15 Oct Are you ready for Crowdsourced Equity Funding in Australia?
Recently, the discussion around opening up crowd sourced equity fundraising (CSEF) has intensified yet again with the government’s second call for submissions on the subject finishing last month. The principal purpose was to fine tune the regulatory framework for crowdsourced equity funding put forward by the government following previous submissions from over 24 industry players.
It was the first step a government department has taken to address an obvious need to close the gap for Australian start up companies in need of an equity portal where other forms of fundraising are unavailable to them. After the axing CAMAC, the regulatory body responsible for the initial consultation process, the future of CSEF in Australia was unclear, and has to date remained in a consultation loop. Crowdfunding platform leader Pozible and Melbourne-based tech specialist lawyers Clearpoint argued in their submission that CSEF is critical to growth companies who can often falter in their second stage growth cycle, due to the scarcity of angel investors and venture capitalists in Australia.
Other markets such as the US, Canada, UK and New Zealand have introduced highly successful CSEF regulatory frameworks which have lead to significant positive growth in the sector. By 2020, crowdfunding is projected to raise $500 billion per annum, generating $3.2 trillion a year in economic impact and creating more than 2 million jobs.* For Australia to remain globally competitive or at least on a par with other markets, the regulatory environment needs to open up a CSEF option, and soon.
Currently, the fundraising laws in Australia restrict public offers to “sophisticated investors” only. Even so, businesses such as VentureCrowd, or Our Crowd, offer “crowdfunding” platforms, which promote a select number of start up companies to sophisticated investors. Outside of this, raising capital from so called ‘retail investors’ without a prospectus is limited to small scale personal offers only. Most seed stage startups do not have the funds and capacity to go through the expensive and cumbersome process of obtaining a prospectus.
The key proposal outlined in the recent discussion paper put forth by Treasury, is the creation of a special type of CSEF public company. Under this structure, a founder would be able to raise up to $5 million in any 12 month period from an unlimited number of ‘retail investors’ without invoking the disclosure requirements of a traditional publicly listed company. Instead, reduced disclosure and reporting requirements would apply to CSEF public companies. This exemption would continue for 5 years, or until the company achieved an annual turnover of more than $5 million at which point the company would transition into a public company.
The pros of this approach are that it would potentially train executive teams in public shareholding compliance, enable better due diligence and hopefully create confidence in the market. However, the devil is often in the detail, and it is unclear as to what the limited disclosure requirements will be and whether this would over burden a small enterprise.
The requirement to have a licensed intermediary assisting with the compliance process will go a long way in encouraging transparency and education of investors. In addition, limitations are imposed on the amount able to be raised from each investor. Under the new proposal, there are investment caps of $10,000 per offer and $25,000 in total per 12 months. There is also a requirement for intermediaries to display a general warnings and obtain an acknowledgement of risk from investors prior to commitment.
In our view, modelling CSEF on a temporarily scaled back version of the public company structure, may in practice end up burdening startups and smaller enterprises unnecessarily at too early a stage of their growth cycle. The most recent proposal put forward by the Government is too conservative to deliver the boost Australian startups really need to compete globally.
We propose in the alternative that CSEF proprietary company is sufficient to create a CSEF process with the following amendments:
- Increasing the cap on the number of shareholders from 50 to 100;
- Permitting public offers on registered intermediary websites;
- Raising retail capital limit from $2 million in a 12 month period to $5 million;
- Implementing individual investment caps of $150,000 per investor in a 12 months period as this reduces the amount of investors required for a single round;
- Continued involvement of online registered intermediaries after the investment round to reduce the administrative burden on regulators and the companies
This would avoid the problem of a CSEF public company being forced to transition to a public company in circumstances, which may not be an appropriate for the particular industry or business.
Whether the government pursues a CSEF public company or CSEF proprietary company structure, by far the most valuable opportunity is for the intermediary. A crowdfunding platform can create an efficient, transparent due diligence and shareholding management process for all stakeholders. It offers the opportunity to continue the momentum of the company’s growth, by giving it a public profile off which to launch online marketing. The online portals will also be able to better track and manage day to day stakeholder interactions, which in turn offers stronger security for investors. In fact the portals could be designed to plug into online regulatory systems or portals. It also creates vital education opportunities for founders and investors along the way, and in time can become niche enough to cater to different industries.
From our experience working with several crowdfunding platforms in this space, the crucial element of the fundraising process is also the UX design experience. A good example is UK outfit SEEDRS, which conducts a thorough screening process for selected investible companies who are then offered a visible presence on the site. Investors are able to see and monitor progress during the raise in real time. Consequently, they have seen a phenomenal growth in their deal flow at a crucial early stage for companies on the rise.
Now is the time for action as evidenced by initiatives such as PolicyHack kickstarted by Wyatt Roy Assistant Minister for Innovation and incubator Blue Chilli, and designed to assist both sides of government to work together to develop a healthy, globally competitive startup ecosystem. As the Minister has stated on, Our Say a crowdsourced policy platform, “Funding, taxation, education, migration everything is on the table…”
We say, there’s never been a better time to revive and enact the CSEF framework and bring it out of an endless consultation cycle. Implementing a CSEF framework offers a “quick win” and alongside other initiatives such as tax concessions, co investment funds, and entrepreneurial education programs, could significantly close the equity gap that many startups face early in their seed phase, kickstarting a new era of Australian innovation.
By Katherine Bulog Legal Counsel, Clearpoint Ed. Anna Reeves
** The Rise of Crowdfunding, Sandeep Sood, September 2014, The Wall Street Journal.
**Crossroads Report 2015 p31, p73