Raising capital is one of the most difficult stages of growing a business. Traditional bank finance may require security and regular repayments, while attracting private investors can be time-consuming and limited to existing networks. Crowd sourced equity funding can provide another pathway for eligible Australian companies that want to invite a wider group of people to become shareholders.
It is not simply an online fundraising campaign. A successful raise requires a suitable company structure, reliable financial information, a realistic valuation, clear investor communication and an ongoing willingness to answer to a larger shareholder base. For founders, the opportunity is access to growth capital. The trade-off is giving investors an ownership interest in the business.
What crowd sourced equity funding means
Crowd sourced equity funding, often shortened to CSF, is a regulated form of equity fundraising. Rather than asking the public for donations or advance purchases of a product, a company offers shares to investors through an authorised online intermediary.
Investors contribute money and receive an ownership interest in the company. In most cases, this means they may benefit if the company grows in value or pays dividends in the future. It also means they can lose some or all of their investment if the business does not perform as planned.
The Australian CSF framework applies to offers of fully paid ordinary shares. It is therefore different from:
– donation-based crowdfunding, where contributors receive no ownership interest;
– reward or pre-sale crowdfunding, where contributors receive a product, service or other benefit;
– debt crowdfunding or peer-to-peer lending, where money is lent and repaid under agreed terms;
– raising funds informally from family, friends or business contacts without using the CSF regime.
For a business owner, the central question is whether issuing shares to many investors supports the company’s broader growth plan. It may be a good fit for a business with a clear story, an identifiable market, a credible use for the funds and the capacity to manage shareholder communications after the campaign closes.
Which Australian companies can use the CSF regime?
The CSF regime is designed for smaller, unlisted Australian companies. Both public companies limited by shares and eligible proprietary companies can potentially make a CSF offer.
At the time of the offer, an eligible company must meet key conditions. Among other things, its principal place of business must be in Australia, a majority of its directors must ordinarily reside in Australia, and it cannot be listed or part of a group that includes a listed entity.
The company and its related parties must also satisfy the assets and turnover test. The consolidated gross assets and consolidated annual revenue of the company and its related parties must each be below $25 million.
Eligible proprietary companies have additional requirements. They must have at least two directors, and this requirement continues while the company has CSF shareholders. A proprietary company that has CSF shareholders also takes on added reporting, audit and related-party transaction obligations.
A proprietary company can issue shares through CSF without those shareholders counting towards the usual limit on non-employee shareholders, subject to the relevant rules. This can make CSF more practical for a growing Pty Ltd company that wants to remain proprietary rather than convert to a public company.
The company must also be raising money for its own business. CSF is not intended to be used by companies or related parties whose substantial purpose is investing in other entities or schemes.
An eligible company can raise up to $5 million through CSF offers in a 12-month period, taking into account certain other amounts raised during that period. This is a meaningful amount for many early-stage and expanding businesses, but it is not unlimited capital. Founders need to consider whether the amount available is enough to fund the next stage of growth without creating an overly complex shareholder structure.
How a CSF campaign works in practice
A CSF offer must be made through a single CSF intermediary that holds the required Australian financial services licence authorisation. The intermediary operates the platform, performs prescribed checks before publishing the offer document, receives application money and manages the application process.
The platform is an important part of the process, but it does not replace the company’s responsibility for the accuracy and quality of the information presented to potential investors.
A typical campaign involves the following stages:
– assessing whether the company is eligible to make a CSF offer;
– choosing a licensed CSF intermediary whose process, investor audience and commercial terms suit the business;
– preparing financial information, a business plan, forecasts and a clear use-of-funds plan;
– deciding how many shares will be issued and at what price;
– preparing the CSF offer document;
– completing legal, accounting and commercial due diligence;
– publishing the offer through the platform and communicating with investors during the campaign;
– issuing shares and updating company records if the offer completes successfully;
– meeting the company’s ongoing reporting and governance obligations.
The CSF offer document is not a full prospectus, but it remains a formal disclosure document. It must contain prescribed information and be written and presented in a clear, concise and effective manner.
In practical terms, investors need enough information to understand the company, the offer and the risks. This includes information about the business, its management team, capital structure, rights attached to the shares, use of funds, offer terms, prior CSF offers and investor rights.
A well-prepared campaign does more than meet the minimum disclosure requirements. It helps investors understand the problem the business solves, its target market, how it earns money, the commercial milestones it is aiming to reach and the main risks that could affect the outcome.
Setting a realistic valuation and funding target
Valuation is often one of the hardest decisions in an equity raise. Founders understandably want to protect their existing ownership. However, a valuation that is difficult to justify can discourage investors and leave a campaign underfunded.
Before setting the share price, work through:
– the amount of capital genuinely required;
– the specific activities the funds will support;
– the percentage ownership that will be offered to new investors;
– the company’s existing share structure;
– any options, convertible instruments or employee equity arrangements;
– the assumptions behind revenue, margin and cash flow forecasts;
– comparable transactions or businesses, where meaningful;
– the possibility of later funding rounds.
It is important to distinguish between an ambitious business plan and evidence that supports the valuation. Forecasts may be appropriate, particularly for an early-stage business, but they should be based on reasonable assumptions that management can explain.
For example, a growing Australian consumer-products company may want capital to expand manufacturing capacity, build inventory and fund a targeted marketing program. Its CSF offer could explain the amount required for each purpose, the operational milestones expected from the capital and the key assumptions behind projected sales. It should not present projected revenue as a guaranteed outcome.
A minimum subscription amount is also important. If the business cannot sensibly deliver its plan unless it raises a certain amount, this should be reflected in the offer structure. Raising less than required can leave the company with new shareholders but insufficient working capital to execute the strategy it promoted.
