Equity crowdfunding: what does it mean?

29th March, 2017

Equity crowdfunding is now open to retail investors, meaning that startups now have a whole new pool of potential capital to tap – so why isn’t everyone jumping for joy?

In case you missed it, the senate passed the legislation recently allowing companies with less than $25 million in annual turnover and less than $25 million in gross assets to effectively raise funds from smaller ‘retail’ investors.

The companies would be able to raise up to $5 million per year from investors who can take up $10,000 worth of shares in that company over a 12 month period.

In theory, it’s a good solution to a bit of a vexing issue.

The options before equity crowdfunding

Up until now, small companies such as startups have only undertaken other forms of crowdfunding, like rewards-based or product crowdfunding.

For example, if an investor pays $500 they can reserve a product under development by a company.

Or, if a potential customer pays $500 they can get an experience such as lunch with the founders of the company seeking investment.

Platforms such as Kickstarter, Indiegogo and Pozible have thrived by utilising these methods.

There are equity crowdfunding platforms like The Australian Small Scale Offering Board, but for the first time opportunities are being opened up for ‘retail’ investors.

Basically, anyone can invest.

This is the first time retail investors have been able to get involved, but not everybody is jumping for joy.

The downside

There are two key things detractors of the system point to:

  • The requirement that companies involved become public unlisted companies
  • That there’s a five day cooling off period for investors

Becoming a unlisted public company can be exhaustive, with a whole bunch of compliance work needed to become one – the least of which is appointing at least three directors.

While a lot of compliance stuff has been put off for five years under the new legislation, just the hurdle of becoming an unlisted public company can be huge.

Perhaps somewhat predictably, opposition Shadow Minister for the Digital Economy Ed Husic is ropable with some of the changes.

“This bill achieves one thing and one thing only—a headline,” he said in parliament.

“After having advice delivered three years ago on what to do with the system, this system puts a massive barrier between small businesses and start-ups and access to finance.”

However, international players point out that this stipulation isn’t unique to Australia.

The upside

Alternative lending platform expert and CEO of KoreConX, Oscar Jofre, told The Pulse that what passed in Australia was like what had passed in other countries, and hadn’t stopped the category from growing.

“Australia has taken a very interesting approach but it’s similar to other countries,” he said.

“Companies need to understand for you to gain access to the public, you need to be more transparent and you need to act like a public listed company.

“Those who do it voluntarily are going to benefit the most.  Investors will show their support and continued support by becoming advocates and ambassadors of the company.”

He said by having stringent reporting and management requirements in place, that it would help provide investors with a degree of certainty in the system.

Whether equity crowdfunding being established in Australia, and how it was established, is a good thing very much depends on your point of view.

If a money tree falls in the woods…

Tighter regulations mean investors can have more confidence that the companies seeking to raise are at least required to meet a minimum set of standards.

However, if no startup can afford the time and energy to jump through the hurdles is it worth it in the first place?

After all, the most recent Startup Muster report found that just 33 percent of startup founders had sought a government grant – despite it being potentially free money on the table.

The reason why the other 66 percent didn’t bother?

“The top response was that [applying for grants was] time-consuming,” said Wulff. “We know startups and one of the things they have an issue with is that they have no time.”

Only time will tell whether startups will be put off by the system as it currently is – but it’s a positive that at least they have another avenue for getting more capital to bring their ideas to market.