Crowd Funding

Discuss about the Crowd Funding.


Crowd-funding is considered to be a type of crowd-sourcing wherein a business establishment raises money through contributions from a large number of people for funding a new project or a new business venture and this is often undertaken with the help of internet mediated  registries. Apart from that this task is also accomplished through benefit events, mail-order subscriptions and other methods[1]. Crowd funding has emerged as an effective source of finance for the business establishments as business establishments are increasingly facing a lot of challenges for obtaining the necessary financial capital for expanding their business or starting up a new business venture. Conventional source of financing such as bank loans, venture capital or funding through angel investors are increasingly becoming quite tough and difficult for the business establishments as they come with a lot of riders and pre-conditions and this is one of the major reasons for the recent popularity and emergence of crowd funding as an effective source of business financing[2]. Crowd funding has been increasingly considered by the business establishments around the globe as an alternative form of financing due to the paucity of capital access.  Crowd funding has proved to be particularly attractive to SMEs and entrepreneurs who are looking to raise their capital quickly because unlike the traditional debt financing it does not usually require the following:

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A comprehensive credit assessment or due diligence of an organisation;

Any minimum securable asset base; or

Extensive negotiations with financiers regarding financing or creating a formal finance documentation.

However, there are a certain differences which exist between Crowd funding and Crowd sourcing and both of them are not exactly the same thing. In the words of Schwinbacher and Larraide[3], crowd sourcing helps a business establishment to outsource some of their specific tasks which are extremely vital for generating product sales in the market. It is considered to be an open call to the general public to contribute to their production processes by enabling them to deliver value to the customers[4]. This task is essentially undertaken by communicating and engaging with people over the internet. On the other hand, the crowd funding is often viewed as utilising the concept of crowd sourcing in order to obtain the necessary financial capital for funding a new business venture or a project (i.e. seeking financial support from the general population) or for the purpose of microfinance (wherein small amounts are contributed by many individuals with  no collateral).

There are various benefits which are being provided by crowd funding as compared to the traditional sources of business financing and this is the main reason for its apparent popularity among the business enterprises. The main advantage of crowd funding is the availability of a large number of consumers who are willing to voluntarily contribute a certain amount according to their capacity and ability[5]. This helps a business establishment to save a lot of time and money for their business and thus they are able to ensure their growth and success in the market. Moreover, the crowd of individuals which are funding their money within a new business project or venture could also share their views and insights regarding the any new business ideas which might help the business establishment to develop a competitive advantage in the market. This will invariably play a vital role in helping a small business establishment or a new business start-up which has a limited number of employees to reduce the time associated with the development of a new product or services[6]. Utilising crowd funding as a source of finance can bear rich dividends for an organisation when it comes to the marketing and popularising of their products and services. This is mainly due to the fact that having a committed and involved crowd at their disposal will invariably result in better acceptance of a product or service among the customers in the market and this will help an organisation to promote their product and service offerings in an effective manner. Thus, an organisation will be able to gain from the collective wisdom of the crowd and this will help in ensuring organisational efficiency and business productivity within an organisation. However, experts are having different opinions regarding the extent to which such collective wisdom could be provided by the crowd which could be utilised for ensuring the growth and success of a business entity in the market[7].

The process of crowd funding essentially stars with an entrepreneur posting a classified advertisement on popular crowd funding websites such as In the advertisement the entrepreneur shares his ideas and visions regarding a business concept and requests the necessary funds from the crowd. Entrepreneurs usually pitch their business ideas to the general masses which includes a detailed business plan that describes the diverse business activities and objectives of the proposed business venture, and how the entrepreneur intends to utilise the funds that he/she is planning to raise from the market for ensuring the growth and success of the business venture[8]. The crowd funding platforms also inform the funders what returns will they be getting in exchange for the capital which they are contributing in a new business venture. This is usually done through a terms and condition sheet which mentions all the different aspects of the financial dealings.

One example of a crowd funding venture in a commercial context is Star Citizen. This is a space combat video game which has been developed by Chris Roberts who is also the designer of the popular game Wing Commander. By April 19, 2013, Chris has been successful in raising a combined amount of $9,061,882 through Kickstarter and his own personal website.


