Regulating crowdfunding

On 29 September, 2017 crowdfunding came of age in Australia. That was the day the Australian Securities and Investments Commission (ASIC) introduced a new crowd sourced funding (CSF) regime modelled on those already operating in the US, UK, New Zealand and Singapore. The intention was to make it easier for smaller companies to access capital and safer for mum and dad investors to get a piece of the ‘new economy’ action.

Crowdfunding has been around in various forms for centuries. In recent decades, the Internet has taken it to a whole new level but until recently online crowdfunding was a cyber Wild West. One where members of the crowd providing funds had few protections and those requesting those funds, or facilitating the exchange of capital for equity, had few legal responsibilities.

The new sheriff in town

In order to regulate this growing sector, ASIC has belatedly stepped into the role of sheriff, setting out the rights and responsibilities of the three parties involved: the companies seeking capital, the investors providing it and the crowdsourcing platforms facilitating the transaction.

  • Unlisted public companies with less than $25 million in assets and annual revenue can now raise up to $5 million a year via crowdfunding. These companies still need to meet certain requirements to sell their equity, but they will be exempt from many of the reporting, auditing and corporate governance requirements usually applied to public companies.
  • Crowdfunding platforms now need to be licensed and investors will be able to check ASIC Connect’s Professional Register to confirm a platform is trustworthy. Platforms are also required to act as gatekeepers, reviewing the investment information companies supply before helping them access capital.
  • Investors have a five day cooling off period, are required to obtain a risk acknowledgement before investing, and are limited to a maximum investment of $10,000 in any one company.

Seeking capital

The new crowdfunding regime is designed to help start ups and small businesses access the opportunities that are available from new technologies without undue red tape.

Companies from many industries will be eager to take advantage of the new arrangements. But it’s likely to be ‘new economy’ businesses that are most eager to access capital through crowdfunding and of most interest to investors using crowdfunding platforms.

Investing in early stage

It’s long been difficult for smaller investors to ‘get in on the ground floor’ with tech start ups, which has been a both a blessing and a curse. Mum and dad investors have missed out on the spectacular returns enjoyed by bigger players who invested in success stories such as Atlassian, the Sydney based start up listed on the New York Exchange. But they’ve also avoided ‘doing their dough’ on the thousands of start ups that never turned a profit.

There are different ways of investing for individuals willing to take a risk on early stage investments.

  • Individuals can do their own due diligence based on the limited information available, then invest directly via a licensed crowdfunding platform.
  • It is also possible to invest as part of a collective, which provides access to the expertise, knowledge and connections of experienced ‘angel’ investors. The drawback with this option is that angel groups can be picky about who they allow to join and often require a significant investment of time and money.
  • Venture capital funds can also offer access to investment in early stage companies, although this is typically limited to high net worth individuals.

Weigh up risks and rewards

For small companies, an alternative source of funding is welcome but CSF also brings with it fresh obligations to keep potentially large numbers of individual shareholders informed and rewarded.

From an investor perspective, picking winners from each year’s new crop of start ups is never easy, even for experienced professionals. Out of every 100 early stage companies they invest in, perhaps one will become a big success, a handful will do OK and the majority will fail.i

Even though the new rules have introduced a little more rigor around this sector, there is still some way to go and only investors happy to roll the dice are likely to be comfortable putting their money in early stage companies.

i http://www.smh.com.au/business/the-grim-reality-of-startups-95-per-cent-fail-20150320-1m3wtb.html