Crowd funding represents an untapped source of finance for projects and businesses trying to get off the ground, but regulatory traps lurk for the unwary.
Crowd funding, via websites like Kickstarter, Crowdcube, iPledg and Pozible, involves harnessing the power of the internet and social media to fund projects and business ideas. Online ‘friends’ contribute money towards a project, and in return receive a reward once the project is funded and completed. For example, a musician who gains funding to record a CD gives a signed copy of the CD once it’s launched.
So far, it has mostly been used for artistic projects, but an emerging trend is for entrepreneurs to use it to side-step bank lending and venture capital to raise funds for profit-making initiatives, promising funders shares and ownership stakes. In Australia, such activities may be subject to heavy penalties if they do not comply with certain legal requirements.
For example, if a promoter offers shares in a start-up, the crowd funding platform could be seen to be dealing in a financial product, and require an Australian Financial Services Licence and be subject to a rigorous disclosure regime.
Similarly, if a promoter offers stakes in a project, it might be seen as fundraising and they will be required to lodge a prospectus and comply with other requirements, as well as be exposed to liability.
If sales proceeds are offered, then it could be considered a managed investment scheme and may, among other things, need to be registered, have a scheme constitution and compliance plan.
Promoters also need to take care not to run foul of misleading or deceptive conduct laws.
Participants need to carefully read the platform’s terms and conditions to understand their rights and obligations. Funders should independently assess the project and contact promoters directly before committing any funds. Promoters should be careful and clear in their pitch about what they are seeking and what funders will receive.
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