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Historically startups and early stage companies have looked to venture capital and angel investors to source funding. As previously, restrictions within the Corporations Act 2001 (Cth) limited startups and early stage businesses from seeking funding from alternative sources like retail investors, meaning startups had to always rely on the sophisticated and professional investors for early capital raises.

Fortunately, this changed in 2017, when the Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) came into effect, enabling the use of crowd-sourced equity funding (CSEF) by public unlisted companies aka startups. This legislation opened the flood gates on a new source of capital raising and will no doubt support the startup ecosystem tremendously.

What is CSEF?

The CSEF Act provides an alternate source of capital to the traditional methods and allows startups to raise up to $5 million (AUD) in any 12 month period. Investments can come from a large number of retail investors, who each can only invest up to $10,000 in a specific entity in any 12 month period.

An advantage of taking this route is that generally, when retail investors invest in a startup through CSEF they are unlikely to require significant governance rights within the startup. As a result, founders will enjoy more flexibility using retail investors as opposed to the more significant expectations that the professional investing community are likely to demand.

Whilst the CSEF is aimed at startups and innovative companies, the Act can be accessed by all publicly unlisted companies with a few exemptions. For example, the company’s business directors must 'ordinarily reside in Australia' and must have a 'consolidated annual revenue of less than $25 million' are two of the limitations. The exemptions for CSEF can be found here in full.

What is the potential impact?

Whilst we don’t expect CSEF to override the need to access historical sources of fundraising, this new legislation is sure to open up the investment market and will introduce new players into the startup space. This ultimately means more capital for startups and can only be beneficial for the growth and development of innovative companies and ideas.

It is also crucial to remember that investment aside, angel investors and venture capital firms provide expert mentoring, relevant networks and coaching when engaged with a startup. Good mentors in the ecosystem are priceless and the support of a VC who shares your vision is worth its weight in gold in the long haul.

A final thought

When going for a raise or considering an investment opportunity, founders should always consider the terms and conditions of the investment in full; dilution consequences, implications for future fund raising activity and governance rights relating to how they drive the business and utilise funds following a successful raise. A startup lawyer can assist you with the process and also help structure and close investors to support your next phase of growth. There’s no harm in asking.

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