New Zealand’, above n 33, 66.

68. Keeper, above n 41, 10.

69. Ibid.

70. Corporations Act s 738ZA(1).

71. See Corporations Regulations 2001 (Cth) reg 6D.3A.03 for the wording of the general risk warning. See also Corporations Act s 738ZA(3)(b); RG 262, above n 43, [262.118].

72. Explanatory Memorandum, above n 45, 72 [6.19].

73. See Keeper, above n 41, 12–14.

74. Corporations Act s 738ZE(1).

75. Corporations Act s 738ZE(2); See also RG 262, above n 43, [262.191].

76. Corporations Act s 738ZG(1).

77. Explanatory Memorandum, above n 45, 74 [6.28].

78. See Terence W Wong, ‘Crowd Funding: Regulating the new Phenomenon’ (2013) 31 Companies and Securities Law Journal 89, 92–3.

79. Douglas Cumming and Sofia Johan, ‘Demand-Driven Securities Regulation: Evidence From Crowdfunding’ (2013) 15(4) Venture Capital: An International Journal of Entrepreneurial Finance 361, 376.

80. Ibid.

81. Marina Nehme, ‘Regulating Crowdfunding: The Why and How’ (2018) 45(1) Journal of Law and Society 116, 134.

82. Ibid.

83. CAMAC Report, above n 2, 16 [2.4.2].

84. Cabinet Business Committee of New Zealand, ‘Financial Markets Conduct Regulations Paper 4: Licensing regimes’ (Cabinet Paper No MBIE-MAKO-4363783, Cabinet Business Committee of New Zealand, 27 June 2013) 18 [136]–[137].

85. Ibid 18 [140].

86. Ibid 18 [141].

87. Schwartz, ‘Gatekeepers’, above n 41, 926.

88. Ibid 927.

89. Ibid 929.

90. Chee Keong Low, ‘Cornerstone Investors and Initial Public Offerings on the Stock Exchange of Hong Kong’ (2009) 14 Fordham Journal of Corporate and Financial Law 639, 649.

91. Schwartz, ‘Gatekeepers’, above n 41, 936.

92. Ibid 935. See also James S Murray, ‘Equity Crowdfunding and Peer-to-Peer Lending in New Zealand: The First Year’ (2015) 2 JASSA: The Finsia Journal of Applied Finance 5, 10.

93. Schwartz, ‘Gatekeepers’, above n 41, 935.

94. Ibid.

95. Abraham J B Cable, ‘Fending for Themselves: Why Securities Regulations Should Encourage Angel Groups’ 13(1) Pennsylvania Journal of Business Law (2010) 107, 116.

96. For a more detailed discussion of the information asymmetry problem faced by retail investors in crowdfunding and the benefit of syndicates in this regard, see Ajay Agrawal, Christian Catalini and Avi Goldfarb, ‘Are Syndicates the Killer Apps of Crowdfunding?’ (2016) 58(2) California Management Review 111.

97. Dominic Powell, ‘Australia’s First Equity Crowdfunding Raises Finalised as Neobank Xinja Pockets $2.16 Million From Investors’ StartupSmart (online), 29 March 2018 <https://www.smartcompany.com.au/startupsmart/news-analysis/australia-first-equity-crowdfunding-raises-finish-neobank-xinja-pockets-2-16-million/>.

98. Corporations Act s 738ZA(5).

99. Schwartz, ‘Gatekeepers’, above n 41, 937.

100. See, eg, business.gov.au, Entrepreneurs Program (10 December 2018) <https://www.business.gov.au/assistance/entrepreneurs-programme>; Business Innovation and Incubation Australia, About BIIA <http://businessincubation.com.au/about/>. See also Dominic Powell, ‘Here are Australia’s 24 Most Active Startup Accelerators and Incubators’ StartupSmart (online), 10 November 2017 <https://www.smartcompany.com.au/startupsmart/news-analysis/australias-24-most-active-accelerators-incubators/>.

101. Matt Vitins, ‘Crowdfunding and Securities Laws — What the Americans are Doing and the Case for an Australian Crowdfunding Exemption’ (2013) 22(2) Journal of Law, Information and Science 92, 100.

102. See generally Andrew A Schwartz, ‘The Non-financial Returns of Crowdfunding’ (2015) 34 Review of Banking and Financial Law 565.

103. Ibid 575.

104. Chris Pash, ‘A Startup Making Dissolvable Caffeine Hits Just Closed Australia’s First Finished Equity Crowdfunding Campaign’ Business Insider (online), 27 March 2018 <https://www.businessinsider.com.au/revvies-crowdfunding-campaign-australia-2018-3>.

