Obligations just begin with the crowdfund campaign
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Your Mates on the Sunshine Coast expressed it well when, after their hugely-successful crowdfunding campaign, they said in a Facebook post, ‘Our heads are still spinning after an absolutely mental response to our Crowdfund campaign going live’.
So, once the raising crowdfunding campaign is finished and you have hit your target, what are your obligations as a business?
First off, it’s worth remembering that there are two basic forms of financing for a business: equity and debt finance.
Debt finance is the traditional borrowing of money with the obligation being placed on the business to repay the financer in the future.
Equity Finance is the process of raising capital by selling your business’ equity to investors.
The main difference between equity and debt finance is that with equity, in return for investors funding your business, they also receive an ownership interest. This results in the shared ownership of the business, proportional to their investment amount. Just as the owner receives profit (or lack of), so do any of the equity investors.
In terms of obligations to repay investors, unlike debt finance, there is no obligation to repay investors as they have bought into the business and the possible profits. Raising funds in this way means that there is no chance of being in debt as there is no obligation to pay an equity investor, they instead share the profit with you.
But it’s not free money, it still comes with obligations both during and after the fundraising campaign.
- the company and its related parties must not have more than one Crowd-Sourced Funding (CSF) campaign/offer open at a time.
- the company and its related parties must not provide financial assistance to any retail investors to enable them to invest in the company’s CSF offer.
- the company must comply with the rules about advertising its CSF offer.
- the company must not engage in misleading or deceptive conduct (further, information published on the CSF intermediary’s platform must not be misleading or deceptive).
- the company must not give personal advice to investors in relation to its shares.
- the company must only make the offer of its shares via a CSF offer document published on a CSF intermediary’s platform.
- the CSF offer must not relate to a company that has not been formed or does not exist.
- the company must notify the CSF intermediary if it becomes aware that its CSF offer document is defective.
The following protections are in place for retail investors participating in CSF offers:
- Retail investors can only invest a maximum of $10,000 in the same company, via the same CSF intermediary, in any 12-month period.
- Retail investors have up to five days after making an application to reconsider their investment and withdraw their application.
- A general risk warning statement (as required by law) alerting potential investors to the potential risk and high failure rates of startups must be provided to retail investors in the CSF offer document and on the CSF intermediary’s platform.
- Retail investors must acknowledge that they have read and understood the general risk warning before applying for shares under a CSF offer.
And on an ongoing basis?
There are certain corporate governance and reporting obligations that apply to public companies, including the obligations to:
- hold an AGM.
- appoint an auditor and have the company’s financial reports audited, and
- distribute hard copies or electronic copies of the company’s annual reports to shareholders.
There are temporary concessions from these obligations, available for up to five years, for certain public companies making CSF offers, but it’s best to seek advice to make sure, also you should read this ASIC Guide, which outlines your full obligations under the CSF regime.
For further information please contact Ross Sawczyn HLB Mann Judd 0419 223 242.