Investing in start-ups and small
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
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
- 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
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
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)
How does crowd-sourced funding work
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'.
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
The website will have information on how to use your cooling-off
What are the risks of
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
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)
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.
Last updated: 18 Oct 2018