While consumers need to be wary of fraud, so too do those seeking funding.
Obviously the bona fides of any website operator should be established, to ensure money received is actually paid through to the company seeking funding.
Is there any means of verifying the funds received versus those paid? In addition, some website operators have themselves been targeted by rivals or market participants for patent infringement or intellectual property breaches.
This may impact upon those operators and conceivably companies who have raised funding using that technology.
If crowdfunding results in actual shareholders this will raise a number of ongoing control and compliance issues.
In particular, a proprietary company in Australia may have no more than 50 non-employee members.
Public companies are subject to more stringent ongoing reporting and audit requirements.
Similarly, offers involving a mutual pool that may be regulated as a managed investment, or pre-purchase under the consumer laws, will give rise to legal and compliance issues.
Even if the ‘offer’ to funders does not involve equity participation or future benefits, there is a genuine risk that there will be a number of stakeholders who will want access to information about the company’s progress, and in some instances feel as though they are entitled to have a say in its management or strategy.
This may be an unwelcome distraction and even escalate to adverse sentiment or publicity if not successfully handled.
So, is crowdfunding worth it?
As start-up funding is scarce, particularly in the current economic climate, many companies may be attracted to crowdfunding as a seemingly easy source of capital.
There are regulatory issues which appear to be evolving in this area and they are an example of the often ‘untested’ situations that can arise where laws drafted for ‘old economy’ businesses have failed to keep pace with modern technology.
The ASIC media release certainly signals a likely increase in surveillance which may herald possible action against any non-complying operators or companies seeking funding in a manner deemed illegal.
It is certainly a space in which caution should be exercised. Consideration should also be given to the commercial downside relative to any possible benefit which may be obtained.
Perhaps the question is not as simple as ‘is it a good idea?’, but rather a more delicate balance of factors which boil down to: ‘Is it worth it?’
Reece Walker is a partner at McCullough Robertson, a leading Australian independent law firm with industry specialists combining legal expertise with deep industry knowledge and foresight.
Andrew Sadauskas is a former journalist at SmartCompany and a former editor of TechCompany.
