An Analysis of Crowdfunding

Question: Discuss about theAnalysis of Crowdfunding. Answer: Introduction: Often it is seen that a person has a great idea but lacks the funds to work on such idea. Such person has no means of attaining the capital required for implantation of the idea. Mere monetary insufficiency should not come in the way of an idea. And to solve this very problem, the concept of Crowdfunding was born. In the following segments, various aspects relating to Crowdfunding have been explained. Crowdfunding is the medium of raising monetary contributions from the general public for funding (Lipton, Herzberg Welsh, 2016) a venture or a project. The general public can include friends, family, consumers or potential investors. Crowdfunding is a collective approach of efforts of a large number of people and the primary source of such funding is online through social media (Young, 2013). There are various Crowdfunding platforms for raising monetary contributions. Such people leverage their network to increase the reach and exposure of Crowdfunding. Crowdfunding is a rising trend for raising capital (Laemmermann, 2012). One of the most difficult parts of any business is acquisition of capital, to either start it or to grow it. Banks loans are readily available but are not practical for small or new businesses. The reason behind loans not being practical for such businesses is the lack of significant collateral or established cash flow. Further, a loan application takes a lot of time and efforts and even then an approval is not guaranteed. Crowdfunding provides a wider investor pool and various flexible fundraising options. Through the medium of Crowdfunding, capital is raised for entrepreneurial undertakings, creative and artistic plans and even for not for profit and society oriented social entrepreneurship projects. By raising capital through the medium of Crowdfunding, many startups have skyrocketed, which in absence of funds, would have just been dreamy ventures (Cunningham, 2012). Crowdfunding helps the startups to attain venture capital from several sources over the internet and helps to bridge the gap among undersized and outsized organizations that are at the early stages of developing their businesses. There are various ways to raise capital through Crowdfunding (Freedman Nutting, 2015). It can be a Rewards based Crowdfunding; or a Donation based Crowdfunding; or an Equity based Crowdfunding. As the name suggests, a Rewards based Crowdfunding involves a persons capital to be contributed towards the business in exchange for a reward. This reward can be in the form of products or services offered by the company. This method of Crowdfunding lets the business owners reward their contributor without actually selling any ownership stake or incurring much extra expense (Dresner, 2014). A Donation based Crowdfunding is the communal endeavor of different people for some benevolent reasons. For example, by organizing a civic Crowdfunding, a Donation based Crowdfunding is established as the results of a civic Crowdfunding would be used o improve the public space (Bottiglia Pichler, 2016). An Equity based Crowdfunding permits its contributors to be part owners of the organization by offering them equity shares in return for such contributions. By becoming the equity owners in a company, the contributors attain economic return on their investment and in due course obtain a part of the profits in the manner of dividend or distribution (Australian Government, 2014). An investor has to be vigilant before investing in any Crowdfunding. An investor has to understand the rights they have and need to check the terms of such funding to ensure that the money invested by them would be returned if the start up cancels the project. An investor has to research about the Crowdfunding platform. Lastly, it has to be kept in mind that such projects are experimental in nature and are just prototypes. To establish a successful Crowdfunding campaign, certain factors are to be kept in mind. An enthusiastic group of friends and family is essential who are willing to become the contributors and urge others to become contributors to the fund. A clear and precise business plan is a pre-requisite for such a campaign. And most importantly, the ability to answer any question of the probable contributors makes the whole Crowdfunding campaign a success. The highest reported Crowdfunding till date was for the project Star Citizen (Crawley, 2015). Star Citizen is an online space trading and combat video game which is being developed by Chris Roberts and Cloud Imperium Games. In October 2012, the developers of this began a Crowdfunding campaign on the games website by means of IgnitionDeck which is a Crowdfunding plugin for WordPress. After about just a week into the Crowdfunding crusade, they began raising funds through Kickstarter campaign. Their initial targets of funding were quickly achieved. After that, the developers added new-related goals to the funding campaign to expand the targets of Crowdfunding. The date of the campaign was also extended by ten days to match the end date of Kickstarter and to further raise capital. Just two before the campaign was set to close; the game attained a record of utmost crowdfunded game project with over US $4.2 million. By the end of initial Crowdfund campaign, a