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Banking and Finance Law

Question:

Discuss about the Banking and Finance Law.

Answer:

Introduction

Development of technology over the years has changed in a significant way how businesses raise funds. Entrepreneurs have learnt to make use of internet to reach a wide range of people and establish a connection with them to make an appeal to them to contribute their money to businesses which can bring benefits to parties on both sides. This has come to be called crowd funding which is becoming more popular with businesses and people.

Role of crowd funding in raising capital

Crowd funding is a method of raising finance for business activities through a network from friends, relatives, common public and institutional investors. This approach to raising money for business has been a real boon for start ups and other small businesses which found other means of raising finance difficult or out of their reach. Even established large companies have used crowd funding to finance their business expansion.

In case of crowd funding, business firms use social media or crowd funding platforms to reach thousands of people through the internet and ask them to contribute their money for the business activities of the enterprise. This contribution would take the form of a donation where the people do not get anything in return from the business firm for their money put in the enterprise. People would donate money in such cases if they are interested in promoting the kind of business being done by the enterprise which has resorted to crowd funding. For example if a firm is carrying out the activity of selling educational books to children at reasonably fair prices, several people would donate money for its business activities as they feel that the business is promoting a noble cause.

In other cases of crowd funding people would invest in a business in return for a reward which might be in the form of a product. Then people would also lend money through the medium of crowd funding in return for interest to be paid to them by the firm collecting money through crowd funding. This is like debt financing.

There is another way of crowd funding where people contribute money to a business in return for equity in the business firm. Thus in this case the contributors become shareholders in the enterprise collecting funds through crowd funding.

The firms resorting to crowd funding carry out what are called crowd funding campaigns on the internet. This would in many cases involve the firm making available to people video providing information about its business activities and plans for the future. Moreover information is also provided about the returns promised to people. The marketing skills of the business firm are put to test in running its crowd funding campaign.

Many people with business ideas would like to make use of the method of crowd funding and they would be able to impress common people with their marketing skills and collect funds from them. But just any business idea does not have merit to be funded. Moreover the public money has to be used responsibly by these start ups. Some of the firms would try to just vanish with the public money collected through crowd funding. This is the reason why there is need for effective laws to protect the interests of common people who invest money through this method. The Australian Investments and Securities stipulated in 2012 that legal provisions for crowd funding were that it was to be treated as any other managed investment scheme and the firms resorting to such financing would need to get a financial services license and would have to disclose certain information and issue a prospectus (under the Corporation Act 2001), when equity is offered to people in return for their contribution in crowd funding. In addition Australian laws pertaining to Consumer Protection and Intellectual property would also apply in case of crowd funding.  In 2015 a law was passed in Australia that provides that such crowd funding can be done by way of providing equity to contributors only by unlisted public companies with less than five million dollar worth of assets.

Crowd funding has become very popular in several countries. The economy of Australia would also grow with greater speed as startup firms acquire more funds to expand their businesses. On the other hand the firms raising money through crowd funding also have to realize that this type of financing also creates more responsibilities for them. When debt is collected from a large number of investors, it has to be paid back. Although the money can be collected with speed and much convenience through crowd funding, it has to be paid back. Even the startup business firms which are relatively smaller in size need to maintain proper infrastructure to service investors. These people have to be paid back. Moreover just having a good business idea and easy funding is not a guarantee for success. It requires lot of skill, dedication and effort to convert a business idea into a successful business which can provide returns to its investors. In this case ordinary people who become lenders or equity shareholders in a business enterprise as a result of crowd funding are not usually like seasoned investors who can identify the right business idea and also provide some sort of mentorship to the management of the growing business firm.

