Crowd-Funding and Property Investment
Crowd-funding is a rapidly developing form of new capital raising that has been evolving in Australia in recent years. Crowd-funding broadly consists of schemes raising funds, often for early stage start-ups or small enterprises, through investment by individuals (the “crowd”) via the internet.
Crowd-funding is an increasingly popular method of capital raising used by entrepreneurs, start-ups, small enterprises and artists to raise funds in support of a specific business idea or project, allowing them to turn their ideas into reality. It also opens up investment opportunities to a range of investors, allowing individuals to directly invest in and benefit from ideas or projects that they think will succeed.
The development of crowd-funding has been facilitated by the internet, as the underlying idea or project is typically advertised on the internet via a crowd-funding website (known as an intermediary), with the funds usually being raised by the crowd-funding website. Individuals, who wish to invest in the idea or project, can invest by submitting funds through the crowd-funding website.
Traditionally, the individuals who chose to invest in an idea or project by way of crowd-funding were offered a reward of nominal value, such as free products or discounts. This has changed in recent times though, with the introduction of equity based crowd-funding investment (which allows investors an equity stake in the company as a reward for their investment).
Crowd-funding for Property Investment
Crowd-funding has recently been applied in Australia to allow investors to participate in property investment opportunities. Several venture capital groups in Australia have launched online crowd-funding investment platforms to facilitate the financing of new developments by developers and to allow eligible investors to build a portfolio of properties online. A couple of recent examples are:
- VentureCrowd Property, which has launched an equity based real estate crowd-funding platform allowing eligible investors to invest in properties and to build property portfolios without having to deal with real estate agents and solicitors or conveyancers; and
- CrowdfundUp, which has launched a real estate crowd-funding platform offering both debt and equity investment opportunities to eligible investors, for the purposes of introducing or matching investors with its real estate development partners looking to raise capital for real estate projects.
VentureCrowd Property has teamed up with property development group Mirvac for the purposes of its platform, offering eligible investors an opportunity to invest in Mirvac properties for as little as $100 through its crowd-funding structure.
TressCox Lawyers recently advised VentureCrowd Property on the terms of an Option Deed and Contract for an investment opportunity in a Mirvac development at Bondi that is currently open on VentureCrowd Property’s crowd-funding platform.
Regulatory Restrictions to Crowd-funding in Australia
Crowd-funding in places such as the United Kingdom, North America, Italy, France and New Zealand is well established and supported by equity crowd-funding legislation and appropriate financial reforms. However, in Australia the development of crowd-funding has been limited by the current fundraising regulatory environment in Australia.
Under Australia’s current regulatory environment, equity based crowd-funding investment is regulated by the Corporations Act 2001 (Cth) which contains a strict disclosure and licensing regime designed to protect unsophisticated “mum and dad” retail investors.
Generally, the Corporations Act has stringent disclosure requirements (such as the issue of a prospectus) where companies seek to raise funds from the public. Disclosure is not required if:
- A company raises funds of less than $2million from less than 20 investors over a 12 month period. Given the purpose of crowd-funding is to raise funds through the internet from a “crowd” of investors, this exemption is not conducive to this form of fund raising.
- The investment is offered to “sophisticated” or wholesale investors, being investors who hold net assets of at least $2.5million or have had a gross income of at least $250,000 in the last 2 financial years. It is this exemption that is relied on by equity crowd-funding platforms in Australia, including the recent application of crowd-funding to property investment.
Another impediment hampering equity based crowd-funding in Australia is that the online platforms promoting the crowd-funding investment opportunities are likely to be carrying on a financial services business for which an Australian Financial Services Licence will be required, the obtaining of which is costly, time consuming and heavily regulated, and the holding of which will impose significant compliance requirements under the Corporations Act.
Given the above impediments, the Australian Government’s Corporations and Markets Advisory Committee released a report on crowd sourced equity funding in May 2014 which outlined recommendations for implementing this model of fund raising in Australia, in order to permit investment by retail investors. A discussion paper was released by the Australian Treasury in December 2014 seeking feedback from the industry on potential equity based crowd-funding regulatory models for Australia.
There is hope that in time there may be legislation changes to open the way for retail investors to be able to participate in the property investment opportunities being offered by the online crowd-funding investment platforms in Australia.
In this regard, the Government announced in the recent Budget that the Australian Securities and Investments Commission will receive funding to implement and monitor a regulatory framework to facilitate the use of equity based crowd-funding in Australia. In announcing this, the Budget papers noted that crowd sourced equity funding (equity based crowd-funding):
“… is an emerging form of funding that allows entrepreneurs to raise funds online from a large number of small investors, and has the potential to increase funding options available for entrepreneurs to assist in the development of their business.”
Such changes will allow younger and less wealthy investors, who are currently priced out of the property market, to both enter the property market in Australia and build a diversified portfolio.
We will keep you updated on any proposed changes to the current fundraising regulatory requirements in Australia in order to facilitate the use of equity based crowd-funding.
We can assist if you are interested in:
- participating in a crowd funding property investment;
- seeking finance for a property project via crowd-funding; or
- seeking to establish a crowd-funding platform for property investment.
Christopher Conolly, Partner
Benjamin Harris, Senior Associate