By: Jeremy Colless
The federal government waited until the last parliamentary sitting day of 2015 to introduce legislation allowing regular Aussies to invest in startups through equity crowdfunding. We have waited two years for these laws but it’s clear that, in all that time, the government has not listened to the market.
Australia’s startup community has made it painfully obvious that equity crowdfunding is a winner. Small private companies want the ability to efficiently raise money from crowds of investors without having to add more than one new entity to their share register.
They want to be able to do it online, with minimal time lost to investor conversations, negotiations and post-investment communications. But how do we know?
Just like any startup, we only know because we’ve listened to our market.
Allowing retail investors to participate in equity crowdfunding could put an end to capital raising difficulties for Australia’s newest and most innovative companies, increasing the capital pool by $300 million over the next three years.
Yet the legislation introduced to parliament today would restrict this type of funding to public (but unlisted) companies with less than $5 million in assets. Such startups would only be able to raise $5 million per year.
Importantly, crowdfunding platforms would be banned from aggregating investments into a single vehicle (like a unit trust) that then invests in the startup. This is exactly what VentureCrowd has been doing, because startups don’t want a huge list of individuals on their share registers — their job is to grow the company, not become encumbered with investor relations.
Even though the laws will allow ordinary mums and dads to invest in Australia’s innovative startups, the burdens this legislation introduce on startups would leave no companies left for those mums and dads to invest in.
Even when ingogo raised $4.2 million through VentureCrowd in May, as part of a $12 million raise (the second largest equity crowdfunding raise on record, globally), it was not a public company.
There is a misconception in the market, and perhaps the government has bought into it, that startups who raise money via equity crowdfunding only do it because they couldn’t raise money anywhere else.
Investor protection is simply good customer service. It’s natural and fundamental to our business. It’s logical that we would do everything in our power to protect our investors, while simultaneously making life easier for our startups.
Holding equity crowdfunding platforms to account and demanding their responsible management is what the government should be doing, not penalising startups for their efforts with unrealistic demands.
The extraordinary expense and administrative nightmare associated with becoming a public company represents an existential risk at a time when they should be focusing on growth.
The Corporations Act (which was enacted long before this type of finance was available) does not allow private companies to have more than 50 shareholders. Shoehorning equity crowdfunding into legislative existence without properly reforming the Corporations Act is simply lazy.
The government has assumed that startups interested in equity crowdfunding would want more than 50 new shareholders on their books. They have also ignored operating models like VentureCrowd’s, that utilise unit trusts to make life substantially easier for our besieged startups.
They clearly spent little time speaking with actual startups on this critical matter.
A regulatory framework for equity crowdfunding that would enable retail investors to participate in these transactions without requiring startups to become public companies, even if platforms like us must bear the brunt of the regulatory burden instead, would be embraced by Australia’s startup and venture capital community.
We have expressed these concerns to both sides of the political divide. We’ve made submissions, attended round tables and been to Canberra numerous times. Sadly, it seems the government just won’t listen to its market.
We are left with the prospect of ineffectual half-measures that threaten Australia’s competitiveness as a burgeoning international startup and innovation hub.
In May, now Prime Minister Malcolm Turnbull said Australia should follow New Zealand’s crowdfunding laws. It appears instead that the government is content to simply dust off the much-pilloried report produced by CAMAC under the previous Labor government, enact it into law and miss a brilliant opportunity to change the Australian business landscape forever.