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Planning successful crowdfunding

Get funding, gain visibility, validate and grow your business

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  • Know the difference between crowdfunding and crowd-sourced funding
  • Develop a project plan for your campaign
  • Structure your campaign

Crowdfunding or crowd-sourced funding?

Did you know there's a difference between crowdfunding and crowd-sourced funding?

Crowdfunding is used by artists and entrepreneurs to find money to fund their projects through crowd funding websites such as Pozible or birchal.

Introduced by the Australian Government on 29 September 2017, crowd-sourced funding (CSF) is a new way for start-ups and small and medium sized companies to raise money from the public to finance their business.

The Australian Securities and Investment Commission (ASIC) administers the law around CSF. The Corporations Amendment (Crowd-sourced Funding) Act 2017 provides a framework for CSF.

There are serious consequences for breaching the law – so if you are considering starting a crowdfunding or CSF campaign, seek advice from your accountant and lawyer before you start to raise funds.

Guidelines for starting your crowdfunding/CSF project

Use this simple planning guide to make sure your crowdfunding/CSF campaign is a financial success.

1. Before setting up your campaign

Before you even think about starting a crowdfunding/CSF campaign, it's important to have a clear idea about how much money you'll need.

If you're successful in raising the money, how would your supporters feel if your project goes over budget or you run out of money and fail to deliver?

That's why good project planning and management is critical.

Start by developing a detailed project budget with a contingency amount to help you get an idea.

To ensure financial success with your campaign, you'll also need to have a marketing plan in place and a good social network presence to raise awareness of your crowdfunding/CSF project.

3. What will you give in return?

Most crowdfunding campaigns give something to those who support the project:

  • Will it be products or services?
  • Will it be an equity interest?
  • Will the money be a loan and get repaid?
  • Are the funds simply a donation?

You don't want to find yourself in a situation where the rewards cost more than what you've received – so make sure the costs are budgeted and planned for.

4. Are you a business for tax purposes?

The first place to start is to determine if you're in business at all. If your project is a hobby, then there may not be any GST or income tax implications for your crowd sourced funds.

The Australian Tax Office (ATO) provides information about the differences between a hobby and a business.

Learn more about taxation and crowdfunding.

5. Is the money a donation?

If you are in business, what you give in return for the money received will help to determine the tax issues.

If you treat the money received as a donation to your business, then there could be GST and income tax issues – as it's likely the money will be revenue. The cost of providing any rewards (say goods or services) should be a tax deduction.

A donation to your business by an individual will generally not be tax deductible to the person making the donation. For funders to receive a tax deduction for their donation, your business will need to have Deductible Gift Recipient (DGR) status with the ATO.

It's highly unlikely the ATO will grant DGR status to your private business. Generally DGR status is reserved for not-for-profits, charities and community organisations.

You don't want to find out you owe GST and income tax after you've used all the money. That's why it's important you seek advice from your accountant or adviser before you start to raise funds for the project – so any cash flow implications can be built into your project budget.

6. Are you asking for a loan or offering equity?

If the funds received are treated as debt or equity, it's unlikely that any GST or income tax issues would come up.

However, debt and equity present other issues.

If the money raised from crowdfunding/CSF is treated as a loan, then at some point the debt will need to be repaid, with interest at a rate agreed between the parties. Given the amount of people involved, this could be an administrative nightmare.

If the money raised is treated as equity, then you're effectively 'selling' part of your business to those who contribute funds, which poses a whole range of complex issues including:

  • whether or not your structure allows you to sell equity – if you're operating as a sole trader, partnership or discretionary trust you might need to look at re-structuring into a company or unit trust
  • whether or not you're willing to give up a proportion of future profits or business value to others investing in your business
  • how you'll determine the value and percentage ownership interest for each investor
  • how you'll manage your share register if there are a large number of funders
  • whether or not you'll need a shareholders' agreement – this deals with who gets to be a director, when dividends will be paid, how shares will be valued in the future, and who shareholders can sell to.

Case Study: Crowdfunding John Gorilla

'Connect with your community - if you're not already using social media, get onto it before you start your crowdfunding project.'

Joanna Wilson and Nic Kocher, John Gorilla

Read more about the power of social media and networks.

Joanna smiling leaning out the front window of the cafe, leaning on her elbows