105. Schwartz, ‘Non-financial Returns’, above n 102, 576.

106. Powell, ‘Neobank Xinja’, above n 97.

107. See generally Methenitis et al, above n 5.

108. Murray, above n 92, 7.

109. HashChing Ltd, Replacement CSF Offer Document (14 May 2018) Equitise, 51 <https://equitise.com/offer/regular/hashching-1>.

110. Alex Walker, ‘A Melbourne Esports Team is Letting Fans Buy Equity’ Kotaku (online), 20 February 2018 <https://www.kotaku.com.au/2018/02/a-melbourne-esports-team-is-letting-fans-buy-equity/>.

111. Schwartz, ‘Non-financial Returns’, above n 102, 579.

112. Ibid 579–80.

113. Ibid 578.

114. See Jay Coen Gilbert, ‘Putting the Impact in Impact Investing: 28 Funds Building a Credible, Transparent Marketplace’ Forbes (online), 9 October 2017 <https://www.forbes.com/sites/jaycoengilbert/2017/10/09/putting-the-impact-in-impact-investing-28-funds-building-a-credible-transparent-marketplace/>.

115. PARK, PARK: The Leading Soccer Brand for the Next Generation (2018) Birchal <https://www.birchal.com/company/park>.

116. Ibid.

117. Birchal, above n 53.

118. Keeper, above n 41.

119. Schwartz, ‘Gatekeepers’, above n 41, 931.

120. Ibid.

121. CrowdReady, New Zealand Equity Crowdfunding — 2nd Year in Review on CrowdReady, (16 October 2016) <http://www.crowdready.com.au/news-1/2016/10/nz-equity-crowdfunding-2nd-year-in-review>.

122. Ibid.

123. Dominic Powell, The First Australian Equity Crowdfunding Licences have been Issued, (11 January 2018) StartupSmart <https://www.smartcompany.com.au/startupsmart/news-analysis/the-first-australian-equity-crowdfunding-licences-have-been-issued/>.

124. Schwartz, ‘Gatekeepers’, above n 41, 941.

125. Douglas J Cumming et al, ‘Disentangling Crowdfunding from Fraud-funding’ (Research Paper No 16-09, Max Plank Institute for Innovation and Competition Research, April 2017) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2828919>. However, it should be noted that this analysis is based on reward-based crowdfunding data rather than CSF, and also that the authors themselves note that as the sector grows, fraudsters may adapt accordingly.

126. Ibid.

127. Ibid.

128. Ibid 24.

129. See, eg, Equitise, ‘Founder Interview: Mandeep Sodhi of HashChing’ on Equitise, Blog (6 June 2018) <https://blog.equitise.com/hashching-crowdfund>.

130. Christina Parajon Skinner, ‘Whistleblowers and Financial Innovation’ (2016) 94 North Carolina Law Review 861, 879–80.

131. Australia introduced a Whistleblower Bill in 2017 seeking to protect whistleblowers who report misconduct in the corporate and financial sector and misconduct relating to tax laws. See Treasury Laws Amendment (Enhancing Whistleblower Protections) Bill 2017 (Cth).

132. Corporations Act ss s 912A(1)(g), 912A(2).

133. Cara Waters, ‘“A Very Unusual Case”: Financial Ombudsman Service’s Failings Laid Bare Before Royal Commission’ Sydney Morning Herald (online), 28 May 2018 <https://www.smh.com.au/business/small-business/a-very-unusual-case-financial-ombudsman-service-s-failings-laid-bare-before-royal-commission-20180528-p4zhwo.html>.

134. Ibid. See also Stephanie Chalmers, ‘There’s a New Place to Lodge Complaints about the Banks — and it’s Already been Flooded’ ABC News (Online), 5 Dec 2018 <https://www.abc.net.au/news/2018-12-05/new-financial-complaints-authority-more-than-6500-complaints/10585690>.

135. Hamish R McCormack, ‘“MISsed” Opportunities and the Corporations Amendment (Crowd-sourced Funding) Bill 2016 (Cth): The Challenges of Reconciling Australia’s Existing Securities Regulation With Equity Crowdfunding’ (2018) 29 Journal of Banking and Finance Law and Practice 3, 8.

136. Cumming et al, above n 125.

137. Marina Nehme, ‘The Phenomenon of Crowd Equity Funding: An Opportunity to Promote Financial Literacy’ (2017) 59 Canadian Business Law Review 1, 14.