Business and Company Law Assignment

Business and Company Law Assignment

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Business and Company Law Assignment

The phrase crowdfunding describe a practice of fund raising via the pooling of moderately small financial contributions from many investors to fund a business or to finance commercialization of a novel product, normally facilitated via an online platform. It is a collective measure employed by huge number of people who, support personal businesses and projects using small contributions started by organizations or entrepreneurs. The capital raising is normally done via social networks, aided by internet special platforms. Crowdfunding is a modern source of raising capital that gained momentum after ArtistShare launch in 2003 by Brian Camelio who was a computer programmer and a musician. Crowdfunding can demonstrate specific attractiveness to entrepreneurs and SMEs working to raise quick capital as contrary to a traditional debt financing, it specifically does not need a detailed credit due diligence or credit assessment, a fundamental securable base of asset, and negotiations with the execution or financiers of official finance documentation. There are various forms of crowdfunding, however there are only four accepted forms of crowdfunding which are categorized based on the used taxonomy. They include reward-based, lending-based, donation-based, and equity-based forms of crowdfunding. This paper focuses on discussing crowdfunding and how it can effectively be used by Howard Jones to fund his business idea of doubling the life of batteries utilized for electricity storage in the solar energy market.

Crowdfunding as Employed in a Commercial Context

Crowdfunding can be used to finance an SME or commercialization of a product in a number of ways. One way is reward-based crowdfunding which refers to a situation where financial contributions are carried out in expectation of a benefit in future or current goods. I this case, the public will finance Howard idea with intention getting or using the product that Howard has in mind. So Howard should be sure that the idea will work to ensure that he rewards the public with an improved solar battery. The second method is donation-based crowdfunding which refers to contributions that are carried out to back a social course. This kind of funding may not be fit for Howard since the idea seems more as an entrepreneurial idea than a social based idea. The third possible form of funding is equity-based crowdfunding which is a financial contribution carried out with anticipation of earning a stake position in a developing company. In this case, the contributors will do so if they are convinced that the idea will work and that they will be part of the established company, either as investors or partners in the business. This can be a good idea to Howard, where he will get funds to people interested in being part of the company and hence part of those who will share the profit. The fourth possible way in which Howard can manage crowdfunding is through lending-based crowdfunding. This form of crowdfunding involves the collection of discrete financial contributions which are then given as repayable debt with interest. In this case, Howard will take money from the public as a loan, with a promise of repaying the loan using a certain strategy with a defined rate of interest.

The selection of the right funding method will highly depend on the funders Howard manages to convince with his idea or intends to work with. The four methods of funding can be categorized into two crowdfunding models. They include peer-to-peer lending (P2Pl) and crowd-sourced equity funding (CSEF). In model of CSEF, people raise money in exchange of equity or securities in a firm. In this respect, there are a number of similarities between the traditional share capital issue by a firm and CSEF model. This model distinctively typified by the application of online intermediary podium to typically sell insignificant equity interest provided by firms to a possibly unlimited number of entities or persons. Peer-to-peer lending refers to a model which is debt-centric that allows financial contributions to be carried out in return for resultant profit that is relative proportion. The lending arrangement is directly enhanced between borrowed and lender, with online platform operator in various cases being a contracting party with the borrower and lender and merely offering an administrative and facilitation role in other situations. Thus, it is Howard role to determine the model that fits him most and adopt it accordingly.

Example of Commercial Based and Social Based Crowdfunding that have taken Place in Real Life

Crowdfunding has been used to raise funds in a number of occasions that include social and commercial related occasions or purposes. There are already various crowdfunding platforms that have been established to facilitate this activity. Among the most popular platforms include Crowdfunding.com, Indiegogo, and Kickstarter. A good example of commercial related crowdfunding event was carried from 2012 to 2015 in Kickstarter. The activity involved Aplo Alto-based Pebble Time (Schuz & Mollica, p.136). The company was reaching to the crowd to help it fund for a new smart watch which they said would have a battery that lasted for seven days and that would be water resistant. The Smart watch was anticipated to beat Apple Smart watch that though resistant to water, its battery is considerably poor, lasting for only 18 hours. The watch was to cost around $99 compared to the apple watch that costs $349. The company managed to attract a total of 78471 backers with a crowdfunding contribution of $20338986, which was great achievement following their initial target of $500000. The adopted crowdfunding technique was reward based where the contributor anticipated benefiting by obtaining the manufactured product, which in this case was the smart watch.

The recently featured social crowdfunding is hurricane Harvey relief for alliant employees which is being conducted via Fundly platform. The contribution is focused to assist individuals affect by hurricane Harvey particularly Alliant Insurance employees and their family members. The contribution target is $95000 while the currently raised amount is $103467, in September 2017, meaning it has already surpassed the anticipated target. The project managed to get 463 donors and it surpassed its target long before its due date. Social crowdfunding is basically made to assist those experiencing social problems or those that may need to be promoted socially. For instance in this case, the funding is done to assist those that are currently being affected by hurricane disaster in Houston. Another successful social crowdfunding project was conducted by the ASRC Food Justice Truck via Startsomegood platform. The project which was conducted on April 2014 focused on raising money to assist in feeding 2000 asylum seekers in Melbourne for one month. The project attracted 933 supporters who raised a total of $153,412 that suppressed the organization target of $100000. This project assisted in assisting asylum seekers to survive for at least a month without lacking enough to feed on.

