Can you use Crowd-Sourced Equity Fundraising to grow your business?
Crowd-Sourced Equity Fundraising (CSE) is a federal initiative that helps start-ups and small to medium-sized companies raise money from a bunch of individual investors.
Here’s how it works: Through a licensed online platform companies can offer their own company’s shares to a number of potential investors in exchange for cash.
When an investor provides cash to a company in exchange for shares, they will receive ordinary shares in that company. This means these investors become part-owners and can potentially benefit from the company’s success.
Benefits of Crowd-Sourced Equity Fundraising
Crowd-Sourced Equity Fundraising has many benefits. First of all, it makes accessing capital a lot easier. Thanks to online crowdfunding platforms, entrepreneurs and companies can now reach a much bigger audience of potential investors compared to old-school capital raising methods. It’s a way more efficient and effective approach to attract capital, especially for early-stage companies that might not be eligible for bank loans or lack the connections to access investors.
Crowdfunding offers a cost-efficient alternative to going public, as it typically involves lower expenses related to legal, accounting, and marketing efforts.
Additionally, companies opting for crowdfunding can retain greater control over their operations and decision-making, as they are not subjected to the extensive regulatory oversight that comes with being a public company. Moreover, crowdfunding provides the flexibility for companies to tailor their fundraising campaigns by customising key terms such as valuation, equity offered, and fundraising goals, allowing them to create more favourable and personalised fundraising strategies.
Risks of Crowd-Sourced Equity Fundraising
Investors engaging in a company’s CSE should be made aware of the potential risks. Some of these businesses using crowd-sourced funding are just starting out, so they might not have a solid track record yet as an investment. That means there is a higher risk that the company will be unsuccessful, and an investor could lose the money they invest.
Also, the value of an investor’s investment could fall or be hard to sell. If the company decides to issue more shares, it could dilute the value of those shares and your returns may end up shrinking.
As mentioned above, since there is a higher risk for investors this also requires higher incentives for those investors, which is an overall risk to the company.
Another risk for the company engaging in crowd sourced equity fundraising is the possibility of not receiving any funds. If a company sets a specific funding target and fails to meet it, they can be left without any of the expected capital.
Restrictions for Companies and Investors Engaging in Crowd-Sourced Equity Fundraising
If you’re a company wanting to dive into the world of Crowd-Sourced Equity (CSE) fundraising, you’ve got to meet a few criteria:
- Unlisted public company or a proprietary company, but not an investment company
- Your consolidated assets and annual revenue should be less than $25 million
- Your principal place of business is in Australia
Now, if you’re a proprietary company you have a few extra restrictions.
- Maintain a minimum of 2 directors
- Prepare annual financial and directors’ reports in accordance with accounting standards
- When you start bringing in $3 million or more from crowd-sourced offers you must have your financial reports audited
Whether you are a proprietary company or public company, you can only raise up to $5 million in any 12-month period.
Protection for Investors
When it comes to crowd-sourced funding, there are certain restrictions in place to protect investors too.
- Retail investors can pitch up to $10,000 per company each year This means that if you’re a regular individual investor, you’re allowed to invest up to $10,000 in a single company within a year
- There is a 5-day cooling-off period When you make an investment in a company through CSE Fundraising, you’re given 5 days to change your mind. If you have second thoughts, you can back out within those 5 days
The Process for Making a Crowd-Sourced Equity Fundraising Offer
Step 1: The company teams up with a licensed CSE intermediary, an online platform authorised to facilitate CSE Fundraising.
Step 2: The company must prepare their own Crowd-Sourced Funding offer document containing the prescribed minimum information required.
Step 3: The company must obtain consent and can publish the offer on the intermediary’s platform.
Step 4: The fundraising period commences, and investors can send in offers until the closing date or the maximum amount is raised (whichever is reached first).
Step 5: Completion or refund of the Crowd-Sourced Fundraising offer. If the offer is successful and the target amount is reached, the company issues shares to the investors. However, if the offer is not successful, the intermediary refunds the investors’ money.
How We Can Help
There is no need to stress about Crowd-Sourced Equity (CSE) Fundraising – we’re here to help you! At Pretium Solutions, we can simplify the process for you.
Don’t hesitate – reach out to us today and get started.