Startups in Australia can only attract wholesale investors under the current crowdfunding equity rules – something the government is looking at changing.
But as the Abbott Government ponders how it might deal with equity crowdfunding so that mum and dad investors can participate, New Zealanders have got their system up and running.
They’re quite a progressive bunch. Over the ditch the Kiwis introduced liberalised crowdsourced equity funding legislation early last year. The changes mean businesses are able to raise $2 million a year by issuing shares to the public through crowdfunding platforms like PledgeMe. They also don’t need to issue a prospectus or deal with costly scrutiny from authorities.
PledgeMe started about three years ago, as a project-based crowdfunding platform (similar to Kickstarter), and when the laws were changed it entered into the equity crowdfunding space.
Founder Anna Guenther still holds up the UK’s crowdfunding system, which doesn’t have the same raising caps, as an example of what to strive for. But she says a number of Australian startups have been sniffing around to see if they could raise funds on the platform under New Zealand law.
“The amount of Australian companies that we have coming to us at the moment is really quite interesting,” she said. About 20 have reached out, spanning tech, renewable energy and agriculture.
One Australian startup founder who looked at NZ to run an equity crowdfunding round told Business Insider she wanted to do so because the reach was broader than just sophisticated investors. She’s now considering running a round in Australia and another in NZ. As an Australian company, moving IP overseas also affects federal R&D grants, which many local startups rely on.
PledgeMe’s stance is that it would be “too complicated” because Australian residents still wouldn’t be able to invest via the platform. Companies would also have to set up a New Zealand entity.
“It would be too complicated. It’s not just the company being able to get funds, it’s their crowd being able to invest,” Guenther said.
With Australia drawing up the legislation, expected to be introduced to parliament in the spring, Guenther says there are a few things local politicians can learn from New Zealand.
“The burden of having to cap individual investors is going to be huge,” she said. “How are you going to manage that across platforms? That’s going to be a nightmare to manage not just for the investors but for the platforms.”
Early last month Business Insider reported taxi app Ingogo was looking to raise about a quarter of its $12 million round via crowdsourcing. It’s a campaign which, because of its size, couldn’t be run in NZ.
“If they follow New Zealand’s suit at capping at $2 million, that’s probably going to be too low for Australian companies,” Guenther said.
Since the legislation has been in play, Guenther said there has been a lot of work to get companies ready to crowdfund equity.
“New Zealand did really well not making it too onerous for the company, but there are some things New Zealand missed,” she said. They included the takeovers code, which comes into play if you have more than 50 voting share parcels in a company you become takeover code compliant.
“You have to have an independent report written which is really expensive and for the most part all companies going through equity crowdfunding will get more than 50 new shareholders. That was a piece of legislation that wasn’t looked at as part of the changes.”
A similar thing happened in Australia when employee share scheme legislation was changed under the Labor government back in 2009. It resulted in a piece of legislation which was meant for the big end of town, actually fell on little startups. The government changed ESS rules in the May budget.
Guenther says when the NZ equity crowdfunding rules were being written it was assumed the takeover code laws would be included. It’s a change the New Zealand government is reportedly looking at making.
It’s one piece of advice she said her counterparts in Australia should take on: If changes are being made, consider other pieces of legislation on the outskirts that could come into play.
Once the equity crowdfunding laws were changed the one thing Guenther noticed was the amount of work the platform had to do to get companies ready for funding. But it’s more than just capital, Guenther explains startups also get a bunch of engaged shareholders who either know the team, product or company.
“Now you get a crowd of skills coming to the table,” she said.
While it’s too early to tell how much it has changed the Kiwi startup scene — just over 20 companies have launched campaigns — Guenther expects to see a wave of new companies coming online after spending the last nine months figuring out how the legislation affects them. She also expects early stage funding headaches to be bridged by the mechanism.
“I don’t think there should be investor limits. I don’t think that we decide how people spend their money in any other aspect of their lives, why should would we decide that they can’t invest in a company that they know?
“They still have to understand what it means to be investing and I think that’s a big thing, it’s not just getting companies ready for investment it’s about educating investors what it means to invest in a private company.”
As for what Australia wants, Tim Heasley, managing partner of Artesian Ventures which runs equity crowdfunding platform VentureCrowd, previously told Business Insider opening up the practice to retail investors is something that needs to be handled with care.
“There needs to be a lot of education and people need to be aware of the risks that they’re taking. You don’t put the rent money into a startup,” he said.
He hoped Australia’s crowdfunding rules will take inspiration from New Zealand’s laissez faire style, rather than the CAMAC report last year, which included ideas like limiting how much people could invest. Heasley described it as “nanny state” at the time.
He said Australia’s regulatory framework needs to balance the benefits of opening up the marketplace with the risk of getting involved with early stage companies.