Architects have a lot of strong ideas about design, what constitutes good design and what good design can achieve. How that design might be achieved however is always constrained – by clients, planners, councils, engineers, builders and the budget. The budget required to undertake a project at all, or to undertake it in a way that will give the best design outcome is one of the most common and significant constraints.
Architects thinking about how to overcome this funding shortage may look to crowdfunding as a possible way of funding public or private architecture or design projects. In 2014 $16.2 billion was raised globally through crowdfunding, an amount that is expected to have increased to $34.4 billion in 20151. Surely some of that money could go towards good design!
The aim of this article is to set out what crowdfunding models are, how they work within the regulatory framework in Australia and what you can and cannot do to raise funds from ‘the crowd’. As for what good design is, that one is definitely not for the lawyers to determine.
What is crowdfunding?
The term ‘crowdfunding’ is an internet neologism that simply describes the online raising of money through contributions from a great number of donors (the ‘crowd’). In and of itself, crowdfunding is nothing new. What makes modern crowdfunding unique is the potential size of the crowd.
Typically a crowdfunding campaign is advertised through an online intermediary, to maximise access to the crowd. The party seeking funding prepares a campaign describing the project to be funded, and distributes it to the crowd through the intermediary. Sites such as Kickstarter and Indiegogo are well known examples of online intermediaries.
A recent report prepared for the American Institute of Architects showed that though an embryonic industry, crowdfunding has already funded architecture projects as varied as pedestrian bridges, religious structures, urban skyscrapers and multitudes of community projects2. An intermediary site specifically related to architecture and design projects already exists (https://www.makearchitecturehappen.com) and campaigns ranging from design furniture for cats to prototypes for Egyptian houses were up and running at the time of writing. The Rotterdam studio ZUS claims to have completed the ‘world’s first crowdfunded public infrastructure project’, a 400 meter long pedestrian bridge.
Crowdfunding in Australia
Crowdfunding in Australia is a burgeoning industry. Statistics on our crowdfunding market are hard to come by, but it is certainly smaller than that of Europe or the US. In part, this is attributable to our relative size. However, one of the virtues of crowdfunding is that it is not geographically restricted – in theory, anyone can contribute to a project anywhere. This may be less of the case for architectural projects, which by their very nature are often more locally concerned. Nevertheless, it remains that crowdfunding in Australia could be occurring on a scale much larger than it presently is.
The crowdfunding campaign
A crowdfunded project can be of any size. A campaign to enable the production of a new piece of furniture or lighting may enable you to fund the production of prototypes, a local campaign may seek to fund the urban renewal of an existing area. An extreme example would be the campaign to recreate the Tolkien city of Minas Tirith in real life3.
But what does the crowd receive in return for their contribution? Generally, there are four main campaign types: Reward Based, Pre-Sale, Donation and Equity.
Most intermediaries require a campaign to specify the amount a project requires, and only release the funds raised if they reach this amount. The ‘Invisible City’ architecture project championed by Helen Bonham-Carter, which proposed to transform London’s Regent’s Park into an elevated urban park and civic space, raised only 5% of its goal. On Kickstarter, only 44% of projects meet their funding goal4. You need to balance the amount you are seeking with the amount required to reach your objective – reflecting the need as you would in any business pitch or tender process – to develop projects that appeal to the crowd on an emotional or commercial level. Crowdfunding platforms may present your voice to a vast number of ears otherwise inaccessible, but they don’t promise those ears will be receptive.
You should also factor in the amount the intermediary will charge on the way through – normally a percentage of the amount raised, regardless of the commerciality or not for profit nature of the project.
Presently in Australia, donation, reward-based and presale crowdfunding are feasible. However, any campaign that distributes a portion of the profit from the project will be treated as an investment, and regulated as such. Even if you do not offer a ‘share’ in the project, or create an actual company for contributors to own a part of, the interest in the profit will be considered to be a security, and the proposal may be considered a managed investment scheme.
In Australia, you cannot issue an interest in a security without disclosure about the risks of making an investment in that security. The form of disclosure is significant, is required to be in a prescribed manner and requires professional assistance in the preparation of the disclosure document or ‘prospectus’. This is intended to prevent unscrupulous investment raising and is a valuable policy designed to protect the public. It does not sit well with crowdfunding however, as the cost of disclosure would be prohibitive for most campaigns, while the small nature of the investment reduces the risk to the contributing party.
In addition to the disclosure requirements for any specific investment, a company may not have more than 50 non-employee shareholders before it becomes a ‘public’ company. A public company has significant ongoing annual reporting and compliance requirements that are intended to provide information to the investors in that company.
A small proprietary company (99% of companies in Australia fit into this category) may be able to raise money without such disclosure if the investments fit within a narrow set of existing exemptions. By making offers to ‘sophisticated investors’ or ‘small scale personal offers’ for example, where no more than $2 million is raised in any 12 month period from no more than 20 investors. In either case however, this is hardly a ‘crowd’ of investors to appeal to, rather a select few.
All of these regulatory restrictions add up to mean that equity crowdfunding is currently off the table in Australia. This is set to change with legislative reform to liberalise the industry slated for the near future. In August this year the Federal Government released a consultation paper on equity crowdfunding, and draft legislation is scheduled for public release later this year.
Key elements of the new law are expected to allow incorporated public companies with an annual turnover and gross assets of less than $5 million to use equity crowdfunding to raise up to $5 million in any 12 month period. The investments will be subject to a cap of $10,000 per issuer and a contributor may only contribute $25,000 in total to all crowdfunding campaigns in one year.
Disclosure about risks of investment, the structure of the company and its financial reports will still be required, but will be much more streamlined. Intermediaries themselves will be required to hold an Australian Financial Services Licence and the contributors will be required to acknowledge the risks of investment. Public consultation around the form of the new law is ongoing and there is a significant push to have the exemptions apply to private companies as well as public companies and to allow private companies to have more than 50 non-employee shareholders.
In the meantime, you need to be careful of the type of ‘incentives’ offered in any campaign to make sure they do not come attached with heavy legal obligations. In general terms, any present crowdfunding campaign must be structured so that it can only receive donations as gifts or in return for ‘rewards’ that are not financial in nature.
This certainly does not mean opportunities to crowdfund in Australia are limited. Despite the growth of equity fundraising overseas, donation and reward based models remain the dominant form of crowdfunding. Indeed, for architecture projects whose appeal to the crowd often centres on community and collective interests, donation and reward-based crowdfunding will continue to be used regularly.
Nor does it mean donation and reward-based crowdfunding models are exempt from the wider general law. In particular, where a reward is effectively a pre-purchase of a good or service, the issuer is prevented from engaging in misleading or deceptive conduct. Similarly, there are broad ranging proscriptions against fraud. How widespread such behaviour is on crowdfunding platforms is unclear but strict penalties can and do apply. You should also seek advice around the taxation implications of amounts raised during any campaign.
Just what effect opening up Australia to equity crowdfunding will have remains to be seen. The limited evidence available from overseas jurisdictions indicates that equity crowdfunding is rapidly becoming a legitimate alternative funding avenue5. In the context of architecture projects however, even if the effect is minimal, it is already apparent that donation and reward-based crowdfunding are driving change in the industry.
The time is now in terms of public consciousness of crowdfunding campaigns in Australia and money can be raised for your projects this way – get out there but take care in doing so!