A draft crowdfunding framework released by Treasury today looks at how the fund raising method could work for private Australian companies without hitting them with huge compliance costs.
Crowdfunding is one way startups are stitching together pieces of capital from large investor pools to launch their businesses or projects and there are a bunch of platforms popping up online to assist with the process.
In the May Budget, Treasurer Joe Hockey said the government would introduce a framework to facilitate crowd-sourced equity funding in Australia. Today’s consultation paper looks at how compliance costs could be reduced and make capital raising more flexible for small public companies.
Small Business Minister Bruce Billson says more will be revealed in draft legislation later this year. Legislation is expected to be introduced to parliament during the Spring sitting.
The consultation paper outlines retail investment caps would be $10,000 per offer per 12 month period with a $25,000 total over the year. Intermediary platforms would be responsible for monitoring compliance. It is also considering a raising cap for public companies of $5 million a year. A lower cap for private companies of, for example, $1 million is also on the table.
“A lower fundraising cap would also be consistent with the amount of funds a proprietary company could feasibly raise from CSEF (crowd-sourced equity funding) if they were subject to both a cap on the number of non-employee shareholders and to the investment cap for retail investors of $10,000 per issuer per 12-month period,” the report says.
Under the Corporations Act a private company cannot have more than 50 non-employee shareholders. If the company breaches that limit ASIC can direct the company to covert to a public entity which requires additional disclosure requirements and audited financial statements to be prepared. The consultation paper is calling for recommendations on what an appropriate shareholder limit might be.
This table shows the key elements being considered.
Matt Pinter, head of the Crowd Funding Institute of Australia, has been in talks with the Treasury on the consultation paper and says it’s a good start but the process still has a long way to run.
“A regime based on public companies does not meet the policy agenda, supporting startups and small businesses, that structure is far too expensive and complex to meet the needs of this sector, hence we will continue to advocate for crowd friendly private company structures,” he said. “What they have announced was reasonably predictable and from an industry perspective.”
Many of the initiatives are similar to crowdfunding frameworks around the world, including self-assessment for the capping process and investment thresholds which are similar to the UK.
As for what this will all mean for startups and private companies in general, Pinter says the conversations he’s had with Treasury to date “were very supportive of the proprietary structure” but that “it’s just more complicated and difficult” and breaking the submission processes into two is a “logical move”.
He says upping private company raising limits to $5 million a year, placing reasonable investment caps on retail investors, reducing compliance and not limiting shareholder numbers would all fuel a solid crowdfunding sector in Australia. But with private company frameworks still not finalised, no mention of a hawking provision (how the issuer advertisers the raising) and no details on how a secondary market might be managed, the framework is a long way from perfect.
“People don’t get out of bed in the morning contemplating what interesting and novel thing they’re going to buy. We need some clarification on the hawking provision,” he said, adding this type of crowdfunding is an investment product, not a reward or pledge environment like Kickstarter. Having clear guidelines on secondary markets is critical.
Submissions close at the end of the month.
The full report is here.