HAVE you heard of a product too unique to be funded in the mainstream market? Not so long ago, these ventures often stayed on the drawing board, but now the “crowdfunding” revolution is turning many of them into a reality.
Crowdfunding raises money from members of the public in order to kick-start projects and ventures. Crowdfunding platforms like Kickstarter and Pozible are part of a booming market worth $US2.7billion ($3.4billion) in 2012, and tipped to grow to $US96billion within 10 years.
Should the average Australian consider spending their hard-earned cash to “crowd-surf” this investing phenomenon?
No regulatory system exists in Australia that specifically applies to crowdfunding. The Minister for Small Business, Bruce Billson, says he will introduce specific crowdfunding legislation to Parliament later this year.
In the meantime, crowdfunding investors must rely upon our securities laws and contract law, which are unlikely to provide adequate protections. The Australian Securities and Investments Commission (ASIC) has expressed a view that crowdfunding schemes may constitute a “managed investment scheme” and therefore be subject to compliance requirements.
Several independent organisations, including the Corporations and Markets Advisory Commission (CAMAC) have urged reform in light of the insatiable growth of this market. A 2013 CAMAC report explored reform options that balance the needs of start-up entrepreneurs, investors and crowdfunding facilitation websites. The report’s concerns focused on the high-risk nature of the ventures and covered:
■ the need for investor protections, especially regarding misleading and deceptive advertisements;
■ the almost limitless number of potential investors on the internet; and
■ the degree of responsibility that crowdfunding website facilitators have for the due diligence of the investment opportunities they list.
CAMAC’s proposed reforms include ASIC-directed standardised disclosure, fundraising caps, licensing and stricter regulation of intermediary websites, and a clear and consistent legislative response.
Comprehensive crowdfunding reforms could better protect investors and innovators, but would greater regulation ultimately detract from the eccentricities, innovation and commercial accessibility that are so attractive to many start-ups and their investors fuelling the crowdfunding revolution?
Hopefully not and ideally the reforms will tread that delicate line of affording protection but not stifle investment with excessive red tape. If you are thinking of investing in a crowdfunding venture then you need to consider these questions:
■Do you want a financial stake in a venture, or are you just happy to see this idea realised?
■Are you sure it is legitimate?
■Are you being realistic about investment returns?
■Have you looked closely at the crowdfunding platform’s terms and conditions?
It is important to seek specific financial and legal advice on any investment, as potential risks and benefits vary between ventures.
Dean Frith is a commercial lawyer and partner at Baker Love Lawyers