Crowd-sourced funding

Investing in start-ups and small businesses

You can use crowd-sourced funding to invest up to $10,000 per year in small and medium companies to help them begin or grow their business, or pay off existing debts. Here we explain the key things you should know before investing this way.

What is crowd-sourced funding?

Crowd-sourced funding (CSF) (also called equity crowd funding or crowd-sourced funding of shares) is a way for start-ups and small and medium-sized companies to raise money from the public to finance their business. Companies typically raise small amounts from a large number of investors. Each investor can invest up to $10,000 a year in a company and in exchange they'll receive securities in the form of shares.

Eligible companies can raise up to $5 million a year using crowd-sourced funding but they must have less than $25 million in assets and annual revenue.

Which companies can use crowd-sourced funding?

In Australia, this type of fundraising is available to:

  • public companies who want to get funding by issuing ordinary shares but are not listed on a stock exchange such as the ASX or Chi-X
  • proprietary companies that have at least two directors, and comply with relevant reporting, audit and related party obligations. See ASIC's media release about the extension of the CSF regime to include these companies from 19 October 2018. 

For more information about the reporting requirements and accountability standards that apply to companies raising funds through the CSF regime, see ASIC's Regulatory Guide 261 Crowd-sourced funding: Guide for companies.

Crowd-sourced funding of shares is different from crowd funding

Crowd-sourced funding of shares is different from the donation-based crowd funding typically used by artists or entrepreneurs to raise money for one-off projects.

It is also different from investment-based crowd funding, which may involve investing in a managed investment scheme or be offered by someone who does not need an Australian financial services (AFS) licence.

How does crowd-sourced funding work in Australia?

By law, eligible companies must use a CSF platform, usually a website, to make their investment offer. The website is run by an intermediary that must have an AFS licence which authorises them to provide CSF services.

The intermediary acts as a 'gatekeeper' between the company and investors and checks the company and the investment information the company provides before the offer is placed on the website.

The CSF website must have a warning for investors about the risks of investing this way, as well as copies of the offer documents for each investment, which has important information about the business making the offer.

The website must also have an online portal that potential investors can use to ask the company and the intermediary questions about the investment.

How to invest through crowd-sourced funding

If you want to invest in a company offering shares through a CSF website you must apply through that website.

Before you can apply, you will be asked to acknowledge that you have read and understood the risk warning listed on the website and in the offer document.

You can only invest up to $10,000 per company in a 12-month period, so your application will be rejected if you try to invest more than the cap.

Check the intermediary is licensed

You should also check that the company has listed their offer on a website that is run by a licensed intermediary.

Check ASIC Connect's Professional Registers to see if the website operator has an AFS that allows it to legally provide CSF services. If they do, the information will be listed under the section called 'licence authorisation conditions'.

Cooling-off period

You have a cooling-off period of 5 business days to change your mind if you decide the investment isn't for you. During this time you can withdraw your application to invest and receive a full refund.

The website will have information on how to use your cooling-off rights.

What are the risks of crowd-sourced funding?

Investing through crowd-sourced funding is risky. Each funding offer is unique, so it's important that you understand what you are investing in and the risks associated with that investment.

Before you invest, read the offer document issued by the company and use the portal on the CSF website to ask questions about the company or investment.

Some companies have no or little track record

Some businesses that raise money through crowd-sourced funding are new or in the early stages of development, so there's more risk that the business will be unsuccessful and you may lose all the money you invested.

Make sure you read all the information available on the CSF website to check specific risks associated with each business, as well as doing your own research on the company.

Shares may fall or be hard to sell

Even if the company is successful, the value of your investment might fall, and the return you receive could be reduced if the company issues more shares.

Your investment is also unlikely to be 'liquid', so if you decide you need the money you've invested, you may not be able to sell your shares quickly, or at all.

Risk of fraud or insolvency

There are rules for handling your money when you invest through crowd-sourced funding. However, if your money is handled inappropriately or the intermediary operating the website becomes insolvent, and hasn't met its obligation to keep your money separate, you may lose all the money you've invested.

How to complain about crowd-sourced funding

The website operator must have a process for handling complaints about the way they provide the CSF service.

If you are not satisfied with how they handle your complaint you should refer the matter to an external dispute resolution (EDR) scheme. 

See how to complain for more information about what to do if you're not happy with a financial service or product.

Before you invest in a company through crowd-sourced funding, make sure you understand the company you are investing in and the risks you are taking on.

Related links

Last updated: 18 Oct 2018