total of US $6.2 million had b een raised. Funding was continued even after the end of initial campaign. By mid 2013, Star Citizen became the utmost funded Crowdfunding venture anywhere, by raising a total of US $15 million. Till date, Star Citizen has raised over US $100 million through Crowdfunding and is the best example of a successful commercial Crowdfunding. Not only commercial but social Crowdfunding campaigns are also quite successful. A Crowdfunding campaign for An Hour of Code for Every Student was started through the platform of Indiegogo with the object of raising UD $5 million (Indiegogo, 2015). On December 15, 2014, the end date of this campaign, a total of US $5024281 was raised and the campaign was declared successful. The objective of this campaign stated that each student in each school must get the opportunity to study computer science. So, even social campaigns find success through the medium of Crowdfunding. Even with the growing popularity of crowd sourced funding across the globe; Australia has been slow in recognizing and adapting to this global phenomenon. The Australian regulatory bodies like ASIC (Australian Securities and Investments Commission) have moved to affect the existing regulatory frameworks to Crowdfunding. In 2012, ASIC (Schulz Mollica, 2015) issued various guidelines which contained various factors. These factors included the sort of reward offered to contributors and the manner of platform to be used. Such schemes have been classified as either an administered investment plan or fundraising, as per Chapter 6D of the Corporations Act 2001 (Cth). But the reforms of ASIC are not enough. The equity based Crowdfunding has been emerging as a winner as a means of raising capital. In December 2015, Minister for Small Business and the Assistant Treasurer, Kelly ODwyer, brought in the legislation containing the governments anticipated crowd-sourced equity funding framework, in the Federal Parliament (Farrar, 2016). The legislation has been designed to provide for online fundraising from those people who make economic contributions to an organization in return for an equity stake in the organization. The Corporations Amendment (Crowd-sourced Funding) Bill 2015 (Bill) looks forward to amend theCorporations Act 2001(Cth). Through this Bill, a framework has to be established to assist crowed-sourced funding offers by small unlisted companies. Further, this Bill provides temporary relief to new public companies which are qualified to crowd fund. This Bill also provides temporary relief to such new public companies from the applicable corporate government requirements (Bull and New, 2016). This Bill also gives the Minister a power to provide exemption, to a few financial market and clearing and settlement facility operators, from some specific segments of the Australian market License and clearing and settlement facility licensing regimes. This Bill also seeks to make substantial modifications to the Australian Securities and Investments Commission Act, 2001. Keeping in view the earlier suggestions of Corporations and Markets Advisory Committee (CAMAC), the Bill creates some basic rules for Crowdfunding. The Bill states that Crowdfunding will be available for only such unlisted companies who have assets worth less than $5 million and have an annual turnover of less than $5 million (Kollmorgen, 2016). An investment cap has been prescribed as per which, an investor can contribute up to an amount of $10,000 for a period of 12 months (The Treasury, 2015). This Bill provides a protection in the form of a five day cooling off period, during which they can reclaim the invested amount, in case they have second thoughts about such investment. The CAMAC recommendations which have been included in this Bill relate to the cooling off period and the investment cap (Australian Government, 2014). Developed countries around the globe such as United States, Italy and New Zealand have recognized the global phenomenon of Crowdfunding as a source of raising capital. In United States alone, Venture Expert identified all seed level VC funding rounds in high technology (Excluding biotechnology) from March 2009 through July 2012 (Mollick and Robb, 2016). Crowdfunding complements the traditional sources of finance, debt and equity, in a genuine manner. These countries have been very active in developing and implementing laws to regulate crowd-sourced funding. A comprehensive Crowd-sourced equity funding(CSEF) scheme was introduced in New Zealand in mid-2014 and has been quite significant as a reference in the Australian debate on Crowdfunding (LegalVision, 2016). As per the New Zealand scheme, all incorporated entities can raise capital through CSEF. The amount which can be raised by an issuer through CSEF has been capped for a period of 12 months for an amount of NZ $2 million. But this capped limit does not include the contributions made by wholesale investors. Further, a risk acknowledgement statement has to be signed by the investors as per this scheme. On December 01, 2014 the Financial Markets Conduct Act2013(NZ) (FMC Act) and theFinancial Markets Conduct Regulations2014(NZ) (FMC Regulations) came into force, to enable the Crowdfunding and peer-to-peer lending services. As per Part 6 of the FMC Act, states three key regulations for laying emphasis on the benefits of