There are two main types of crowdfunding – equity and rewards-based. Both offer a way for a project, small business or start-up to raise funds via members of the online community either pledging cash (equity) or buying products and services (rewards).
Companies can already get small investments – the Corporations Act has a specific provision (section 708) that exempts small-scale offerings from strict prospectus requirements. Offerings of up to $5 million in a 12-month period can be made without a prospectus, as long as no more than 20 investors participate – this is known as the 20/12 rule. Companies are allowed to have 50 non-employee shareholders. Any more, and they must change status to an unlisted public company.
But crowd-sourced equity funding would see this investment process taken online, through a specific portal and platform that formalises and handles all the administration.
Willing and able
Bruce Billson, federal minister for small business, says the government is “red-hot keen” on crowdfunding but “wants to get the model right”.
“We announced in the Industry, Innovation and Competitiveness Agenda in October 2014 that we would look to get [the legislation] up,” says Billson. “We recognise that crowd-sourced equity funding is another avenue for raising the finance that is desperately needed by smaller businesses and startups. But we want to take our time and make sure we calibrate the regulatory framework so that it’s the lightest touch, most effective and cost-effective regime we can put in place, that balances all interests.”
The government asked the Corporations and Markets Advisory Committee (CAMAC) – which is no longer in operation – to report on crowd-sourced equity funding. The committee recommended that individuals could invest up to $10,000 a year in small businesses, with a maximum of $2,500 in each company. CAMAC also recommended that a specificpurpose entity structure be created to facilitate crowdfunding.
“We have the recommendations from CAMAC, we have consulted widely with interested parties and we’ve drawn on all the international experience,” says Billson, pointing to New Zealand’s current framework.
Broadly, he says, the government is working on four key themes:
■ An Australian crowd-sourced equity funding framework should complement other equity-raising mechanisms already in place for more mature and larger businesses.
■ The existing corporate entity structures should be sufficient.
■ The licensed intermediaries (the web-based platforms) should play the role of gatekeeper, conducting due diligence, investor identification and enforcing market regulations.
■ The regulatory framework should be right-sized, balancing investor protection with the broader benefi ts of crowdsourced equity funding.
Room for improvement
Paul Niederer, chief executive of the Australian Small Scale Offerings Board (ASSOB), says Australia was the fi rst jurisdiction in the world to allow ‘mum-and-dad investors’ to invest in a private-company raising, through section 708 and the 20/12 rule, but the government has a “wonderful opportunity to improve the settings”.
“That was great legislation. It has stood the test of time, but 20 investors is not enough these days,” says Niederer. “Small private companies get their funding in the fi rst place from friends, family and fans of the business – people that are around the business. But if you want to raise $600,000 from your friends and family, they’ve got to put up $30,000 each. If we say 100 or 150 investors can participate, we can reach more people and make it easier to raise money.”
This is truly “using the power of the crowd”, says Chris Gilbert, co-founder of crowdfunding platform Equitise. “That is the strength of the crowd-sourced equity funding model: that businesses get to aggregate funds from friends and family and the customers and supporters more easily,” he says.
According to a Deloitte Access Economics report, 30 per cent of small businesses in Australia in 2014 could not access expansion capital, adds Gilbert. “The banks aren’t lending and even if they are, they want property as security,” he says. “Getting venture capital investment is next to impossible as well, unless you’re the next Facebook. This is all about using the power of the crowd to get small amounts of money, instead of getting one big cheque from a cornerstone investor.”
Gilbert’s platform has gone live in New Zealand – where crowdsourced equity investments are uncapped – while he participates in Billson’s consultation process and waits to see what emerges in Australia.
“Some of the things that New Zealand has done – such as having restricted reporting requirements and people acknowledging before they invest that they understand the risks of private companies – make a lot of sense,” he says.
Opportunity knocks
Niederer says crowdfunding represents a great opportunity for accountants. “Every accountant knows about Section 708 and the 20/12 rule, but they should be thinking about how to better it,” he says. “Let’s get it up to 100 or 150 investors – then you’re crowd sourcing. The accountants get to manage the share registry, the escrow account, they do the accounts, they may have to do the offer document – there’s a great opportunity for accountants if they get behind it.”
Accountants also need to know about crowdfunding to “fi ll out their advice repertoire”, notes Gilbert. “It is important that accountants know about this sort of thing and can suggest it for the right candidate,” he says. “We fi nd that lots of the opportunities come from boutique accountants. The knowledge that their clients can raise fi nance in a quick and easy manner, simply by giving their customer database the ability to chip in $1,000 each to become a shareholder in the business that they love in the fi rst place, is a big opportunity.”
As Andrew Conway, CEO of the Institute of Public Accountants, says: “An ideal future outcome would be crowdfunders, business angels and venture capitalists each working on contiguous parts of the market for entrepreneurial finance.”
