22 Sep Ready Steady Equity:
In May the Corporations and Markets Advisory Committee (CAMAC) released a report giving firm support to the development of a specific legislative regime to facilitate Crowd Sourced Equity Fundraising (CSEF) in Australia. The sector is now holding its breath to see how the federal government decides to act on the recommendations, with an announcement expected in November this year.
For those not familiar with CSEF, it’s a fundraising mechanism which allows businesses to raise money by selling equity in their company to the public as opposed to “crowdfunding for rewards”, where the start up gives contributors rewards in exchange for donations.
CSEF is well established in jurisdictions such as the US and New Zealand. You will likely be familiar with intermediary companies that facilitate CSEF such as Angel List and Crowdnetic Start Up Valley. These intermediaries provide the technological marketplace for startups and investors to connect, and also manage the investments, being accredited financial services providers themselves. Start ups register with an online intermediary and present their pitch to the public. The public in return is able to browse and invest in a range of businesses at the click of a button.
CSEF means contributors will own a fraction of the company and so benefit if the business grows in the long run. However there are significant compliance requirements associated with running a company and managing shareholders. The recommendations by CAMAC aim to address these issues and develop a specific framework which should make it somewhat easier for CSEF issuers to manage their investors and responsibilities.
So what are we likely to see if the CSEF law reforms do happen, and what are the key things you need to know?
You can take advantage of a new corporate form created specifically for CSEF
The proposed changes would create an exempt corporate entity called a “exempt public company”. Exempt public companies would be able to advertise to the public and solicit offers from an unlimited number of shareholders however they would not be held to the same compliance requirements as public companies. On the other hand, there is likely to be a limit on the amount that an exempt public company can raise in a year. CAMAC has suggested that this limit should be $2 million, which is the curent limit on small scale fundraising.
You can bridge your “capital gap” with public retail investors
In its report CAMAC, recognised the crucial role that CSEF can play in bridging the “capital-gap” for seed businesses and encouraging a vibrant and multi-dimensional economy. If you are a start up looking for your next round, this could be a great way to scale to the next level, or supplement funds raised through venture capital although you would be limited to a raise of $2 million per year from CSEF.
You can learn how to deal with investors in a lower risk environment
If you are an investor you would only be able to invest $2,500 on one company, and if you have a portfolio of companies, the maximum is $10,000. This is good for start ups who are inexperienced in dealing with investors, and can allow them to learn the ropes with smaller funds at stake.
On the other side, having limits on the amount an investor can contribute means you need more investors to reach larger amounts, which means more investors to manage. These caps are being examined by the start up groups in consultation with the federal government now.
Intermediary sites will make you get your (*&( together
Businesses that are eligible to engage in CSEF would be required to sign up with a licenced crowd-funding platform of their choice that would act as a neutral intermediary between the company and the investors.
The intermediary would be responsible for carrying out preliminary due diligence of the company and its business, issuing generic warnings to investors and monitoring subscriptions to ensure that the various investment caps were not exceeded.
The intermediaries will be a comfort to investors and also a great incentive for companies to get their act together and get investor ready.
The inability of CSEF intermediaries to invest in the companies they advertise has been critised by those currently operating venture capital fundraising platforms. Such investment provides a valuable source of return for these platforms and acts as an indicator to sophisticated investors that these companies have been assessed by experts in the industry as worth investing in.
However the neutral model may allow for a more diverse range of intermediaries designed for the retail market with different focuses and categories and will ensure that all entrants on the market are on an equal playing feild.
The government is listening – so get out there and get heard
The changes will create an exciting new opportunity for start ups that have previously had to seek out angel investors or join incubators with connections to sophisticated investors.
In New Zealand a number of sites such as PledgeMe and Snowball Effect have very recently started offering CSEF. Australian policy makers will have the benefit of being able to observe how CSEF is received and develops in the New Zealand market, hopefully giving them the confidence they need to get the show on the road over here.
It’s also up to the start up community to have its voice heard in this process. With the recent announcements such as the Industry & Innovation Competitiveness Agenda – now is the best time to provide feedback about other steps which need to be taken to make CSEF an effective mechanism to create globally competitive businesses from Australia.