The federal government’s equity crowdfunding legislation has been met with criticism from the startup sector.
Australian entrepreneurs had hoped that crowdfunding could help plug a perceived gap in startup finance, but as it stands, only companies with less than $5 million in assets will be eligible, and they will be limited to raising $5 million a year.
There is a lot Australia can learn from similar legislation overseas. The United Kingdom, the United States and New Zealand have all legislated crowdfunding.
A recent report about crowdfunding in the United Kingdom shows mixed results for investors. Of the 367 crowdfunded companies that the report looked at, 29 had gone out of business and 41 were showing “warning signs” – an inability to be reached by telephone, an inactive website or were late filing documents with the regulator.
The amount of these crowdfunded businesses that had gone bust is lower than the average for small businesses – less than 20% compared to the 55% that fail in the first five years. The returns weren’t great either – only one of the companies had been acquired for a 250% gain, and 58 had gone on to raise more money at a higher valuation. All that’s known about the rest of the companies is that they were still running.
This could explain why the crowdfunding legislation has new restrictions on investors. Investors can only put $10,000 into a company annually and will need to complete a “risk acknowledgement statement”. Companies must register each investor individually rather than grouped together in a trust – meaning they might need to expend resources on managing their investors.
The startup community have criticised these restrictions. Matt Barrie recently called restrictions on who could invest “stupid”. And Stuart Stoyan, CEO of Moneyplace, says it’s “overprotection”.
“There is no reason why arbitrary caps should be placed on investors. Any Australian can invest in speculative mining stocks, or even gamble their life savings away at the casino,” says Stoyan. “To place a cap on crowd equity investments reeks of overprotection.”
The United States, meanwhile, saw a huge influx of capital after it passed legislation in 2013. Some estimates put the total raised through crowdfunding at $250 million in the first year alone.
Crowdfunding in the US has proven particularly attractive for companies with a well-defined product or project. Oculus Rift, for example, raised funds through crowdfunding before being acquired by Facebook.
Crowdfunding is touted by American entrepreneurs, as seed funding is hard to come by – venture capitalists reject 97-99% of pitches and crowdfunding serves to validate the idea. Some venture capitalists even talk of the two funding paths as not being mutually exclusive.
But the limits placed on crowdfunding by Australian legislation would put a damper on such efforts here.
The startup sector is especially concerned by the need to be a public company. While the government is offering incentives for companies who become public – such as a five-year moratorium on some regulatory environments – the requirement means crowdfunding won’t be available to early stage startups.
“The public company requirement is regulatory overkill, with the cost and administrative burden likely to suffocate startups. If there are specific reporting requirements needed, it would be much easier just to call them out directly,” says Stoyan
“By only offering a crowd-funding avenue to public companies with $5 million or less in assets, $5 million or less in turnover, and by capping raises at $5 million, the government is going to simultaneously dissuade larger companies from participating, high-quality start-ups from participating, and self-directed investors from making significant investments,” says CEO of Sharesight Doug Morris.
“Companies that fit this mould are likely planning on a public listing anyhow.”