Recent amendments to the federal Corporations Act help to remove red tape and make it simpler for start-ups to raise much-needed funding.

Qualifying companies could gain access to up to $5 million in capital, in as little as three months, to help grow their ideas.

The changes could see an increase in crowd-sourced equity funding through the popular Go Fund Me and Kickstarter-equivalent funding campaigns often shared via social media.

This is good news for the state’s innovation space as the previous system was procedure heavy and convoluted.

While the changes don’t go as far as was called for, they do make crowd-sourced equity funding less formal and less regimented.

The key features of the new crowd sourced funding rules include:

• Crowd-sourced equity funding is open only to public companies limited by shares, with an annual turnover or gross assets of less than $25 million.
• The legislation will ease the regulatory burden for public companies, as those who use crowd-sourced funding (CSF) may be exempt from holding annual general meetings for five years.
• Companies seeking CSF can raise up to $5 million in any 12 month period.
• Funding must be sourced through a CSF intermediary, most likely in the form of an online platform that holds an Australian Financial Services Licence, which will receive funds from investors and have gatekeeper obligations.
• Offers cannot be open for more than three months.
• Information disclosed by the company, through the offer document, will be less onerous than the previous, more formal process. The industry is still awaiting federal regulations to provide details of what must be included in offer documents.
• Misleading or deceptive statements in the offer document may put companies at risk of civil or criminal penalties.
• Retail investors will be able to apply for a maximum of $10,000 per offer, within a 12- month period. This will be subject to a five-day cooling off right. These measures are designed to limit risk for retail investors.
• Investors will have to accept a risk acknowledgement when submitting funding applications.

Experienced wholesale investors, such as global fund managers, are well-versed in this funding method, with countries such as the US, UK and New Zealand already having established CSF regimes.

However, for this state’s investment community, particularly South Australian ‘mum and dad’ retail investors, it will make investing more accessible. The process has been simplified and there will be new options to generate personal wealth.

While the industry consensus is that the legislative changes are good news for public start-ups, many people (our law firm included) would have liked to have seen proprietary or private companies included in the regime, as this is the corporate structure used by the large majority of start-ups.

We understand that there is still discussion at government level about opening up the CSF regime to proprietary companies. With adequate disclosure and reporting obligations, we see no reason why that shouldn’t happen. But for now, private company start-ups will have to either rely on other means to fund their ideas or convert to a public company.

Very early stage private companies typically look to family funding or traditional personal bank loans to help get their ideas up and running. Angel investors and then private equity are the next options once they have some “proof of concept” and a level of business established.

While the legislation is restrictive, the Federal Government has put this framework around CSF to help protect investors, especially the mums and dads. It is hoped the regime will help to filter out unscrupulous companies who con investors out of quick cash. Public companies have stricter reporting obligations than proprietary companies. As with all investing, investors will still have to carefully assess the risks associated with any CSF investment.

There are some concerns over the “crowd mentality” that may be associated with an online platform offering. Some investors may be lulled into following the crowd and jumping onto an investment bandwagon, only to get burned.

It will be more difficult for investors to meet with the people running these companies and see first-hand their products or services before hitting submit on their funds transfers.

Only time will tell what affect the changes will have and just how much of an injection of capital into the state’s start-up industry we will see.

We will be relying on our entrepreneurs to deliver high-quality ideas that challenge conventional thinking and spark public interest and investment enthusiasm.

Brett Cowell is chairman of partners at Adelaide commercial law firm Cowell Clarke.