Regulation hold-ups put Australia at risk of falling behind in the equity crowdfunding stakes

Australia is at risk of becoming one of the last developed markets in the world to act in support of equity crowdfunding, according to the founder of equity crowdfunding platform Equitise, Chris Gilbert.

Sources told The Australian that Treasury officials have concerns about crowdfunding schemes and the government will delay the details of new policy until after the department consults with industry and the community.

Gilbert says he’s been told by a prominent government source that there’s a chance regulation might not be in place until July 1 next year, and a small chance that it might not happen until July 1, 2016.

Equitise, one of four startups in the AWI Ventures accelerator program, is working towards its New Zealand launch in four weeks’ time. Unlike Australia, New Zealand has introduced laws which allow retail investors to participate in equity crowdfunding and enable startups like Equitise to operate.

Gilbert says Equitise would not be impacted too much if regulation was delayed until next year. He says while they would have liked to launch in Australia first, the startup is content focusing on that market for the time being. However, a delay until 2016 is a different matter.

“It’s looking like legislation and licensing will be released in the first of July next year, and Australia will be one of the last developed markets in the world to support equity crowdfunding,” he says.

“We can deal with the 1st of July next year, but if it were the 1st of July the following year that would be pretty bad for us.”

Earlier this year the Corporations and Markets Advisory Committee (CAMAC) called for the government to make it easier for startups to raise capital through online crowdfunding platforms. Currently, crowdsourced equity funding is only available to wholesale investors with more than $2.5 million in investable assets or annual earnings of around $250,000.

CAMAC recommended Australia introduce legislation which allowed retail investors to invest up to $10,000 a year, across at least four startups, in equity crowdfunding, and allow companies to raise up to $2 million per year on such platforms.

The Australian reported that some government ministers regard these caps as too low, and Gilbert agrees. He thinks Australia should follow New Zealand’s lead and allow investors to invest as much as they want.

“If they understand the risks they should be able to invest,” Gilbert says.

“I think it’s important to have a cap, but $10,000 is way too low. It’s difficult to say exactly what that cap should be. In New Zealand where we’re launching in about four weeks’ time, they don’t have caps. If you look at that market they’re leading the way globally in terms of legislation at the moment.

“We’re required to have disclosure statements, warning statements, all through the site, it’s quite up front and you really can’t miss it. That’s how they’re dealing with the risk.”

He also believes companies should be able to raise up to $5 million per year through equity crowdfunding.

“$2 million is far too low. New Zealand has the same limit, although it is bringing in a micro-cap market on the stock exchange. The Australian Stock Exchange has a minimum market cap of $10 million, so there’s an $8 million difference that needs to be filled.”

The chief operating officer of VentureCrowd and Artesian Capital Management, Tim Heasley, says while there is broad political support for the liberalisation of equity crowdfunding in Australia, that’s where agreement ends. He believes it’s inevitable that reform won’t occur until mid-2015 at the earliest.

Among CAMAC’s recommendations were that crowdfunding platforms should be prohibited from having a financial interest in a startup or platform, or being paid in shares of startup or according to the amount of funds raised. He says those recommendations are “nonsensical” and give strength to the argument that CAMAC failed to consult properly with industry before releasing its report.

“Neither is required to protect against conflicts of interest and each would make it extremely difficult, if not impossible, for platforms to be run profitably,” he says.

“There has been some criticism on the low caps placed on individual investors by which they can invest only $10,000 in any year and this must be spread over at least four startups. VentureCrowd favours any recommendation that requires diversification of investment across a number of start-ups instead of allowing investors to put their eggs in one basket.

“While the overall limit could be increased, we see no harm in starting somewhat cautiously now with a view to higher limits in the future as this form of funding grows in popularity.”

Australian Private Equity and Venture Capital Association chief executive Yasser El-Ansary says irrespective of what the caps are, the more pressing issue for the government should be the development of a new national innovation policy.

“Private investment whether through crowdfunding, angel, venture capital or private equity funding needs to be accompanied by a national innovation policy that has a focus on the translation of research into commercial outcomes,” he says.

“Our weakness is in the D of R&D, we need a new translational innovation fund to attract matching private capital. We have recommended a new $500 million translational innovation fund funded by 10% of the proposed Medical Research Future Fund.

“Also, the government needs to address a range of tax issues including ESOP structures. Without such a holistic approach at the policy level, we’ll continue to major in the minors and innovation will not deliver for the economy.”

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