Australia has been slow to legislate in support of crowd-sourced equity funding. Will proposed new regulatory changes prove to be a step in the right direction?
When a word from cyberspace pops up in the Oxford English Dictionary, it’s a safe bet that it’s gaining traction away from an internet connection. In June this year, the dictionary tipped its hat to “crowdfunding”, alongside the likes of “tweeting”, “photobombing” and the less enthusiastic “meh”.
Despite this global endorsement, equity crowdfunding in the Australian marketplace has yet to take off, the industry largely unregulated and underutilised.
This appears set to change. Treasury set aside A$7.8 million in the 2015-16 budget to implement a new regulatory framework for the crowdfunding market in Australia. In August, the federal government released a discussion paper on crowd-sourced equity funding (CSEF), the latest step towards legislating in the area.
Crowdfunding on the rise
In the present-day environment, crowdfunding works in two ways. The first, and perhaps most familiar, is rewards-based crowdfunding. This model allows contributors to chip in for a product or prototype, guaranteeing them “first dibs” when released. Platforms that offer this type of funding include Kickstarter and Australia’s Pozible.
The other method is CSEF, where a number of backers make equity investments in a company, hoping for a future return. Both forms of crowdfunding are fast becoming important drivers of the investment environment. According to a 2013 World Bank study, traditional methods of injecting capital into small businesses are being transformed by technology, and the global crowdfunding market could be worth as much as US$96 billion by 2025.
Others already have the jump on Australia. New Zealand’s 2014 legislative reforms allow companies access to CSEF and exempt restrictive disclosure obligations and compliance requirements that would normally apply to equity raising via prospectus.
“This sort of funding innovation is not without its challenges, but it’s critical to economic growth and jobs.” Alex Malley FCPA
Australian equity crowdfunding platform Equitise launched an Auckland office earlier this year, while other Australian industry players waited patiently for local legislation. Malaysia’s Securities Commission (SC) also introduced guidelines for the regulation of registered equity crowdfunding platforms earlier this year and has so far approved six platforms.
Former CPA Australia chief executive Alex Malley, who met recently with SC chairman Datuk Ranjit Ajit Singh in Kuala Lumpur, says now is the right time to reform the law to more easily facilitate CSEF in Australia. “This sort of funding innovation is not without its challenges, but it’s critical to economic growth and jobs,” he says. “It is a risk, but it’s better to be on the train when it’s leaving the platform than try to catch it once it’s on the move.”
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As the Corporations Act currently stands, Australian start-ups can only attract investors (not companies) who earn at least A$250,000 per annum or have A$2.5 million in assets. The general rule contained in the Corporations Act is that you must issue a disclosure document or prospectus in Australia before you can raise capital.
Section 708 of the Act offers the small-scale offering exception to the established rule, known as the 20/12 rule. This rule allows securities issued or transferred to 20 or fewer persons, with no more than A$2 million being raised in a 12-month period. It allows companies like Equitise and the Australian Small Scale Offerings Board (ASSOB) to conduct business in Australia now.
Although crowdfunders like ASSOB (a company that has helped 320 companies raise more than A$144 million under the auspices of the 20/12 rule) are keen to cast a wider net, the potential for fraud is ever-present. Investors must trust that the company will be good custodians of their money and deliver on promises made.
Malley believes the proposed legislation needs to strike the right balance between offering the strongest consumer protection and encouraging investment.
“As an organisation, we’re very supportive of the reforms undertaken in Malaysia and New Zealand,” he says. “They’ve moved quickly and they’ve taken action to reduce the risks associated with this form of financing.”
What’s in the legislation?
Bearing in mind the Australian Government has been looking closely at the New Zealand legislation and a 2014 model put forward by the Corporations and Markets Advisory Committee (CAMAC), what exactly is being proposed in the discussion paper?
Key elements of the proposed policy framework include:
- only public companies can seek CSEF (although the Australian Government is currently consulting on whether to allow proprietary companies to seek finance through CSEF)
- limit fundraising to A$5 million during a 12-month period
- caps for investors of A$10,000 per offer and A$25,000 per annum
- certain withdrawal rights and a tailored disclosure document
- compulsory use of intermediaries who hold an Australian
- Financial Services licence
- some relief from public company compliance obligations
ASSOB CEO Paul Niederer believes the legislation should seamlessly allow investors to participate in equity crowdfunding. “I find it surprising that the paper isn’t too different from the CAMAC report,” he says, claiming that the laissez-faire New Zealand model would attract more investment.
“The government has to legislate for the regulators, investors, small business and the platforms. but the system must work so that small businesses can attract the investment required.” Paul Niederer, ASSOB
New Zealand, notably, has no investor limit, attracting friends in high places. In May this year, Australia’s then-Communications Minister Malcolm Turnbull said, “I’m very attracted to just taking the New Zealand law, deleting New Zealand and inserting Australia.”
Investor caps are a contentious issue in the crowdfunding, start-up and regulatory communities, with some championing the right of investors to self-govern, while others support the caps as a method of investor protection.
“Caps on investment is about protecting the investor. It’s a pay-off between less disclosure and fewer transparency requirements against the ability of investors to invest,” says Malley.
Another discussion point is the provision of a secondary market for unlisted securities of early-stage companies. “The development of a secondary market is critical to the success of equity crowdfunding,” says Malley.
“Investors need a marketplace to realise their investment, otherwise why would they invest?”
With legislation expected to be handed down by the end of the year, those with skin in the game are watching the space closely, hoping that the government’s softly, softly approach will meet their approval.
“The government has to legislate for the regulators, investors, small business and the platforms. But, at the end of the day, the system must work so that small businesses can attract the investment required,” says Niederer, before taking a pause. “That’s the most important thing.”
5 Australian crowdfunding successes
Australian entrepreneur Phil Bosua launched a Kickstarter campaign in 2012 for his wireless light bulb company LIFX. The idea went viral, with more than US$1.3 million raised by campaign’s end. The original target was US$100,000.
Byron Bay father-and-son team Stuart and Cedar Anderson invented a tap that allows users to harvest honey without disturbing the beehive. They sourced the crowd at Indiegogo in February this year, asking for US$70,000. In a windfall, investors have chipped in about US$12.5 million.
Global Kinetics Corporation
In May this year, Australian health tech company Global Kinetics Corporation (GKC) raised A$1.5 million to kickstart its US expansion. GKC sells a movement-sensing device for managing Parkinson’s disease. CEO Andrew Maxwell says the “one pitch, many investors” nature of the funding campaign has had a positive effect on GKC’s productivity.
Taxi app and mobile payment platform Ingogo raised A$12 million of venture capital in May this year, with A$4.2 million of that total coming from crowdfunders VentureCrowd. This campaign is the largest Australian equity crowdfunding raise to date.
Developed by Brisbane-based 5 Lives Studios, cyberpunk strategy video game Satellite Reign sourced almost A$800,000 through Kickstarter after going to the crowd for A$600,000. The game was released in August this year, more than two years after the campaign ended.