What is crowdfunding?

Posted on November 15, 2015 by ATB Chartered Accountants

Crowdfunding campaigns, such those offered by Kickstarter, allow individuals to invest money in projects/ventures. Since Kickstarter’s launch in 2009, 9.9 million people have invested over $2.09 billion, highlighting the true capacity of the funding.

The way crowd funding works is that businesses launch campaigns onto platforms such as Kickstarter, providing an in depth spiel of what they are aiming to achieve. Included in this is how much money they require for the project to be successful, and people can choose to help fund it, or not to. One of the main reasons crowd funding is so popular is that unless the project reaches the set amount by the end date, the individuals who have helped back the project will not get charged.

While crowdfunding has taken off in countries such as the U.S, Canada and New Zealand, Australia has yet to flourish. This is expected to change in the near future with $7.8 million having been set aside in the 2015/16 budget to implement a regulatory authority for it.

There are two ways that crowdfunding works, and these are rewards-based funding, or crowd-sourced equity funding (CSEF). Rewards-based funding is when backers put money towards a project and in return receive a product/prototype, or will be the first group of people to have access to the project upon completion. CSEF is when a number of backers put money into a company in order to receive financial return at a later date.

In 2013, the World Bank noted that the global crowd funding market could be worth up to $96 billion US by 2025. Alex Malley, CEO of CPA Australia mentioned that crowd funding is critical to economic growth and job creation in Australia, and so it is important that the government provide a regulatory authority.

At present, it is extraordinarily difficult for start-up companies and even small businesses to obtain finance for projects and investments due to the level of revenue and assets that are required in order to attract investors. Crowdfunding makes attracting investors much more attainable, as people choose to invest based on belief in the venture.

There is currently legislation from New Zealand, as well as other organisations, being looked over by the Australian government which propose that:

  • Public companies can seek CSEF, however it is important to note that the Australian government are looking to allow proprietary companies to do so as well
  • Crowdfunding should be limited to $5 million in 12 months, and
  • Investors cannot fund more than $10,000 in a single offer, and more than $25,000 p.a.

Due to the far reaching impacts of crowdfunding in our global economy, it is important that there are policies in place to ensure that it is being done responsibly to ensure investors are acting carefully, and that businesses and/or ventures are holding up their end of the deal where possible.