Crowd-Sourced Equity Funding in Australia — A Critical Appraisal

AuthorNuannuan Lin,Akshaya Kamalnath
DOI10.1177/0067205X19831842
Publication Date01 June 2019
SubjectArticles
FLR831842 288..305 Article
Federal Law Review
2019, Vol. 47(2) 288–305
Crowd-Sourced Equity Funding
ª The Author(s) 2019
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in Australia — A Critical
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DOI: 10.1177/0067205X19831842
Appraisal
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Akshaya Kamalnath* and Nuannuan Lin**
Abstract
This article reviews the equity crowdfunding law and practice in Australia. It argues that a light
regulatory approach for issuers and investors is required to ensure that crowd-sourced equity funding
(CSEF) is attractive enough to both investors and issuers. At the same time, it argues that regulation
focused on preventing and detecting fraud is essential for CSEF to be successful. The article therefore
recommends that caps on the amount each investor can invest are not desirable and, instead, suggests
other means of safeguarding against fraud, like the use of whistleblower programs, investor education
and reliable dispute resolution mechanisms, in addition to what the legislation provides.
Introduction
Australia amended the Corporations Act 2001 (Cth) (‘Corporations Act’) in 2017 to ease the way
for businesses to access funding from the ‘crowd’, known as crowd-sourced funding (‘CSF’) or
crowd-sourced equity funding (‘CSEF’).1 Chapter 6D.3A of the amended Corporations Act,
known as the Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) (‘CSF Act’),
recognises the CSF platforms to act as intermediaries between the investors and the business/
entrepreneur intending to raise capital. The motivation for the CSF Act can be traced back to the
Crowd-Sourced Equity Funding Report, which was issued by the Capital Markets Advisory Com-
mittee (‘CAMAC’) in 2014 (‘CAMAC Report’).2 CAMAC defines CSEF, based on the develop-
ments of CSEF in the United States, the United Kingdom, New Zealand, Canada and the European
Union,3 as follows:
A form of corporate fundraising that envisages start up or other smaller companies (issuers) obtaining
seed or other capital through small equity investments from relatively large numbers of investors, with
* Lecturer, Deakin Law School. The author may be contacted at a.kamalnath@deakin.edu.au. We would like to thank the
editorial team who worked on this article. We are also grateful to the anonymous reviewers for their comments on an
earlier draft.
** Lecturer, Deakin Law School. The author may be contacted at n.lin@deakin.edu.au. Research focus: Financial Regulation,
Alternative Dispute Resolution, and Comparative Tort Law.