One example of a crowd funding venture in a social context is Restore King Chapel Now. Every Day & Dollar Counts which is a charitable foundation that is working towards the restoration of the Martin Luther King Jr. International Chapel which is the only religious building that has been named after Martin Luther King Jr. The charitable foundation has so far raised a total amount of $5,048,213 for this purpose[9].

Despite the growing popularity of crowd funding as an effective source of finance across many global markets, Australia has taken a calculated and measured approach when it comes to crowd funding initiatives. Australia has been slow to recognise and adapt to this recent phenomenon. The regulatory bodies in Austrian markets such as Australian Securities and Investments Commission (ASIC) have proposed to apply the same existing regulatory frameworks to the crowd funding models[10]. The ASIC has issued a guidance in this effect in 2012 which included a number of factors such as the type of reward which is being offered to their investors in exchange for their financial contributions, the platform which is used for raising the funds, the investment scheme which is being utilised could be categorised as either a managed investment scheme, whether the fundraising has been done according to chapter 6D of the Corporations Act 2001 (Commonwealth).

ASIC has stated that any crowd funding initiative for any specific purpose can be categorised under a managed investment scheme and thus they would also be subject to the underlined regulation which have been mentioned under chapter 5C of the Corporations Act 2001[11]. Under this act, a managed investment scheme is considered to be a scheme wherein money has been invested by people in order to acquire the rights to the prospective benefits which are being offered by a scheme[12]. When funding is obtained through a crowd-source then the apparent lack of any stringent regulations in case of crowd funding makes it compulsory that the funding scheme will be most likely to be classified as a managed investment scheme. Added to this, the onerous regulatory and compliance requirements which are associated with  such schemes, it has become a necessity that the crowd funding models be incorporated within the existing definition of managed investment schemes which are presently in practice within the Australian market[13].

In the year 2014, the Australian Corporations and Markets Advisory Committee (CAMAC) have published a report which recommended that it was high time that a specific regulatory regime must be implemented for CSEF in Australia. These recommendations played a vital role in protecting the interests of the funders who have invested their capital through the medium of crowd funding. The recommendations included the following:

  • The creation of a new type of business entity which will be known as “exempt public company” which would specifically cater to the needs of the issuers of equity crowd funding.
  • Ensuring a proper licensing of online intermediaries by the ASIC.
  • Providing an investor cap of not more than $2500 for the individual investors to any particular issuer in any 12 months which should not total more than $10000 during the entire duration of 12 months.
  • Providing an issuer cap of not more than $2 million on the total capital which has been raised through the crowd funding platform during any 12 month period.

Austin R.P. & Ramsay, I., Ford’s Principles of Corporations Law, Butterworths, Australia, 15th edition, 2012.

Baxt, R., and Fletcher, K.L., Fridman, S., Corporations and Associations Cases and Materials on, Butterworths, Australia, 10th edition, 2008.

Cassidy, J. Corporations Law Text and Essential Cases. Federation Press, 4th edition Sydney 2013

Ciro T, Symes C, Corporations Law in Principle LBC Thomson Reuters, Sydney, 9th edition 2013

Fisher S, Anderson C, Dickfos, Corporations Law – Butterworths Tutorial Series, 3rd Edition Butterworths, Sydney 2009

Hanrahan, P., Ramsay I., Stapledon G., Commercial Applications of Company Law. CCH 14th edition 2013

Harris, J. Corporations Law, LexisNexis Study Guide 2014

 Harris, J. Hargovan, A.Adams, M.Australian Corporate Law LexisNexis Butterworths5th edition, 2015.

Harris, J.Butterworths Questions and Answers Corporations Law:, LexisNexis, 4th Edition Sydney 2013.

Li, G, Riley, S. Applied Corporate Law: A Bilingual Approach  LexisNexis 1st Edition 2009.

Parker, Clarke, Veljanovski, Posthouwer, Corporate Law,Palgrave 1st edition 2012

Redmond, P., Companies and Securities Law – Commentary and Materials, Law Book Co., Sydney, 5th, 2009.

Tomasic,R.,Jackson,J.,Woellner,R., Corporations Law – Principles, Policy and Process 4th Edition Butterworths., Sydney, 2002. 

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