Examples of crowd funding in commercial and social contexts

One of the examples of crowd funding in a commercial context in Australia is the case of a firm named Zookal which was formed in Sydney and now operates from Singapore. This business enterprise s engaged in offering a number of services for people studying in universities. The firm has raised over five hundred thousand dollars in the crowd funding[5]. Zookal has raised this money by using a crowd funding platform. This shows the important role that intermediaries are playing in crowd funding. Further this crowd funding also indicates the growing popularity and support of Australian people for business firms which offer people a participation in the growth of businesses which are based on sound business ideas which can really work in the business world. The Australian government also needs to support such firms which are also contributing to the growth of economy also by assisting students and in turn helping in creating a more educated work force for the country. The government needs to make transparent laws at the earliest relating to crowd funding in Australia and also ensure that these laws support rather than discourage entrepreneurs.

An example of crowd funding for a social cause is found in the case of ASRC ( Asylum Seeker Resource Centre) Food Justice Truck where a crowd funding campaign is being carried out on a crowd funding platform Startsomegood.com to make people donate for buying a truck by a social organization which would be used for making available fruits and vegetables at discounted rates to asylum seekers. These refugees do not have working rights in Australia and receive inadequate financial assistance from government which should also realize the importance of funding for organizations who are doing humanitarian work and looking after the needs of refugees who have been granted asylum in Australia and are a collective responsibility of people and government. Social organizations are using internet in addition to traditional methods for collecting funds and also promoting their social causes. As society evolves the government also needs to take steps to regulate such activities to prevent fraud and see that funds are used for the purposes claimed in the crowd funding campaigns.

Proposed legislative framework for crowdfunding in Australia

As crowd-based funding is gaining popularity as a source of finance among start-ups and small and medium enterprise, countries around the globe have recognised its importance from financial perspective and brought it under proper governance through regulations and legislations. However, Australian government was slow to recognize the potential of crowd-based funding and as such does not have any specific legislation governing the phenomena.

Current Scenario

Currently, Australia uses a rigorous regulatory framework/ guidelines to monitor crowd-based funding models in the country to protect the interest of investors. These guidelines relate to managed investment schemes based on the rewards given to investors, procurement of Australian financial service (AFS) license by intermediaries providing financial service and providing disclosure documents before raising funds under Chapter 6D of the Corporations Act 2001. These guidelines were issued by the Australian Investments and Securities Commission (ASIC) in 2012. The current guidelines are considered to be unsupportive in realizing the full benefit of this alternative source of finance.

Proposed Legislative Framework

In the wake of increasing popularity of crowdfunding in Australia, the government recognised the need and importance of a proper legislative framework for the same. As such, in 2014, the Australian Corporations and Markets Advisory Committee (CAMAC) supported to introduce a regulatory regime for governing crowd-sourced equity funding (CSEF). The recommendations provided in the form of Corporations Amendment (Crowd-sourced Funding) Bill 2015, which was introduced in the Federal Parliament on December 3rd 2015, are as follows:

  • Only the company that has been deemed as an ‘eligible CFS company’ can raise funds using this method. An eligible CFS company is one that is a public company limited by shares based in Australia with annual turnover less than $5million.
  • The new company, ‘exempt public company’ for use by equity based crowdfunding issuers should be created. This status can be adopted by the companies that wish to raise funds through this method, for a limited time period.
  • All the online intermediaries need to obtain license by ASIC and become “CFS Intermediary” to operate crowdfunding platform. This will safeguard investor’s interest by facilitating communication between them, provide early warnings and conduct due diligence checks on issuers. Moreover, the intermediaries are prohibited to advise the investors.
  • An “investor cap” for individual investors to limit the maximum loss in case of failure of business. Investors can invest maximum of $2500 in any single firm while total investment in a year cannot exceed $10,000 in total.
  • An “issuer cap” for individual firm or start-up wherein they can raise maximum of $2 million from equity based crowdfunding during any year. Also, the issuers are prohibited to float any advertisement regarding the equity offer.

These recommendations would address the shortcomings of the existing guidelines related to crowdfunding and also make the existing structure for CSEF in Australia flexible and bring it at par with other jurisdictions that allows CSEF like New Zealand, UK and US. However, recommendation to adopt new corporate form of “exempt public company” and CFS disclosure requirements would make the proposed framework complex and restrictive. Moreover, it will also lead to more costs for all the stakeholders in terms of conducting due diligence, disclosure documents, compliance costs and many more.