Kamalnath and Lin
289
online portals (intermediaries) publicising and facilitating these equity offers to online users (the
crowd).4
Non-equity (ie, reward, or donation-based) crowdfunding had already become quite successful
prior to the CSF Act. While donation models of crowdfunding seek funds for either charity or
social purposes, the reward model seeks contributions for a project in exchange for a reward that is
linked to the fruits of the project — for example — the signed CDs where the funding was for a
music album or a special badge in an online game where the funding was for a new game.5
Platforms like Kickstarter and IndieGoGo became popular with a large number of crowdfunding
campaigns, especially in the gaming industry, becoming successful.6 In the equity crowdfunding
model, instead of receiving a reward linked to the project if the project is successful, the return on
the investment will be a share in the profits of the project, similar to investing in shares of a
company.7
The Australian economy currently faces steeper challenges in productivity growth than the
challenges in the last decade and the financial system needs to manage innovation more efficiently
with the aim of facilitating productivity growth. Thus, more regulatory reform is needed to assist
small and medium-sized enterprises in obtaining better access to funding, both domestically and
from offshore sources, and remove unnecessary impediments to financial system innovation.8 The
economic motivation to extend the success of the reward crowdfunding model to equity crowd-
funding is therefore to ensure that start-ups that fail because of the ‘capital gap’ or the inability to
secure capital have access to an alternate market (ie, the online crowd).9
Since crowdfunding is essentially a process that can be carried out entirely online, it is impor-
tant for Australia to offer a competitive regime to attract and encourage entrepreneurial activity
within the country. The requirements for a competitive regime made their way to the Innovation
and Science Agenda announced by the Turnbull government at the end of 2015, under which
establishing a regulatory regime for CSF was one of the key measures identified.10 Since there
were several obstacles within the Corporations Act for equity crowdfunding, amendments were
introduced to enable the use of a CSEF model of fundraising.11
This article seeks to evaluate Australia’s CSF regime by appraising how the inherent tension
that any crowdfunding legislation including Australia’s legislation would have to address — that
is, facilitating the access to funds versus the protection of investors — has been resolved. Striking
the right balance will be a key indicator of the success of the legislation.
In undertaking such an appraisal, it is relevant to look at overseas legislation since CSF
regulations have been introduced in a number of countries in the recent past. This article has
mostly focused on the New Zealand experience in assessing the CSF regime in Australia for two
reasons. The first is New Zealand’s relative success12 since the introduction of its CSF regime and
the second is the similarity of some of the features of the Australian and New Zealand regimes.
Based on this analysis, the article argues that a light regulatory approach for issuers and
investors is required to ensure that CSEF is attractive enough for investors. At the same time, it
argues that regulation focused on preventing and detecting fraud is essential for CSEF to be
successful. The article therefore argues that investor caps are not desirable and instead recom-
mends safeguards like the use of whistleblower programs, investor education and reliable dispute
resolution mechanisms, in addition to what the legislation provides.
Since the main focus of this article is equity-based crowdfunding, any reference to crowdfund-
ing or CSF in this article will refer to equity crowdfunding, unless it is expressly mentioned
otherwise. The article follows the following plan. The introduction has provided the background

290
Federal Law Review 47(2)
and context of the research. The second part of the article will highlight the main aspects of the
CSF law in Australia and also provide some comparative insights about New Zealand’s CSF law.
The third part of the article will critically assess the Australian CSF law and provide recommen-
dations to make the law more effective. The final part is the conclusion.
Australia’s CSF Regime
CSEF is recognised internationally both as a financial innovation and a risky form of investment.13
The Murray Inquiry concluded in 2014 that the Australian financial system had weaknesses both in
eliminating ‘unfair consumer outcomes’ and in focusing on the ‘benefits of competition and
innovation’.14 The weaknesses existed particularly in responding to technology-driven market
developments:
As technology continues to increase network speeds, broaden distribution networks and heighten levels
of interconnectivity, the pace of technology-driven market developments can challenge regulatory
frameworks and make it difficult for regulators to adapt with sufficient speed.15
In response to the Murray Inquiry, the Commonwealth Government stated that ‘the develop-
ment of a crowd-sourced equity funding market in Australia is an urgent priority for the Govern-
ment to support the funding needs of early stage innovators’, and therefore, it is committed to
establishing a regulatory framework to facilitate CSEF in Australia.16 The CSF Act, taking effect
from 29 September 2017, is the main legislation governing CSEF in Australia.17 Prior to the CSF
Act, public and proprietary companies faced many hurdles in utilising CSEF. For public compa-
nies, there were two main regulatory requirements under Chapter 6D of the Corporations Act —
that is, the requirement for costly corporate governance and financial reporting and the require-
ment for public fundraising disclosure,18 which discouraged start-up companies or small busi-
nesses from raising crowdfunded equity. For the former requirement, the setup and ongoing
compliance costs, as the CAMAC Report pointed out, ‘could absorb a significant proportion of
any funds raised from the crowd’.19 The latter requirement also increased the cost burden, making
it particularly difficult for start-up companies or small businesses to raise funds through CSF.
For proprietary companies, the legislation, prior to amendments to the CSF Act, prohibited them
from having more than 50 non-employee shareholders,20 and from engaging in any public offer of
equity or other securities.21 Although there were various exemptions from the prohibition on public
offers, any breakthrough either on the shareholder cap or on the scope of CSF was not allowed. A
2018 amendment to the CSF Act has enabled CSF offers by proprietary companies and relaxed the
50 shareholder cap for ‘shareholders connected with CSF offers’.22 This is a welcome change, as
over 99.7 per cent of the Australian market consists of proprietary companies excluded by the
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