Crowdfunding Mechanism

Discuss about the Crowdfunding for Business and Corporations Law.

Crowdfunding is a method of financing a project by generating small amount of capital form a large number of peoples. Generally, the method of crowdfunding is used by entrepreneurs who cannot get funding from traditional sources. Crowdfunding method connects entrepreneurs and small financiers via the internet websites. The small financiers include family members, friends, relatives or other interested investors looking for small investments. In Australia, crowdfunding is a relatively modern concept introduced a few years ago. The government has enacted new regulations to promote crowdfunding for the small entrepreneurs.

The reason for the growth in crowdfunding popularity is that small entrepreneur has interesting ideas but due to their large number, traditional investors cannot invest in each one of them. This essay will describe the procedure of crowdfunding to Howard Jones and evaluate whether it is better for him than traditional sources. Further, the essay will discuss various theories provided by experts and analyse the role of crowdfunding in various fields. The difference between various countries regulations will also be discussed in the essay.

Most of the people have access to the internet which they use for their work, shopping, and entertainment. The modernisation of the internet allows people to learn and build new things. The number of entrepreneurs has grown significantly in past few decades due to the popularity of smartphones and internet-based services. Small businesses also use the internet to reach a larger audience and enchase their operations[1]. Increase in a number of entrepreneurs raises the requirement of funding for their operations. Traditional sources, such as venture capitalists, wholesale investors or banking corporations, cannot invest in all the entrepreneurs which left more of the small businesses without funding. Therefore, the crowdfunding procedure has gained popularity because it connects small entrepreneurs to the public. A large number of people spend a small amount of investment in the entrepreneur’s project which helps them raise funding[2].

There are four different types of crowdfunding methods which entrepreneurs select according to their project’s requirement. The reward-based method is based upon providing various incentives to the financiers, to attract their funding in the project[3]. Many NGO’s uses donation-based crowdfunding procedure which allows people to donate to various social and charitable causes. The equity-based crowdfunding is used by small companies; they provide shares to the financiers as a reward for the investment provided by them. In lending-based crowdfunding, the funding provided by financiers is considered a debt which the company has to repay with interest[4].

Commercial and Social Example

To raise funding through crowdfunding method, entrepreneurs are required to follow certain guidelines. The entrepreneurs should provide all the necessary information regarding their project to the potential investors[5]. The information includes various aspects of the project such as price, investment requirement, time frame, specifications and incentives provided by the company to its investors. All such information must be correct and it must be accessible with the offer of crowdfunding.

There are various entrepreneurs who have used crowdfunding process to fund their projects. In Australia, there are several online websites which assist entrepreneurs and small businesses to raise funding for their projects such as Indigogo, Kickstarter, GoFundMe, and MyCause[6]. These websites connect public with entrepreneur and help them generate investment. In Australian, many small technology companies have used crowdfunding method to raise funding such as Ninja Block or KoalaSafe. Kickstarter websites help to fund more than 22 thousand entrepreneurs’ project through crowdfunding which raises more than $500 million in 2014. These online services assist small corporations and entrepreneurs in Australia to raise investment which eventually benefits the economy of the country.

Pebble Time is one of the most successful crowdfunding projects that attract a large amount of attention worldwide with their smartwatch. The smartwatch provides various facilities to users such as calling, emails, fitness tracing a much more. The crowdfunding page of Pebble time raised more than $20 million through more than 80 thousand investors over Kickstarter website. Another successful example is Flow Hive, which is an Australian corporation which harvests honey. They introduced a new method of harvesting honey; customers can turn on the tap and fresh honey flow right out. In their Australian based crowdfunding campaign, they raised more than $12 million through public investors. These campaigns prove the significance of crowdfunding method for commercial purposes[7].

Many people and NGO take advantage of crowdfunding method by collecting charities for social causes; a good example is Saving Eliza campaign[8]. Eliza was 4 years old when she suffered from Sanfilippo syndrome. Due to the effects of disease Eliza was not able to feed, talk or walk. The treatment of Eliza costs about $2.5 million, Eliza’s parents did not have this much money. Eliza’s father decides to ask for help from the public and uploaded few homemade video of Eliza’s condition. The money raised online was not enough for Eliza’s treatment. Those videos were seen by a filmmaker name Benjamin Von Wong, who decided to help Eliza’s parents. He directed a short film based upon Eliza’s condition and uploaded it to the internet with a crowdfunding page attached; the movie was called Saving Eliza. People started to raise money for Eliza’s treatment and currently, the campaign has raised more than $1.8 million[9]. This campaign shows that along with commercial purposes, crowdfunding can be used for the social and charitable purpose as well.

