After considerable developments in the implementation of equity crowdfunding in the UK, the USA, Canada and New Zealand, Australia has joined the trend in considering this new form of capital raising. A recent report from CAMAC outlines its recommendations for an Australian version of the equity crowdfunding model, which includes introducing a new type of "exempt public company" designed to suit the needs of early-stage startups wishing to raise money from the crowd.
In June this year, the Corporations and Markets Advisory Committee (CAMAC) released an extensive report on crowd sourced equity funding (commonly known as equity crowdfunding), outlining its recommendations for bringing this increasingly popular model of capital raising to Australian shores1.
Equity crowdfunding allows a company to make an offer to the public (the "crowd"), to buy equity in the company in exchange for a cash investment. Similar to "rewards" crowdfunding platforms like Kickstarter or Melbourne-based Pozible, a company making an equity crowdfunding offer (an issuer) relies on a very large pool of investors contributing relatively small amounts (such as $100 to $1000) to reach its fundraising target.
The equity crowdfunding approach allows companies, such as early stage startups, to broaden their investment base from self-funding and the traditional avenues of banks, professional investors and high net worth individuals, who do not often have the risk appetite for investing in very early stage companies.
However, current restrictions in the Corporations Act 2001 (Cth) (Corporations Act) effectively prevent proprietary limited companies from having more than 50 non-employee shareholders, and from making an offer to the public, unless they comply with expensive and time-consuming processes for becoming a public company and making an initial public offering. Once the company is public, it is then subject to a range of ongoing compliance and disclosure requirements, which for the most part are unwieldy and unsuited to early-stage startup companies.
Equity Crowdfunding in Australia
In its report, CAMAC concluded that setting up an equity crowdfunding model in Australia would help bridge the "capital gap" for startups and other small-scale companies. Equity crowdfunding can play an important part in the development and financing of these companies during the crucial early days, helping to promote productivity, economic growth and employment when those companies develop further.
To encourage the use of equity crowdfunding, while ensuring that investors are still adequately protected, CAMAC recommended the following reforms:
- The creation of a new type of company, the "exempt public company", specifically for use by equity crowdfunding issuers. An exempt public company would be a special form of public company that does not have the shareholder cap of a proprietary limited company, and is relieved of some of the compliance requirements that public companies generally have (such as continuous disclosure, appointment of an independent auditor and holding annual general meetings).
- Licensing by ASIC of online intermediaries to operate an equity crowd funding portal, which will conduct due diligence checks on the issuer, provide risk warnings to investors, and provide a means of communication between the issuer and potential investors.
- A standard form disclosure template specifically tailored to equity crowdfunding.
- An "investor cap" for individual investors of no more than $2500 to any particular issuer in any 12 months and no more than $10,000 in total during any 12 month period.
- An "issuer cap" on total capital raised through equity crowdfunding of no more than $2 million during any 12 month period.
Under this proposal, however, the exempt public company status would only last for a certain period of time, such as three years, before automatically converting to a public company. Additionally, if the company's capital value or turnover reaches a certain level such as $5 million, the exempt public company would automatically convert to a public company.
CAMAC also expects that companies would want to raise capital from other sources during this period, so tools such as the small-scale offerings exemption would also apply to exempt public companies. However, if a company wishes to make an initial public offering under Chapter 6D of the Corporations Act, it would need to convert to a public company before doing so.
The proposed model is extensive, but only offers the benefits of reduced compliance requirements for a comparatively short period of time – delaying rather than reducing the regulatory burden that prevents most early-stage companies from raising capital from the public. It is questionable whether this strikes the right balance between investor protections and reducing the compliance burden for early-stage startups.
There is no doubt that alternative capital raising models will emerge with the introduction of equity crowdfunding. Equity crowdfunding could be used to "top up" traditional capital raisings from angel or venture capital investors, additional to small-scale offerings to angel investors or otherwise. Further, the crowd-based approach could also be used as a mass marketing opportunity in addition to a method of capital-raising, especially for consumer-facing companies.
In New Zealand, the process of licensing the country's first equity crowdfunding platforms is underway, with two equity crowdfunding portals being granted licences to operate in late July, and expectations that they will be up and running in mid-August. In the United Kingdom, equity crowdfunding has been available since April this year. While Australia is only beginning the process, the depth of the CAMAC report gives a good insight as to how equity crowdfunding might operate in Australia.
On 15 July, it its Interim Report, the Murray Financial System Inquiry Panel noted that the Government is currently considering CAMAC's proposals. Further, the Government's National Industry Investment and Competitiveness Agenda is anticipated for release later this year, and in this the startup and technology sectors will be expecting to see some progress on the development of an equity crowdfunding model.
With the additional capital-raising opportunities that equity crowdfunding can open up, the implementation of equity crowdfunding would be a significant contribution to the development of Australia's startup ecosystem.