Types of Crowdfunding

Crowdfunding is growing to be one of the most popular ways of raising equity today. In 2022 too, the segment is expected to grow at 3.6%, and reach a value of US $33.20 billion in Australia. It opens avenues for both investors and those looking to invest. The method has its pros and cons and should be taken on after due diligence has been conducted and businesses have weighed their alternatives.

This article covers the main types of crowdfunding, its benefits, and pitfalls so you can be prepared when you exercise this option to raise funds.

What is Crowdfunding?

Crowdfunding is a way through which businesses, organisations and individuals can raise alternative funds. They can choose to fund a business without the conventional methods of funding by receiving small donations from many people. The cash flow can be used to fund projects, or help start-ups take off and launch themselves in the industry.

Most crowdfunding campaigns are through crowdfunding platforms on the internet, have a time frame for raising money, and have specified amounts and monetary goals.

Generally, if the project meets the funding goal, the platform transfers the pledged amount to the company raising funds. If the project does not meet the funding goal, it is cancelled, and no money is transferred.

Types of Crowdfunding

There are 4 broad types of crowdfunding:

  1. Equity

Equity crowdfunding refers to when a company raises money by issuing shares to retail or non-professional investors through online crowdfunding platforms. Hundreds of investors can potentially invest in the company. Typically, private companies cannot have more than 50 shareholders, however, crowdfunding laws have eliminated this hurdle for companies.

Only companies that meet the crowdfunding criteria can raise funds from more than 50 investors. Having met the criteria, a company can raise $5 million within a year with each investor being able to invest up to 10,000. Following are the criteria that make companies eligible to engage in equity crowdfunding:

  • The company should have 2 directors.
  • The company’s principal place of business should be in Australia.
  • The company’s consolidated gross assets and annual revenue have not exceeded $25 million.
  • The company should raise funds through an approved intermediary e.g., Equitise, VentureCrowd, OnMarket, etc.

Additionally, the company will have to comply with disclosure and other reporting obligations, which can be onerous for early-stage start-ups.

  1. Donation

One of the most common types of fund-raising is used to ask for funds in exchange for non-monetary rewards. This is usually used to fundraise for causes you care about – these can be personal or social. The returns can be tangible or intangible, e.g., happiness or contentment or having the finished project as the reward (local community park).

  1. Debt

Debt crowdfunding is also often referred to as peer-to-peer lending. This involves asking a crowd of investors to donate in exchange for potential financial returns at a later stage. These returns can be in the form of dividend-like payments. However, the returns will depend on the terms of the initial investment.

Debt crowdfunding is used by companies when they wish to pay off other financial obligations e.g., a loan or to pay back other liabilities. It can also be used by companies that need capital but would rather pay back in funds as compared to equity. Fundraisers need or mention what the money is needed for, and when can investors expect repayments.

  1. Rewards

Rewards-based crowdfunding is often used to raise funds for start-ups that offer products or services. In return, the investors can get rewards such as free merchandise, handmade items, prizes or gift cards or vouchers for the products or services offered by the fundraiser or their partner companies.

  1. Real Estate

Real estate crowdfunding is a relatively recent type but is gaining popularity rapidly with investors looking to invest in real estate. Through crowdfunding approaches, these investors can avoid the hassle of applying for loans or shouldering the obligations of owning property solely.

In this approach, individuals invest collectively to buy property e.g., a large apartment building. Each investor can choose to invest small amounts depending on how much ownership they wish to have. In return, they can receive payouts each quarter or semi-annually depending on the revenue the property generates.

Benefits of Crowdfunding

Crowdfunding helps individuals and businesses raise money relatively easily by reaching out to a massive public audience. It is faster and more convenient than the traditional channels of seeking debt or equity or loans to invest in businesses.

The crowdfunding approach also works favourably for smaller companies, non-profit organisations or creative organisations that face greater hurdles in the traditional fundraising channels.

The help that investors and the public can offer as part of crowdfunding can be beyond the monetary aspect. They can assist by giving feedback on projects, helpful advice or even lending their efforts to marketing activities.

Companies can test the market and their offerings quicker and more conveniently without having to do a pilot separately. Additionally, crowdfunding offers individuals a chance to invest at multiple price points. Hence, investors too can get convenient and lucrative investment opportunities that fit their budget and are hassle-free.

Risks of Crowdfunding

Crowdfunding exposes you to a wider audience than other traditional methods. However, not all these individuals will be potential investors. Your idea or start-up will also be exposed to competitors, inhibitors and regulatory authorities which can raise complications with your legal and tax obligations.

Companies also then have to comply with disclosure and public reporting obligations which may not suit start-ups. Equity funding also requires an intermediary which increases the cost of fundraising. For effective crowdfunding, you will need a well-developed campaign.