Crowdfunding. These include, licensing Crowdfunding service provide rs; setting out disclosure requirements to safeguard the startups and the investors; and providing standards and suitable systems to make certain that there is a limit for a 12 month period for an amount not more than NZ $2 million. The legislative framework of New Zealand has been used to frame the Australian Crowdfunding Bill. Both CAMAC and New Zealand models restrict the amount that a company can raise through Crowdfunding to $2 million for a period of 12 months. Though both the models exclude any funds raised under specific preexisting disclosure exemptions from this investment cap. New Zealands Crowdfunding rules do not necessitate the investors to issue a prospectus of to abide by considerable scrutiny from regulators. Also, there is no cap over the sum that a single investor can invest. So the New Zealand model of Crowdfunding regulations is much more attractive as against the Bill and CAMACs plan as there is no limit for an individual investor. But if the Australian regulations and legislation mirror the New Zealands, it might result in the convergence of both the countries Crowdfunding markets.It is quite clear from the above discussions that Australias current approach towards Crowdfunding has room fo r improvement. Attempts are being made regularly by the Australian Government to understand and respond to the regulatory shortcomings in a better way. The Bill highlights the potential of a successful regulation for Crowdfunding but still, a need for more clarity in the matter of regulations for issuers, intermediaries and investors is needed. To conclude, it would not be wrong to say that Crowdfunding is a hot selling item in the market (Lennon, 2014). Every other startup and even large organizations, for that matter, are raising capital from this source. These organizations prefer Crowdfunding as the source because of the absence of unnecessary hassles. And also, to escape from the high interests charged by banks and financial institutes against the loans, this method is preferred. The sudden boom has given birth to regulatory framework, which have been, till now, unable to catch up with the speed of Crowdfunding industry. But with the latest amendments and the Bill, this shortfall would be dealt with. References Australian Government. Corporation and Markets Advisory Committee (2014) Crows sourced equity funding. May 2014 Bottiglia, R., Pichler, F. (2016) Crowdfunding for SMEs: A Eurpean Perspective. Germany: Springer, p 17 Bull, J., and New, H. (2016) New equity crowd-source funding (CSF) legislation. Corporate Law Bulletin, pp 7-9 Crawley, D. (2015) Star Citizen Crowdfunding passes $100M mark with over 1Mbackers. [Online] VentureBeat. Available from: https://venturebeat.com/2015/12/14/star-citizen-crowdfunding-passes-100m-mark-with-over-1m-backers/ [Accessed 03/09/2016] Cunningham, W.M. (2012) The JOBS Act:Crowdfunding for Small Businesses and Startups. New York: Apress p 21. Dresner, S. (2014) Crowdfunding:A Guide to Raising Capital on the Internet. Hoboken: John Wiley Sons. Farrar, A. (2016) Crowdfunding in Australia. PKF, 17th Mar. Available from: https://www.pkf.com.au/Media/PKF-Lawler-Blog/2016/March/Crowdfunding-legislation [Accessed 03/09/2016] Freedman, D.M., Nutting, M.R. (2015) A Brief History of Crowdfunding. [Online] Freedman and Nutting. Available from: https://www.freedman-chicago.com/ec4i/History-of-Crowdfunding.pdf [Accessed 03/09/2016] Indiegogo (2015) An Hour of Code for Every Student. [Online] Indiegogo. Available from: https://www.indiegogo.com/projects/an-hour-of-code-for-every-student#/ [Accessed 03/09/2016] Kollmorgen, A. (2016) Are Crowdfunding sites the real winners?. Choice, 15th Feb. Available from: https://www.choice.com.au/money/financial-planning-and-investing/stock-market-investing/articles/crowdfunding-risks-and-rewards [Accessed 03/09/2016] Laemmermann, K. (2012) Crowdfunding. Epubli, P 9LegalVision (2016) What you need to know about Crowdfunding in 2016. [Online] LegalVision. Available from: https://legalvision.com.au/what-you-need-to-know-about-crowdfunding-in-2016/ [Accessed 03/09/2016] Lennon, P. (2014) The Crowdfunding Book:A How-To Book for Entrepreneurs, Writers, and Inventors. Virginia: Author Incubator Lipton, P., Herzberg, A., Welsh, M. (2016) Understanding Company Law. 18th ed. Australia: Thomson Reuters. Mollick, E., and Robb, A. (2016) Democratizing Innovation and Capital Access: The Role Of Crowdfunding. California Management Review, 58(2), p Schulz, L., Mollica, D. (2015) The regulation of Crowdfunding in Austrralia: where are we and whats to come?. [Online] Minter Ellison. Available from: https://m.minterellison.com/files/Uploads/Documents/Publications/Articles/Aus-banking-and-finance-law-bulletin_leigh-schulz-anddomenic-mollica_aug2015.pdf [Accessed 03/09/2016] The Treasury (2015) Facilitating crowd-sourced equity funding and reducing compliance costs for small businesses. [Online] Australian Government. Available from: https://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2015/Crowd-sourced%20equity%20funding/Key%20Documents/PDF/Crowd-sourced-equity-funding.ashx [Accessed 03/09/2016] Young, T.E. (2013) The Everything Guide to Crowdfunding:Learn how to Use Social Media for Small-business Funding. Avon, Massachusetts: Adams Media, p 14.