Regulations getting in the way of crowdfunding in Australia need to be removed to give startups more finance options and to increase competition, says the final report of the Financial System Inquiry.
The inquiry recommends the Federal Government fix regulations to facilitate securities-based crowdfunding and consider more holistic regulatory settings to encourage internet-based financing.
“A well-developed crowdfunding system can aid broader innovation and competition in the financial system,” the report of the inquiry says.
Submissions to the inquiry generally supported a more accommodating regulatory regime and many suggested Australia is already lagging other countries in crowdfunding.
Globally, crowdfunding has emerged as an alternative funding source for small to medium enterprises (SMEs).
Since 2009, overall fundraising via crowdfunding has grown by around 50% a year although crowdfunding still accounts for a very small share of total financing.
In Australia, current regulations impede crowdfunding.
Companies are generally prohibited from making public offers of securities, both equity and debt, and shareholder numbers are capped at 50 non-employee shareholders.
“Start-ups or other small businesses have no viable alternative structures, as the public company structure has costly compliance requirements,” the report says.
For securities-based crowdfunding, the Federal Government should promptly allow issuers to make public offers of simple securities, including common shares and non-convertible debt.
“The risks associated with crowdfunding investments would require some adjustments to consumer protections, including sapping individuals’ investments and clearly communicating the risks,” it says.
These risks include fraud, issuer failure and dilution where the stakes of individual crowd investors could be diluted by subsequent equity issues.
For issuers, risks include action by investors if outcomes do not meet their expectations.
“The Inquiry acknowledges these risks,” the report says. “However, measures such as limiting individuals’ investments and communication to them of the risks of crowdfunding would help mitigate such concerns.”