Starting a business is hard, and if the biggest challenge is coming up with a product or service that people actually want, the next challenge is finding the money to get the business off the ground. Worldwide, more and more start-ups are turning to the crowd for those critical, early stage injections of capital, with enormous success. The Internet, of course, has an important role to play in this, creating unprecedented opportunity for entrepreneurs to reach potential crowd investors all around the globe.
In particular, crowd-sourced equity funding (CSEF) is fast emerging as what can only be described a ‘game-changer’ for businesses in their early stages of growth. Like the established reward-based crowdfunding models, CSEF enables business to pursue fundraising targets by pooling small contributions from a large number of investors. The difference is that instead of the investor receiving a notional reward in exchange for their pledge, their investment buys them a stake in the business. The appeal for businesses and investors alike is clear to see – it allows businesses to unlock potential finance from a vast pool of investors, and it entitles those investors to a return if and when the business becomes profitable.
So, why hasn’t CSEF taken off here in Australia? In short, our corporations legislation just doesn’t facilitate it. Under the current legal framework, proprietary companies are prohibited from raising capital from the public under the ‘excluded offer’ provisions of the Corporations Act 2001 (Cth). On the other hand, public companies face corporate governance requirements (including prospectus requirements) which are simply too costly and burdensome for start-ups and small businesses to comply with. If start-ups and SME’s are to have easier access to equity finance, our regulatory framework needs to change.
In June 2014, the now dissolved Corporations and Markets Advisory Committee (CAMAC) released a comprehensive report on CSEF, and recommended a framework for facilitating it in Australia. In the report, CAMAC carefully considered the approach to CSEF in various jurisdictions, including Canada, US, UK, and our trans-Tasman rival New Zealand, which has just recently introduced its own CSEF enabling legislative regime. Acknowledging the potential for CSEF to promote productivity and economic growth by giving start-ups and SME’s a greater chance of success, CAMAC proposes a detailed deregulatory approach that would overcome the current legal barriers to CSEF, while protecting the interests of crowd investors. To summarise, it proposes introducing a new corporate entity, the ‘exempt public company,’ which would be relieved from some of the compliance requirements of public companies, but able to offer equity to the crowd through a licenced intermediary (subject to certain limitations).
The Federal Government has also joined the conversation, releasing a discussion paper on potential CSEF models earlier this year. It is clear from the paper that the way forward is not set in stone, but it is a promising sign that legislative reform is not a question of if, but when. Its exciting to think that mum and dad investors will soon have the opportunity to share in the success of, say, the next Uber. That said it is crucial that any new regime is well thought-out, and implemented carefully.
We will be watching this space closely, and blogging on developments as the Australian crowdfunding marketplace grows and evolves.