The development, management and carrying out of the campaign can be a costly process, both in terms of money and effort. As an early-stage company, these efforts can take a heavy toll on your business.

Crowdfunding Avenues

While several crowdfunding websites exist, relying on them may be dangerous for investors and costly for the business. Such websites do not take any responsibility for the funds raised or the companies raising them. Hence, as an investor, you will need to carry out due diligence.

As a business, you will have to pay them a cut of the funding as a fee for processing the collection and transfer of funds. You will need to weigh in the funds you are raising and the amount you will be spending on the campaign and the website to raise those funds.

Key Takeaways

Crowdfunding is a method of raising alternative funds from the public.

  • There are 4 main types of crowdfunding that are used for different purposes. You can choose which one best suit your cause and your organisational goal.
  • Crowdfunding gives easier and hassle-free access to funds, and investors can invest small amounts as per their budget in profitable projects.
  • However, crowdfunding also brings on additional scrutiny with increased regulatory obligations and investors must carry out their due diligence before investing.
  • While crowdfunding is becoming increasingly popular, regulations are limited and are in development. This can make crowdfunding a risky endeavour for both businesses and investors.

Crowdfunding is starting to be regulated as a fundraising alternative by the government. However, since it’s a relatively new concept, there are changes to policy and obligations which can be hard to keep track of.

As a start-up, if you are looking for funding options, crowdfunding is one of the many that you can explore. But you should do so with an experienced legal counsel.

Our start-up legal experts at Lazarus Legal have helped countless start-ups reach aspiring heights and navigate the industry’s dynamic landscape through sound and tailored legal advice that furthers your business goals. You can connect with us today for a consultation and find out how we can help you with your legal concerns.

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Mark Lazarus, the visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.

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Types of Crowdfunding

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We’d be lying if we told you that this bloke isn’t the big honcho of our team, but his name is a dead give-away. The founder of Lazarus Legal, Barry is an old school, tough as nails lawyer. They don’t forge litigators like this anymore.

With decades of experience in both Australia and South Africa, his wisdom is as renowned as his name. Back in the days when Schwarzenegger and Van Damme were kicking ass on VHS, Barry was kicking ass in the courtroom. And after all these years, he still has a reputation for refusing to back down.Barry is definitely the badass you’d want in a fight – in court or otherwise. But really, he’s a big softie. Just don’t let him know you know that (although he probably won’t read this anyway – navigating the Internet is not his strong point).

Aside from putting other lawyers in their place, taking long walks on the beach and spending time with his family, Barry enjoys seeing others succeed. Not only is Barry a staunch and unmoving litigator, he has sharp business and commercial acumen having started up ventures from scratch and growing them into full-blown franchises – from real estate to creating ice cream, to making pasta. With his experience on both sides of the commercial and legal equation, you want this guy to be on your side, whether you’re the next Zuckerberg realising your genius, or the next Zuckerberg taking on your opponents in court.

When Barry is not busy lawyering about, he is a part-time lawn bowler and a wannabe comedian, but never took both as a day job, because let’s face it, he’s a lot better at his day job.

If someone ever threatens you to lawyer up…relax, call Barry and he’ll handle the rest. 

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Mark Lazarus

Director

mark@lazaruslegal.com.au 

The visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past stories and experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.

He’s a bit of jet setter, splitting his time between Australia and the UK, maximising every hour of his professional life. He thrives on this adrenalin. It allowed him to work in private practice in Sydney, act for a host of famous celebrities in London, do a two year stint as a NSW barrister (and not the pretentious coffee type in the Melbourne laneways) and more recently did a gig as the Legal Director covering Europe, the Middle East and Africa for one of the world’s coolest fast-moving consumer good brands!  

As an Aussie and UK lawyer and former barrister, Mark not only has the gift of the gab but he’ll walk the walk to prove it too. He likes to think he’s a bit like Harvey Specter or Michael Corleone, the main difference is you can actually retain him as your lawyer and consigliere. He’ll tell you how it really is and will take on any challenge head on. Although litigation and court advocacy comes naturally to him, commercial and IP is what gets his blood pumping! 

When Mark is not out there doing his thing, you will probably catch him chilling at home with his family, on the sidelines of the soccer (football) pitch cheering on his two boys, crawling through mud obstacles, or training hard at the gym. Passion and commitment is what drives Mark to succeed, along with his burning desire to disrupt the legal profession by finding new ways to change the game.

He has sights on the future. So if you’re breaking new ground, ahead of the times, and on the verge of something big, but you need someone who’s got your back and who can give you straight up advice, this is the guy you will want on speed dial.

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