Comparison of Australia’s and UK’s Approach to Crowdfunding

With the growth of crowdfunding all over the world, governments of different countries are viewing this alternative source of finance as opportunity as well as a challenge. As such, they have adopted different approaches to regulate crowd-based funding. While countries like US, Germany, Italy, and France exhibit a rather restrictive approach to crowdfunding, countries like UK and New Zealand exhibit a light and flexible approach in regulating crowdfunding norms in their country. Following is a comparison between the approach adopted by UK and Australia for regulating crowdfunding.

As discussed above, the proposed legislation for CSEF in Australia require companies to adopt a “exempt public company” status and also limits the total amount that they can raise to $2 million. Further, the intermediaries facilitating crowdfunding are required to obtain a license and conduct regular due diligence checks of the issuers. Also, as per the Australian legislations, there is a limit on the amount of total investment made by an individual investor during a period of 12 months. This regulation regime is a bit restrictive and limits the extent of benefits that the SMEs and startups can derive.  Moreover, there are prospectus provisions requiring disclosure that are to be followed by all the companies that use crowdfunding to raise funds.

However, in case of UK, The limits imposed on the issuers or the investors on the amount that they can raise or invest using this platform are comparatively much higher (amounting to €5 million). Also, the intermediaries are not obliged to obtain a new and specific type of license to facilitate crowdfunding service. They can obtain existing license such as that of a broker dealer and can deal in any type of security that lack secondary market.[15] However, in case of Australia, the funds can be raised through equity only. Therefore, it can be said that UK approach is more flexible in facilitating crowdfunding.

Conclusion

Any business activity which involves large amounts of public money needs to be regulated by government. It is the duty of the government to act as a guardian of interests of people who sometimes do not have the knowledge and means to protect their investments[16]. Thus the Australian government needs to make specific laws relating to crowd funding to guide businesses and people regarding how to carry these activities in an organized way.

References

Afr.com, Government Blows Its Chance With Equity Crowdfunding Laws (3 December 2015)

Asylum Seeker Resource Centre, Food Justice Truck (2016) < https://www.asrc.org.au/foodjustice/ >

Australian Government, ‘Crowd-sourced Equity Funding’ [2014] Discussion Paper.

Australian Government, “Crowd-sourced Equity Funding Report” [2014] Corporations and Market Advisory Committee.

Dennis Briintje and Oliver Gajda, Crowdfunding In Europe: State Of The Art In Theory And Practice (Springer, 2016) 55

Erin Brown, Crowdfunding in Australia: A viable alternative?(24 May 2016) mccabes < http://www.mccabes.com.au/crowdfunding-australia-viable-alternative/>.

Kevin Lawton and Dan Maron, The Crowdfunding Revolution: How To Raise Venture Capital Using Social Media (Mcgraw Hill, 2013) 72

Legal Vision, What You Need To Know About Crowdfunding In 2016 (5 January 2016) < https://legalvision.com.au/what-you-need-to-know-about-crowdfunding-in-2016/ >

Leigh Schulz and Domenic Mollica, ‘The regulation of crowdfunding in Australia: where are we and what’s to come?’[2015] Australian Banking & Finance Law Bulletin.

Startupsmart.com, First Equity Crowdfunding Deal In Australia For 2016 Raises More Than $ 675000 (2 February 2016) < http://www.startupsmart.com.au/advice/legal/first-equity-crowdfunding-deal-in-australia-for-2016-raises-more-than-675000/ >

Therese Torris, Global Crowdfunding & Local Regulation: From Light Touch to Prescriptive Bespoke Rules (18 May 2016) Crowdfund Insider < http://www.crowdfundinsider.com/2016/05/85762-global-crowdfunding-local-regulation-from-light-touch-to-prescriptive-bespoke-rules/ >.

Thomas Elliott Young, The Everything Guide To Crowdfunding (Adams Media, 2013) 14

James Bull and Harry New, ‘New equity crowd-source funding (CSF) legislation’ (2015) (4) Butterworths Corporation Law Bulletin 7, 9.


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