Investor protections and the responsibilities they create
The CSF regime includes protections for retail investors. For example, a retail investor is generally limited to investing no more than $10,000 in a particular company through CSF offers on the same intermediary’s platform over a 12-month period.
Retail investors also have a five-business-day cooling-off period after making an application. During that period, they can withdraw their application using the method specified on the platform.
The offer document must include prominent risk warnings. These warnings reflect the commercial reality of early-stage and growth businesses:
– the investment is speculative;
– an investor may lose the entire investment;
– later share issues can dilute the value and percentage ownership of existing shareholders;
– shares may be difficult or impossible to sell quickly;
– even where investor remedies exist, recovering money can be difficult.
For business owners, these protections should not be treated as a hurdle to work around. They are a prompt to communicate openly. A credible campaign identifies the risks that are specific to the business, such as reliance on a small number of customers, supply chain exposure, regulatory requirements, product development uncertainty, key-person dependence or the need for future capital.
The intermediary has gatekeeper responsibilities and must conduct prescribed checks before publishing an offer. However, this does not mean the intermediary has independently verified every commercial claim, forecast or statement made by the company. Directors should approach the offer document with the same care they would apply to any significant investor communication.
If information becomes misleading, incomplete or outdated, the consequences can be serious. Businesses should have a process for checking facts, approving statements, retaining supporting documents and promptly addressing material changes during the campaign.
Ongoing obligations after the raise
The campaign is only the beginning. Once a company has a wider group of shareholders, the directors need systems that support proper governance and timely communication.
For proprietary companies with one or more CSF shareholders, annual financial reports and directors’ reports are required. The company must make the reports readily accessible to shareholders. Audit obligations can also arise once the company has raised $3 million or more from all of its CSF offers.
A proprietary company with CSF shareholders must also comply with the related-party transaction rules that generally apply to public companies. This is particularly relevant where founders, directors or entities connected with them may receive a financial benefit from the company.
These obligations can affect everyday decisions. For example, a related entity leasing premises to the company, providing management services or receiving a loan from the company may require careful consideration under the related-party rules.
Businesses should also plan for the operational work involved in having more shareholders, including:
– maintaining an accurate share register;
– issuing shares and updating ASIC records where required;
– keeping minutes and resolutions;
– providing financial reports;
– managing shareholder questions;
– considering future share issues and dilution;
– reviewing the constitution and shareholder arrangements;
– keeping reliable accounting records throughout the year.
Good bookkeeping becomes especially important after a CSF raise. Investors may not need day-to-day management accounts, but directors need timely and accurate information to manage cash flow, monitor the use of funds and meet reporting obligations.
Tax, accounting and cash flow considerations
A CSF campaign is primarily a corporate and capital-raising exercise, but tax and accounting issues should be considered before the offer goes live.
The money raised from issuing shares, campaign costs, legal fees, platform fees and promotional expenditure may not all receive the same tax treatment. The outcome can depend on the company’s circumstances, the nature of the expenditure and how the raise is structured.
GST should also be reviewed carefully. A fee charged by a platform or adviser may have different GST consequences from the issue of shares itself. Rather than assuming a cost is fully deductible or that GST can be claimed, the business should obtain advice based on the actual agreements and invoices.
The accounting treatment matters as well. The company needs a clear record of application money, share issues, share capital, campaign costs and any refunds. If the offer has a minimum subscription condition, the timing of recognition and handling of funds requires particular care.
Some companies undertaking an equity raise may also explore whether they qualify as an early stage innovation company for tax purposes. That is a separate tax regime with its own detailed requirements. A CSF offer does not automatically make a company eligible, and investors should not be told that a tax incentive is available unless the position has been properly reviewed.
From the investor’s perspective, shares acquired through CSF may have capital gains tax consequences when they are later sold, transferred or otherwise disposed of. Tax outcomes can differ significantly between investors, particularly where shares are held by an individual, company, trust or superannuation fund.
Is crowd sourced equity funding right for your business?
CSF can be a strong option where a business has a compelling growth opportunity and is comfortable bringing new shareholders into the ownership structure. It can also help build a community of supporters who have a genuine interest in the business succeeding.
However, it is not the best answer for every business. Founders who want to retain tight control, are not ready to provide ongoing financial reporting, have not developed reliable forecasting, or need capital urgently may be better served by another funding path.
Before proceeding, consider:
– whether the business is eligible for the CSF regime;
– how much capital is needed and why;
– whether equity is preferable to debt or other funding;
– the impact of issuing shares on founder ownership and voting control;
– the company’s capacity to meet ongoing reporting and governance obligations;
– whether the valuation can be supported;
– the total cost of the campaign, including platform, legal, accounting, marketing and administration costs;
– the financial consequences if the campaign does not reach its minimum target.
Crowd sourced equity funding can provide a practical route to capital for eligible Australian companies, but it works best when it is part of a well-considered business and finance strategy, not simply a response to short-term cash flow pressure.
The key takeaway
A CSF raise can help an eligible Australian company access equity capital from a broader investor base, while allowing investors to become shareholders in the business. It also creates substantial responsibilities around disclosure, reporting, governance, financial records and shareholder communication.
The right preparation can make a meaningful difference. Before launching a campaign, speak with advisers who can help assess the company structure, funding model, financial information, tax position and ongoing compliance requirements. can help you consider the accounting and business implications in the context of your broader growth plans.
This article is general information only and is not personal financial or tax advice. Speak with a registered tax agent or accountant, such as, about your specific circumstances before making decisions about raising capital or issuing shares.