Crowdfunding Regulations

There are several examples which show that crowdfunding is beneficial for entrepreneurs and economy of a country. There are several countries that have enacted regulations regarding the crowdfunding procedure to promote its usage. Recently, Australia has also implemented a provision to regulate the procedure of crowdfunding in the country. The Corporations Amendment (Crowd-sourced Funding) Act 2017 has been enacted which provide provisions regarding crowdfunding used by corporations. The regulations are focused on promoting crowdfunding while protecting the people from fraud[10].

The act amends several provisions of Corporations Act 2001 to provide various exemptions to corporations regarding the use of crowdfunding method. Many regulations of Australian Securities and Investments Commission Act 2001 have also been amended to provide exemptions to market operators. The act limits financiers from spending more than ten thousand dollars over one crowdfunding project annually[11]. The wholesale investors are not restricted from investing in crowdfunding projects, but their amount of investment has been limited by the law. Corporations having an annual turnover or assets capitalisation below $5 million can raise investment through crowdfunding.

In case of other countries such as the United States and the United Kingdom, the restriction over crowdfunding project is not available. The Jobs Act 2012 provides regulations regarding the crowdfunding procedure of companies in the United States. The financiers are allowed to spend according to their financial status[12]. Most of the entrepreneurs in the United States use crowdfunding method to raise funding for their unique and different idea. The regulation of crowdfunding is conducted by Securities and Exchange Commission (SEC) and the government has introduced equity-based crowdfunding from 2016.

According to the market experts in Australia, the regulations restrict entrepreneurs from generating large funding for their original ideas. The successful crowdfunding campaign such as Pebble Time was able to raise a large funding due to the lack of limits. Many experts criticised the regulations of government and provided that they are against the basis provisions of crowdfunding. According to Schulz and Mollica (2015)[13], the limits applied over crowdfunding process will reduce the development of crowdfunding process in Australia as compared to other countries. But, the steps taken by the government will help small entrepreneurs, such as ‘Flow Hive’ to raise funding for their operations which help in the growth of Australian economy.

The popularity of crowdfunding method has grown considerably in between entrepreneurs and Small Corporation. It is a modern method for raising funding for the small projects by entrepreneurs. Many countries have implemented a legislative provision to promote and regulate crowdfunding method which helps in the development of their economy. Australia has also implemented new provision regarding the crowdfunding method to promote it in the country. Many experts have criticised the crowdfunding regulations, but most of them agreed that there was a need for proper legislation over crowdfunding process[14]. Legalising the process makes it trustable in between public which is beneficial for crowdfunding since the public is the key financiers in crowdfunding.

While comparing with other countries, the regulations of Australia are relatively strict over the limits of investment. In the United States, crowdfunding policies are comparatively easier which is beneficial for the entrepreneurs. The maximum number of entrepreneurs in the United States uses crowdfunding to generate funding for unique and different projects. In Australia, the small-scale corporations and technology corporations use crowdfunding procedure for investment. Small corporations and entrepreneurs will be benefited by the regulations of crowdfunding procedure which eventually develop the country’s economy.

The crowdfunding has benefited small corporations into growing their operations worldwide. Oculus Rift is a good example for understanding the influence of crowdfunding. Oculus VR decided to raise funding for their virtual reality headset called Oculus Rift, which gained a huge amount of attention from the public. The company rose a funding of $2.5 million using crowdfunding process. In 2014, Facebook decided to buy the company to acquire their virtual reality technology for $2 billion[15]. In 2015, the projects of crowdfunding have raised more than $34.4 billion for various entrepreneurs.

Australian entrepreneurs are expecting the same enthusiasm from the public as well. There have been few successful crowdfunding campaigns in Australia such as Flow Hive, Ninja Block, and KoalaSafe, but compared to other countries the numbers are significantly low. The provisions established by the Australian government have been criticized but they will assist the progress of crowdfunding in Australia[16]. The regulations are formed to protect the capital of public from scam or fraud, but it restricts genuine entrepreneurs from generating large investment. For future development, the steps of Australian government will improve the country’s economy.

