Crowdfunding

The very nature of the community shares business model leads to the conclusion that techniques for crowdfunding are a good fit for community based funding initiatives.

Crowdfunding is a relatively new means of raising money. There is no legal definition of crowdfunding and there is no specific crowdfunding regulation in Australia8.

Crowdfunding is a product of the enormous reach and power of the internet, particularly, social media. The internet provides an instant means to communicate messages from people or organisations that want some help. Charitable or international aid organisations use the internet to raise funds for disaster relief or to help raise funds to develop cures for diseases. If individuals have faith in the credibility of the organisation seeking funds then they will readily donate money to that cause.

This method of raising funds has more recently been used to fund innovative business start-ups or artistic proposals. Individuals that seek funding across social media generally ask for small amounts as donations or moderate amounts in return for some benefit. For example, a person wishing to make a music album may seek donations of very small amounts in return for a notification that the album has been produced and they may ask for larger amounts in return for a copy of the album to be supplied once it has been produced, like a pre-payment for goods.

The most successful of these campaigns for funding over social media are those that offer a credible promise of an outcome, particularly where the outcome or product is seen as innovative or popular.

A proposal in 2015 to produce an innovative means of harvesting honey from beehives by an Australian inventor managed to net some millions of dollars to enable the inventor to produce the specially designed beehive on a large scale basis. Much of the funds received were in the form of prepayments for the product. The crowdfunding campaign was promoted by Indiegogo.com, a platform established in the US.

Money paid by the ‘crowd’ is paid in the knowledge that the payment will not provide an investment return like a dividend or interest. It is paid on the basis that it is either a donation or a prepayment for a product or service. It is also paid with the knowledge that the innovative enterprise may not succeed and if that is the case, then the money will be lost.

‘Crowd’ members who make these payments take a risk in a similar way that shareholders take when they buy shares in a new company. They are willing to take risks where the amount to be paid is small and the information about how it will be used is credible.

Today, crowdfunding is seen as a legitimate means of raising funds for start-up enterprises. There are a number of websites devoted to crowdfunding campaigns. These websites provide guidance on how to construct a campaign, they host the campaign information and they provide a point for the collection of payments under the campaign:

In Australia the use of crowdfunding for business is limited to the start-up period of a profit making enterprise. In other words, people are willing to get the project ‘off the ground’ but once it starts trading, the enterprise must fend for itself by actually delivering a saleable product that the initial funder may or may not be able to acquire. However, there is evidence that using the ‘crowd’ to fund the ongoing operations of an enterprise is feasible where the enterprise is something that communities believe in strongly.

Despite the similarities of crowdfunding to ‘risk capital’, there are different regulations that apply where an enterprise wants to offer persons a share or ‘stake’ in the ongoing enterprise. Crowdfunding to enable persons to take a financial interest in a new venture is generally referred to as ‘crowd sourced equity funding’. Crowd sourced equity funding is regulated as a share offer. See UK examples of a range of crowdfunding options by donation and equity.

The Climate Council was born as a result of the dismantling of the federally funded Climate Commission in September 2013. A crowdfunding campaign to set up and run an independent climate change scientific organisation launched on 24 September 2013 had raised $165,000 in one day and $1 million by the end of the first week.

The Council’s Annual Report discloses that for the 2014 financial year it received $2,120,227 in community donations from more than 16,000 donors. The median donation was $80.

It continues today as an independent organisation funded through public donations to provide independent advice on climate change