Country after country, state after state are introducing regulations to facilitate equity crowdfunding for entrepreneurs and investors. This is normally sold by the implementers as a combination of ways to create more jobs and fund businesses that are finding it more difficult in the post GFC era to get funding.
Unfortunately Australia isn’t even yet at the starting gate for more broadly permitting equity crowdfunding except for ASSOB. ($138 million raised for StartUps and SME’s facilitated to date for around 300 companies)
ASSOB operates under existing legislation to match entrepreneurs and investors for startup and early stage companies. It has managed to carve a position as the oldest and longest running equity crowdfunding platform in the world.
Conversations I’ve had with regulators around the world have enabled me to share with them the benefits and learnings from data gathered during ASSOB’s 8 years operation as an equity crowdfunding platform. Regulators appreciated the practicality of the data and I believe some of it has shaped better options in other countries around the world than just relying on taking a shot at what might work. Universities and the World Bank have written about the ASSOB journey and findings from data.
Over the last three years I’ve spoken at a score of international events on equity crowdfunding and I thought it was about time I focussed my expertise on changes that would enable Australia to embrace the evolving equity crowdfunding space better. Some were included in ASSOB’s submission to CAMAC but there have been a number of countries come on stream, and a number of new learnings since the submission date of Friday 29 November 2013. For a further look into the future see my previous post “what can we expect crowdfunding to be in 2020″.
My suggested ‘best practice’ pathway is outlined below as a A) “quick summary“, as a B) “graphic summary” and C) “in detail“.
I hope that you will be on board with my suggestions for embracing the concept of equity crowdfunding in Australia and the regulatory changes needed. I’ve tried to blend my extensive practical experience in this area with a holistic approach to implementation. At the end of the day most of this is about legitimising transactions that take place every day but are often not properly done or clearly defined. By far the most money invested into the early stage space comes from friends, family, fans and followers. They deserve better recognition and legitimacy for their transactions. Equity Crowdfunding can reduce family and friend tension.
A) QUICK SUMMARY
Australian regulators are able to modify the fundraising provisions of the Act for ‘minor and technical relief’ without the need of a full parliamentary enquiry. Here are some of the changes that would enable Australia to embrace two huge trends that are driving crowdfunding. “Technological Disruption” and “Meaningful Investing”.
- Broaden the definition of Associates. This group is not fully handled sufficiently in existing legislation.
- Add category of “Experienced” investors. These could be for example people that have reached a certain level in Angel and Director organisations
- Recognise that consultants can accept shares for services rendered but cannot invest funds. This will assist cash-strapped companies in obtaining the corporate advice they need, without burdening operational cashflow requirements.
- Portals cannot give advice or have a pecuniary interest but can curate offerings.
- Small Scale Offerings 20 retail investors in a twelve month period should be lifted to 100 but there should be a cap of $25,000 per investor per annum. A maximum of $2 million can be raised per annumincluding the “CSEF” exclusion.
- A new category of Equity Funding Portal be established for “Crowd Sourced Equity Funding” CSEF. Maximum $1 million per company per annum with a $2,500 max per investor.
- Registered Portals can disclose summaries of the offer information to the public but prospective investors need to log in to see full deal details
B) GRAPHIC SUMMARY
1. Types of investors
2. Limitations by Investor Type
3. Promotion of Offers
4. Changes needed
C) IN DETAIL
1) Types of investors
In an entrepreneurial journey many people contribute. Many prospective investors want to contribute, but with existing Australian regulations it is a challenge.
If we consider first degree connections to a company – say a startup or growth company that needs to raise $800,000 to grow – maybe there are a few mates that would like to contribute a couple of thousand each. However with the existing 20 retail investors in a 12 month period they would have to stump up with around $40k each to actually make it work for their entrepreneurial mate.
Strange though when this is a “small scale offering” exemption at an average investment of $40,000 when the average ASX share transaction is heading for $5,000 a trade! This seems counter to the idea of risk aversion, when a fully disclosed company can accept small amounts, but an undisclosed company has no choice but to ask for large investments.
So what is this worldwide equity crowdfunding trend really about? Well, its basically people that are passionate about a “friend’s” opportunity who want to be able to easily invest and be involved.
Let’s now look closer at the various types of people who really want to support an entrepreneurial endeavor:
After the Founders, early staff are often next to invest. In Australia this is not easy to do due to the tax effect on employee share schemes and consequently seldom happens. The tip of the triangle above is really, really important and we hope that before year’s end the Australian government recognises this with legislation changes to Employee Share Schemes.
This group is not fully handled sufficiently in existing legislation. Many people have direct experience and knowledge of an investment offering that doesn’t usually make it into an investment document.
The types of people in this category should include the full gambit of associates. These are normally executive officers of a company, spouse, parent, child, brother, sister, uncle, auntie, grandfather, grandmother, accountant, lawyer, engaged business consultant and a shareholder for at least a year. You could say, those having genuine knowledge about the people responsible for running the company.
This category is already provided for in legislation. The one type that is not covered adequately is people like Angel or Experienced Investors that are informed and competent enough, but may not meet the monetary cut-offs. Just because someone has a lot of money doesn’t make them a “sophisticated” investor!
Angel investors have often learnt the hard way, as have Company Directors. Two examples of Experienced Investors are people that have reached a certain level in Angel and Director organisations. For this reason I believe a Fellow of an Angel Investors Group and a Fellow of the Institute of Company Directors should be added to the professional investor category.