Howard Jones has an original idea of increasing the life of batteries, which can be beneficial for a large number of people. Howard’s idea has potential to generate large amount through crowdfunding procedure. The legislative provisions passed by Australian government will asset Howard in rising large funding. In case of traditional sources, Howard can only collect funding from one method and the large investment corporations prefer to control the decisions of projects in which they invest their capital. Howard can lose the right for making decisions regarding his own company. Crowdfunding will automatically attract interest financiers to invest in Howard’s project. The decision-making power will also remain with Howard in crowdfunding process. Therefore, Howard should select crowdfunding procedure over traditional sources. 

Conclusion

From the above report, it can be concluded that crowdfunding has gained popularity due to the modernisation of technology. A large number of people are opening their businesses which require funding; the traditional sources of funding are not able to invest in such businesses. Crowdfunding provides an alternative route to entrepreneurs by generating capital from the public. The entrepreneurs and public are connected over online websites, over which the information regarding entrepreneur are available. Interested people can invest a small amount in the project, which later provides various rewards to them. The Australian government has formed various provisions to regulate the procedure of crowdfunding and promote it in the country. Crowdfunding provides capital to entrepreneurs to start their businesses which eventually develop the country’s economy. Howard Jones should select crowdfunding method for generating investment because it provides various rewards to him. Howard will be able to generate large amount through crowdfunding than compared to traditional courses. The power for taking a decision in the project will be available to him; therefore, Howard should select crowdfunding as a method for raising investment.

Books/Article/Journals

Bruton, Garry, et al. “New financial alternatives in seeding entrepreneurship: Microfinance, crowdfunding, and peer?to?peer innovations.” Entrepreneurship Theory and Practice 39.1 (2015): 9-26.

Cordova, Alessandro, Johanna Dolci, and Gianfranco Gianfrate. “The determinants of crowdfunding success: Evidence from technology projects.” Procedia-Social and Behavioral Sciences 181 (2015): 115-124.

Eastwell, Michelle, Jessica Dale, and Felicity Dunstone. “Crowd-sourced equity funding is coming to Australia.” Governance Directions 69.7 (2017): 411.

Fitzpatrick, Jeff, et al. Business and corporations law. LexisNexis Butterworths, 2011.

Frydrych, Denis, et al. “Exploring entrepreneurial legitimacy in reward-based crowdfunding.” Venture Capital 16.3 (2014): 247-269.

Fumagalli, Danielle C., and Arvin M. Gouw. “Focus: Personalized Medicine: Crowdfunding for Personalized Medicine Research.” The Yale journal of biology and medicine 88.4 (2015): 413.

Hui, Julie S., Michael D. Greenberg, and Elizabeth M. Gerber. “Understanding the role of community in crowdfunding work.” Proceedings of the 17th ACM conference on Computer supported cooperative work & social computing. ACM, 2014.

Khadem, N. “Crowdfunding in Australia a step closer.” The Sydney Morning Herald (2014).

Manzoor, Amir. “Crowdfunding for Non-Profits.” Handbook of Research on Emerging Business Models and Managerial Strategies in the Nonprofit Sector(2017): 152.

Mollick, Ethan. “The dynamics of crowdfunding: An exploratory study.” Journal of business venturing 29.1 (2014): 1-16.

Royal, Carol, and G. Sampath S. Windsor. “Microfinance, crowdfunding, and sustainability: A case study of telecenters in a South Asian developing country.” Strategic Change 23.7-8 (2014): 425-438.

Stanko, Michael A., and David H. Henard. “How crowdfunding influences innovation.” MIT Sloan Management Review 57.3 (2016): 15.

Stumm, Tony. “The rebirth of crowd funding in Australia!.” Governance Directions 69.2 (2017): 96.

Valanciene, Loreta, and Sima Jegeleviciute. “Valuation of crowdfunding: benefits and drawbacks.” Economics and Management 18.1 (2013): 39-48.

Weinstein, Ross S. “Crowdfunding in the US and Abroad: What to Expect When You’re Expecting.” Cornell Int’l LJ 46 (2013): 427.

Others

Schulz, Leigh and Mollica, Domenic. ASK THE EXPERT The regulation of crowdfunding in Australia: where are we and what’s to come?. Australian Banking and Finance. Retrieved from < https://forms.minterellison.com/files/Uploads/Documents/Publications/Articles/Aus-banking-and-finance-law-bulletin_leigh-schulz-anddomenic-mollica_aug2015.pdf >