Recommendation 18

Graduate fundraising regulation to facilitate crowdfunding for both debt and equity and, over time, other forms of financing.


Government should continue its current process to graduate the fundraising regime to facilitate securities-based crowdfunding. This would enable entities to make public offers of securities to a potentially large number of people (the ‘crowd’). The risks associated with crowdfunding investments would require some adjustments to consumer protections, including capping individuals’ investments and clearly communicating the risks.

Government should then use the policy settings for securities as a basis to assess wider fundraising and lending regulation to ensure it facilitates other forms of crowdfunding, including peer-to-peer lending.

A range of crowdfunding models is emerging globally. Crowdfunding facilitates the funding of projects or businesses, where small amounts of money are raised from the ‘crowd’ via an online facilitator (or platform).68 Financial crowdfunding models include:

  • Securities-based crowdfunding, where the ‘crowd’ invests in an issuer in exchange for securities — either equity (crowd-sourced equity funding, CSEF) or debt.69
  • Peer-to-peer lending, where an online intermediary facilitates lending between individuals, often in the form of unsecured personal loans, potentially to fund a business.70


  • Graduate fundraising regulation to facilitate innovations in fundraising emerging from new technologies and ensure policy settings are consistent across funding methods.
  • Provide firms, particularly small and medium-sized enterprises (SMEs), with additional funding options.


Problem the recommendation seeks to address

Funding for SMEs is essential to facilitate productivity growth and job creation in the Australian economy. However, compared with large corporates, SMEs — particularly start-ups — generally have more limited access to external financing and higher funding costs. These issues are discussed in more detail in the Interim Report.71

Globally, crowdfunding is emerging as an alternative funding source for SMEs. Since 2009, overall fundraising via crowdfunding has grown by around 50 per cent annually, although crowdfunding still accounts for a very small share of total financing.72

In Australia, current regulatory settings impede the development of crowdfunding.73

  • Offers of securities — Proprietary companies are generally prohibited from making public offers of securities (equity and debt), and shareholder numbers are capped at 50 non-employee shareholders. Start-ups or other small businesses have no viable alternative structures, as the public company structure has costly compliance requirements.
  • Peer-to-peer lending — Licensing requirements apply to direct lender–borrower models and intermediated lending models that operate as a MIS.74

The regulatory framework should facilitate financing via the internet.


Other jurisdictions are adjusting regulatory regimes to accommodate crowdfunding. For securities-based crowdfunding, both the United Kingdom and New Zealand implemented regulatory regimes in mid-2014. Canada is finalising its proposed regime for equity and debt fundraising. In the United States, regulators are yet to settle rules for CSEF.75 Peer-to-peer lending is more advanced globally than CSEF, as accommodating peer-to-peer lending typically has required less significant regulatory adjustment.

In Australia, Government will consult on a proposed regulatory model for CSEF. The 2014 Corporations and Markets Advisory Committee’s (CAMAC) CSEF report considered that, for CSEF to operate in the best interests of investors and issuers, a specific regulatory structure is required. Elements of the CAMAC proposal include:

  • Placing a cap on an issuer’s fundraising — no more than $2 million in any 12-month period — and limited disclosure requirements.
  • Introducing caps on investments by investors — $2,500 per issuer, and $10,000 overall, in any 12-month period — and communicating the high risks to investors.
  • Requiring issuance to occur via a licensed intermediary that is prohibited from providing investment advice, soliciting investors and lending to investors.76


The Inquiry recommends that Government should graduate fundraising regulation to facilitate securities-based crowdfunding and consider more holistic regulatory settings to facilitate internet-based financing. A well-developed crowdfunding system can aid broader innovation and competition in the financial system. Submissions generally support a more accommodative regulatory regime and note that crowdfunding would give some SMEs, particularly start-ups, more funding options.77 Stakeholders suggest that Australia is already lagging other jurisdictions in facilitating crowdfunding.78

ASIC highlights the risks associated with crowdfunding, particularly CSEF.79 For investors, these include fraud, issuer failure and dilution — that is, initial ‘crowd’ investors could be diluted by subsequent equity issues. For issuers, risks include action by investors if outcomes do not meet their expectations. The Inquiry acknowledges these risks. However, measures such as limiting individuals’ investments and communication to them of the risks of crowdfunding would help mitigate such concerns.

For securities-based crowdfunding, Government should promptly allow issuers to make public offers of simple securities, including common shares and non-convertible debt.80

For peer-to-peer lending, the current MIS regime may be able to accommodate different types of platforms — including pooled investment mechanisms and ‘bulletin board’ models — where investors choose to lend to specific ventures. Consideration should be given to graduating the MIS regime, but also to facilitating other mechanisms for direct lending, with policy settings consistent with securities-based crowdfunding.

When new regulatory settings are in place, Government should monitor crowdfunding activity to determine whether settings require adjustment. Of particular interest would be consumer protection concerns and the allocative efficiency of crowdfunding. To this end, crowdfunding platforms could be required to make information about their activities public, which would support research and policy analysis.81

Other recommendations in this chapter could help facilitate crowdfunding, including Recommendation 14: Collaboration to enable innovation, Recommendation 19: Data access and use and Recommendation 20: Comprehensive credit reporting.

68 Crowdfunding can be financial or non-financial. Non-financial crowdfunding is where entities seek donations in exchange for some non-financial reward. This is not regulated as funding.

69 Crowdfunding does not include non-public offers of securities. In Australia, the Australian Small Scale Offerings Board provides offers of securities to retail investors under the ‘20 in 12’ prospectus exemption in s708(1) of the Corporations Act 2001.

70 Ontario Securities Commission (OSC) 2012, OSC Exempt Market Review: Considerations for New Capital Raising Prospectus Exemptions, OSC Staff Consultation Paper 45-710.

71 Commonwealth of Australia 2014, Financial System Inquiry Interim Report, Canberra, page 2-59.

72 The European Securities and Market Authority (ESMA) surveyed estimates of market growth and size. It notes that estimates suggest “activity has been growing fast, at yearly rates above 50 per cent since 2009”, and “there seems to be a 50/50 breakdown between financial and non-financial categories”. ESMA 2014, Position Paper: Crowdfunding, European Union, Paris, page 3.

73 Corporations and Markets Advisory Committee 2014, Crowd sourced equity funding: Report, Commonwealth of Australia, Canberra, page 14.

74 For example, RateSetter and SocietyOne.

75 Corporations and Markets Advisory Committee (CAMAC) 2014, Crowd sourced equity funding: Report, Commonwealth of Australia, Canberra.

76 Corporations and Markets Advisory Committee (CAMAC) 2014, Crowd sourced equity funding: Report, Commonwealth of Australia, Canberra.

77 Banki Haddock Fiora 2014, Second round submission to the Financial System Inquiry, Attachment B, page 4.

78 For example, Australian Private Equity and Venture Capital Association 2014, Second round submission to the Financial System Inquiry, page 20.

79 Australian Securities and Investments Commission, First round submission to the Financial System Inquiry, pages 84–85.

80 This approach is similar to that being considered by the Ontario Securities Commission (OSC). OSC 2014, Introduction of Proposed Prospectus Exemptions and Proposed Reports of Exempt Distribution in Ontario, OSC, Ontario.

81 Such as funds raised, average investment, and degree that offers are over- or under-subscribed.