On 8 December 2014, the Australian Government released a discussion paper on the issue of crowd sourced equity funding in Australia.
Many readers will be familiar with crowd funding through new markets such as Kickstarter, Indiegogo and (in Australia) Pozible, which seek to raise funds for new ventures through pre-sales or other contributor-exclusive benefits (e.g. a film maker may give the contributor a production credit, a pre-release version of the script, or some other exclusive offer). Crowd funding has found particular space in intellectual property-dominated fields such as technology, consumer products, and creative arts. Crowd sourced equity funding is distinguished from these approaches by offering contributors a stake in the venture.
Crowd sourced equity funding has been attempted in other countries but has been difficult to achieve in Australia due to our existing legal and regulatory framework in relation to capital raising and investment.
The Australian Government’s discussion paper acknowledges the difficulties that small business has faced in raising capital through traditional methods and the relative inaccessibility of debt fundraising, and that crowd sourced equity funding may be a better or additional method of raising capital for small business as well as providing new investment opportunities for investors which would otherwise be unavailable.
The paper considers three options:
1. Creating a separate framework as proposed by the Corporations and Markets Advisory Committee (CAMAC) for crowd sourced equity funding under which:
(a) companies seeking to crowd source equity funding would be:
- public companies with an exemption from complying with the ordinary reporting and compliance requirements of public companies for a period of time;
- restricted regarding the method of fundraising and the amount which may be raised; and
- subject to maximum thresholds for the size of companies able to seek such funding;
(b) retailers of issues would be required to have an Australian Financial Services Licence and comply with other requirements with respect to the providing of advice or services; and
(c) investors would be limited to $2,500 per company per year and an aggregate cap of $10,000 per year for all such investments.
2. Creating a framework based on the model adopted in New Zealand which differs from that proposed by CAMAC by:
- not providing reporting and disclosure exemptions;
- not limiting the size of companies which may engage in crowd sourcing equity funding; and
- not capping the individual or aggregate amount of any investment(s) an investor may make.
3. Keep the status quo, particularly:
- proprietary companies are limited to 50 non-employee shareholders and are prohibited on making public equity offers;
- proprietary and public companies must comply with existing corporate governance requirements;
- public companies must provide a disclosure statement when making public offers;
- brokers must comply with all existing licensing arrangements and compliance obligations.
There are obviously advantages and disadvantages to each option (e.g. the first option may cause confusion by creating a new “category” of public company, while the second option may be beyond the focus of small business by not restricting the size of companies which may use crowd source equity funding), which the paper goes on to discuss in detail.
The paper is open for submissions until Friday, 6 February 2015 via the Treasury website. Further information can be found here.