Crowdfunding – receiving small amounts from many funders – is an explosive phenomenon that raised more than five billion dollars worldwide last year.
US President Obama in 2011 said: “Right now entrepreneurs are already using crowdfunding to raise hundreds of thousands of dollars in pure donations – imagine the possibilities if these small-dollar donors became investors with a stake in the venture.”
Using online crowdfunding platforms is familiar to those who donate to causes, support creative endeavours, supply microloans to entrepreneurs or pre-buy new inventions. But it is a relatively new way to raise capital from equity investors that has left outdated corporate and fundraising laws in its wake.
Countries like the US, Canada, UK, NZ, Italy, France and the Netherlands, have redrafted legislation to allow online equity crowdfunding, but in Australia the practice is still legally constrained. This looks like it is about to change.
Communications Minister Malcolm Turnbull recently said he wanted to encourage new businesses to crowd source funds from equity investors while ensuring those investors were protected legally.
Now the Corporations and Markets Advisory Committee (CAMAC) has recommended a new regulatory regime which provides a catalyst for the Government to take action in this area. It also highlights the need to strike the right balance between mitigating investor risk and creating an environment in which start-ups can innovate and thrive.
There are currently a number of obstacles given the corporate laws in this area were developed many years ago. For example, Section 113(3) of the Corporations Act essentially prohibits private companies from offering or advertising shares to the public. One of the few exceptions allows companies to offer new securities, valued at no more than $2 million, to no more than 20 investors who have pre-existing connections to the company.
Further, while our rules permit seeking funds from a few sophisticated or professional investors who put in larger amounts of money, this is at odds with crowdfunding, which pools the contributions of thousands of smaller funders, who may or may not be particularly experienced investors.
Equity crowdfunding opens up new sources of capital for start-ups and businesses requiring cash injections. It also gives ‘unsophisticated’ investors, who are normally locked out of sophisticated investment opportunities, access to new markets.
However those opportunities also bring the associated risks of fraud, scams and failed ventures.
To mitigate risks, other countries have limited how much a company can raise through equity crowdfunding in a year (usually $1-2 million) and also how much individuals can invest -- commonly up to 10% of their annual income or net assets.
CAMAC’s long-awaited Crowd Sourced Equity Funding Report proposes ‘deregulatory’ changes that include:
It now seems a question of when, not if, the Australian Government will relax the laws and allow Australian businesses and investors to join others with their newfound access to global capital markets and investment opportunities.
In considering CAMAC’s recommendations, the Government’s objective should be to act quickly and introduce new legislation in this area which is fair and simple to understand for all parties involved in the equity crowdfunding process.
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