Crowd Funding Equity

Crowd Funding of Equity is coming to Australia

Crowd funding equity laws now one step closer

The Turnball Government recently introduced into Parliament legislation that will provide a framework for the recent phenomenon of crowd funding in this country for the first time.  This week the legislation navigated its first hurdle through the Lower House of Federal Parliament.

What is crowd funding?

The term really covers all manner of methods of raising capital.  But in its simplest form it is the act of raising investment funds from a crowd of individuals and organisations (broadly the public at large) who are prepared to assist a business to develop and grow.

Why does crowd funding need regulating?

There are very specific, strictly applied, laws in Australia regarding the raising of capital, the issuing of securities and the promoting of financial products (including the issuing of equity (ownership) in a business).
Broadly a business could not seek to raise capital or offer to issue its shares to the broader public without meeting a number of highly regulated and costly compliance and bureaucratic requirements.
This meant in order to get around the rules, most small and start-up businesses that sought capital via crowd funding were not permitted to provide the funder with an ownership interest nor a return of profits.  They were restricted to providing non-cash benefits such as a “thank you note” on their website, or free merchandise, or a discount on their products or services, etc.
Therefore the Turnball Government, in conjunction with their Innovation Statement, are attempting to expand the accessibility of crowd funding to allow true equity investment, making it easier for businesses to raise capital and in turn giving the funders (now investors) the opportunity to take an ownership interest in the business they are helping to fund (and potentially to receive a share of resulting profits).

Start with good intentions

“The intent of this bill is to assist start-ups and other small businesses that may have difficulty accessing equity funding due to the costs of disclosure and other requirements, while protecting mum and dad investors,” Minister for Small Business, Kelly O’Dwyer said. Here is Ms Kelly’s Media Release.

The devil (as always) is in the detail

As evidenced in Ms Dwyer’s statement, protecting investors, in particular those considered “unsophisticated”, is always top of the list of priorities for Australian Governments and Regulators (you have to admire their intentions even if you don’t admire the bureaucratic outcomes).
So while the crowd funding of equity is now going to be possible, it is still not going to be accessible by all, and there will still be plenty of hoops to jump through in order to attempt such a raising.
The first barrier to overcome will be the requirement to be a “public” company rather than the more prevalent (and substantially less costly to create and operate) proprietary company.  Shadow Minister for Start-ups, Ed Husic, has referenced several stakeholders in the matter, including the Australian Private Equity & Venture Capital Association, The Business Council of Co-operatives and Mutuals, CrowdfundUP and Chartered Accountants Australia and New Zealand, as all have concerns around this, and other, excessive red-tape requirements.
The next big hurdle is that a business will only be able to raise a maximum of $10,000 at a time from a particular investor.  They can also only raise up to a total of $5 million per year.
While the $5 million annual cap sounds pretty fair, you could even argue generous, in order to get there the business will need to find 500 investors. As anyone who has attempted to raise capital will tell you, unless you have the next Facebook on your hands (and even if you did, would you know it up front), reaching and then convincing that many people to trust you with their money is not easy.
Next, you will have to source your crowd funding via a licensed intermediary, and you can only use one intermediary at a time!  Precisely what that will mean is still to be fine tuned, but expect the likes of Kickstarter and Pozible to remain the gatekeepers (at a fee of course).

Where there is a will there is a way

But, while it is easy to get hung up on what the new laws don’t let you do, the key is to focus on what they actually do now let you do that you previously couldn’t.  And the reality is, seeking capital from the public at large is now a very significant step closer for a large number of small and start-up businesses in Australia than it ever has been before.  And that can only be a good thing for the Australian economy, its small business owners, its entrepreneurs, its workers and of course its investors.
So if you are looking to raise capital for your business including a new start-up idea, or if you are looking to invest in such a raising, we are here to help get you the best result!
(Access here the Bill, its Explanatory Memorandum, and its progress through Parliament Corporations Amendment (Crowd-sourced Funding) Bill 2015.)
(You can also access here a “very” detailed analysis of the new measures from Ashurst.)