Legislative Framework Enacted for Regulation of Crowdfunding in Australia Under the corporations Amendment Act 2017

In March 2017, the Australian government enacted the crowdfunding regulation which was an amendment to the Corporation Act of 2001. The amendment focused on controlling the use of crowdfunding in the country which was being successfully used to fund companies in the country. The law defined crowd-source funding as a financial service in which small businesses and start-ups generally raise money from many of investors who invest their money in small amounts. The legal framework focuses on companies looking to raise money via crowd-sourced funding and intermediaries looking to offer crowd-sourced funding. The legal framework reduced public fundraising regulatory framework while upholding suitable investors’ measures of protection. The framework defines the offers that are eligible for CSF based on division 2. To be eligible, an offer must be from a company which offers to issue for its securities. In this case, Howard must establish a company and register it. The company becomes CSF eligible after making the order. Each security based on this provision has unique regulations and must adhere to the issuer chapter. The law also dictates that fund collected by the offer should not be used by either the company or its related partner to invest in interests or securities in any other schemes or entities than identified in the offer. The offer must as well satisfy other requirements defined based on the kind of the offer or security. The law requires that securities offer for company issue should state the maximum amount that is targeted by the offer, the total amount of money raised within 12 months before a new offer is made, and be pursuant to the CSF offer provided in the time by the firm or associated parties of the company, including the amount contributed by the firms that did not requires to disclose their contribution as per the Subsection 708 (1 or 10). The amount raised through crowdfunding at a single offer should not exceed $5 million.

To be eligible to CSF, the company must satisfy all the requirements. These requirements include that it must be a public company but limited by shares, principal place of the company must be in Australia, most of the directors of the company must normally reside in Australia. It also required that the company should comply to the turnover and asset test, the company or its party should not be listed corporation, or have interest in other schemes or entities or investing in securities. The asset and turnover test compliance include having the company’s value of consolidated gross asset and that of related parties of less than $25 million. The consolidated company and other related parties revenue should be below $25 million.

To make the offer Howard will be required to create offer document with all the needed information as per the law. The document also needs to set out the offer in question. The document needed to be worded and written in an effective, concise and clear manner. This document will need to be drafted in only one CSF intermediary platform. The intermediary need to check on complies of the offer before it is drafted. It is also important to ensure that the intermediary is licensed. The new framework demands that intermediaries be provided with licence that will give them the authority to offer CSF services. New public companies will be permitted to register for CSF while the old or existing proprietary companies will be eligible to be converted to be eligible for, except from corporate governance under the regime of the CFS. The directors of the offer and the intermediaries must consent on the document before drafting it. The consent must be written. To be able to raise capital through crowdfunding, Howard must satisfy all the legal requirements and identify intermediaries that qualify and licenced.

The Australia crowdfunding legal framework will be contrasted with that of the United Kingdom. The Australia 2017 Corporation Act provided guidance for crowdfunding offers without discrimination. However the UK framework specifies that their legal framework focuses only in investment-based and loan-based crowdfunding. It does not apply to donation-based and reward-r prepayment-based crowdfunding. Similar to Australia, the amount raised in the first offer in a period of 12 months should not exceed €5 million. Unlike Australia, the UK has restrictions for investors that act as offer intermediaries. Their licensing checks on eligibility based on various aspects that include individual net worth, restriction on preceding year net investment. A similar restriction is put on the offer. The amount one should raise through lending is restricted, with credit worthiness being the main guide a platform for risk management. Offer need to frequently report to the FCA with regard to the loan status, investors complains, client money position and their general financial position. Based on the gathered information, the Australia system seems to be stricter on the company providing the offer compared to the intermediaries. Intermediaries are highly protects. In addition, Australian legal system seems govern all forms of crowdfunding while that of UK only focuses on the lending and security systems.

Conclusion

Crowdfunding is a form of funding that a start-up business can employ to raise business capital. The investors make their contribution via website platforms through lending, reward based or equity based crowdfunding system. This ensure that a business is boosted to grow, but with investors anticipation of benefiting from it in the future. The investors make their individual little contribution based on how convinced they are regarding the idea of the company. However, this is not as easy as it seems, to effectively qualify; the offer must be in a share limited public company. Howard must start and register a public company with limited shares. The company wealth must not exceed certain amount and the company must be able to adhere to all eligibility and compliance requirements. With these qualifications, Howard will manage to get the capital in any of the three crowdfunding method to grow his idea. The best crowdfunding method for Howard based on the fact that he does not have any company at the moment and hence no asset is reward-based system.

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