Is Equity Crowd Source Funding Right For Your Business?
Raising capital is often necessary but difficult for many businesses, but equity crowd source funding is unlocking new opportunities.
Bringing a business to life or taking it to the next level is not only dependent on the skills and expertise of individuals within the business, but on the ability of the business to raise capital that will allow it to grow. Rarely will a business be successful without external debt. However, in light of recent events in the financial services sector, businesses are finding it much harder to obtain finance from traditional lenders. Fortunately, however, amendments to the Corporations Act 2001 (Cth) over the last three years have ushered in a new era of private funding.
The amendments to the Corporations Act, establishing Equity Crowd Source Funding (‘ECSF’) and subsequently broadening availability of ECSF to private companies, provide an opportunity for businesses to harness the investing power of small investors who were previously inaccessible.
In late 2018, amendments were made to allow private companies to use the ECSF framework without an obligation to convert to a public company. This has made ECSF for smaller businesses more accessible and less costly than before.
Public and private companies with gross assets of less than $25 million and annual revenue of less than $25 million are permitted to raise up to $5 million via ECSF in a 12 month period.
The requirement for private companies to convert to public upon capital-raising under the ECSF framework no longer exists. There are, however, reporting and record-keeping requirements that have been established for companies that utilise the ECSF framework. Similarly, there may be corporate governance changes that are required to comply with the Act.
A capital raise using the ECSF framework must occur via an ECSF ‘intermediary’ – a web-based investment platform that holds an Australian Financial Services Licence with ECSF authorisation.
The intermediary’s website will display important documents for potential investors to view, such as:
- Offer document
- Subscription Agreement
- Shareholders Agreement
- Deed of Acknowledgement
- Company Constitution
Why use ECSF?
Every business faces its own challenges in regard to financing, but some common themes exist – that may be solved by utilising the option of ECSF.
Traditional finance is unavailable or too costly
Traditional financiers such as banks and credit unions may not be appropriate funders for new businesses or new business ideas. Their funding models are rigid and require recurring repayments. ECSF investors are shareholders who will benefit from the long-term success of the business – they do not expect their return to come from interest payable on their investment.
Companies don’t want small shareholdings to affect day-to-day business
The shares that investors obtain via an ECSF raise do not attract any rights of influence over the company. In respect of private companies, ECSF investors don’t count towards the 50 non-employee shareholder cap. Investors are essentially ‘passive’ but are still subject to the Shareholders Agreement of the company. Similarly, due to the low individual cap ($10,000) of investment per person, per year, it is inherent that investors won’t have inflated expectations as to business decisions.
Investor pool is broad
Investors need not be ‘sophisticated’ for the purpose of an ECSF raise – unlike other funding options provided for under the Act. Investors must simply be able to execute the relevant documents of the raise.
To be successful and avoid any risks with ECSF, it is important to seek legal advice. CXT Legal has extensive experience in corporate structuring and capital raising. We are positioned to advise on corporate structures for start-ups, as well as providing review and suggested changes to existing structures.
CXT Legal is able to determine whether ECSF is right for your business and provide you with a path to financial resourcing that is suited to the nature and aspirations of your business.
Contact us for a no obligation discussion about your needs.