Crowdfunding risks and rewards

Is it time to regulate crowdfunding in Australia?
Learn more

01.Are crowdfunding sites the real winners?

There is a call for tighter crowdfunding regulations in Australia

For entrepreneurs who need funding for their projects or ideas but don’t have much pull with banks or private investors, crowdfunding has become a viable alternative – so much so that countries such as the US and New Zealand are putting regulations in place around it. Canada, France and the UK are considering doing the same. 

But the grassroots approach to raising money still lies outside the financial mainstream in Australia, and some analysts think a bit of regulation wouldn’t be a bad thing. The federal government’s Corporations and Markets Advisory Committee (CAMAC) recently released a report that lays out a regulatory blueprint for crowd-sourced equity funding that would better protect the funders, including  limiting funders to $2500 per project per year and $10,000 per year for all crowdfunding projects.

CAMAC, which was slated to be abolished in the May Budget, also recommended that crowdfunders be provided a cooling-off period and other rights to withdraw their money. 

Crowdfunding – also known as crowdsourcing – seems to be a hit in Australia, where venture capital may be harder to find than in larger markets such as the US. So far, it’s mostly been applied where funding is notoriously thin, such as music, arts, and performance projects. One of the world’s biggest and best-known crowdfunding sites, US-based Kickstarter, recently started operating here – one of just five of its non-US locations. (The others are NZ, the UK, Canada and the Netherlands.) 

Win–win for crowdfunding websites 

Crowdfunding can get a project off the ground if the money comes through. But because the crowdfunding sites take a healthy cut of the funding that’s processed through their online platforms, charge substantial transaction fees and take no responsibility for the trustworthiness of the people seeking funds, they come out ahead whether or not the project ultimately succeeds (though no funding changes hands if the financial target isn’t reached). 

Melbourne-based Pozible, which says it has become “one of the top three [crowdfunding] platforms in the world”, claimed to have received $US19,197,929 in pledges as of mid-April. Crowdfunding sites around the world aren’t accountable if a project flops – and plenty do. But it’s the success stories that have made crowdfunding a growth industry.

Last year, two Brisbane-based video game developers used Kickstarter to crowdfund a game that was in mid-development after major game maker Sega closed its Brisbane studio. They aimed for $600,000 and ended up with almost $800,000 from about 15,000 funders around the world. More recently, two NSW fund-seekers who launched their project on Pozible exceeded their $10,000 target to fund a brand of Australian-made organic vodka. The reward for funders was bottles of vodka, an invite to the launch party, and an “Australian spirit tasting and cocktail making master class”, depending on how much you gave (the range was $20 to $1000). The funding target was reached in April; the estimated award delivery date is June 2014.

Piece of the action?

Some overseas crowdfunding platforms offer funders part ownership of what they’re helping to fund – otherwise known as equity. One local crowdfunding expert we spoke to, Steve Johns of the multi-national law firm Norton Rose Fulbright, says offering funders equity would be a step forward for Australian-based platforms.

“It’s very difficult to crowdfund in return for equity in Australia, and this has limited the projects capable of being crowd-funded and the investors willing to invest in those projects,” Johns says. “A key purpose of any new regulatory structure would be to facilitate equity crowdfunding. If Australia doesn’t do this, it risks losing projects to countries where equity crowdfunding is permitted.”

While the details of any new crowdfunding rules remain uncertain, Johns says protecting funders will be a central plank. “Investor protection is particularly important as investors are likely to be unsophisticated and have limited financial resources, and companies are likely to be at a very early stage with little or no track record."

What regulation? 

Regulatory steps for crowdfunding under consideration in Australia include: 

  • Limiting the amount a person can invest in a crowd-funded company over a particular period of time. 
  • Limiting the amount a company can raise via crowdfunding. 
  • Mandating disclaimers and warnings on crowdfunding platforms that highlight the risks investors face. 
  • Requiring crowdfunding platforms to verify the identity of the companies seeking funds. 
  • Requiring funds to be held in trust by the crowdfunding platform until the funding target is met.

Even with such regulatory measures in place, however, funders will not be fully protected. “It is unlikely that any new regulatory structure will include specific requirements that the company deliver on promised rewards,” says Johns. However, companies that seek crowdfunding are currently subject to existing investor protection laws.



Sign up to our free

Receive FREE email updates of our latest tests, consumer news and CHOICE marketing promotions.

Your say - Choice voice

Make a Comment

Members – Sign in on the top right to contribute to comments