blog Those of you with an interest in the technology startup equity funding space will be interested to know that the Federal Government’s Corporations and Markets Advisory Committee this week delivered a major report into the possibility of allowing so-called Crowdsourced Equity Funding in Australia (CSEF). The concept, which is not dissimilar to the crowdfunding techniques used by sites such as Kickstarter, but with an ownership component, has been introduced overseas. The report is available online here in Microsoft Word format. It’s complex, but there’s also a much briefer guide to the report which is possibly more useful for most people who are interested in this area. From the guide:
“The CAMAC report sets out a detailed regulatory blueprint for the stimulation of the innovative start-up and other small-scale enterprise sector of the Australian economy through internet-based funding.
A legislative initiative to facilitate crowd sourced equity funding (CSEF) has the potential to promote productivity and economic growth in Australia, provide employment opportunities and return financial and other benefits to crowd investors. Equally, lack of a supportive local regulatory environment for CSEF may result in worthwhile Australian entrepreneurs incorporating in other countries, or moving their businesses offshore, to enable their ideas or projects to be funded by the crowd.
CAMAC’s proposals are deregulatory in that they seek to overcome current legal impediments to Australian companies (issuers) raising funds through CSEF. However, in the view of CAMAC, for this form of corporate fundraising to operate in the best interests of investors as well as issuers, a regulatory structure specifically designed for CSEF needs to be developed. The elements of this proposed structure are set out in this report.
CSEF is a world-wide phenomenon, given the global reach of the internet and the capacity of issuers to make offers to crowd investors wherever located. In developing its proposals, CAMAC has closely considered recent initiatives in key overseas jurisdictions, including the USA, Canada, the United Kingdom and New Zealand, as well as developments at the European Union level. While each jurisdiction, including Australia, is entitled to forge its own regulatory path, there is a strong benefit in seeking broad cross jurisdictional regulatory guidelines, to which Australia can make a useful contribution.
CAMAC has sought in its proposals to achieve a regulatory balance that takes into account the legitimate perspectives of issuers and crowd investors, as well as the online intermediaries that will host the offers to the crowd. For instance, for innovative start-up and other projects to stand a reasonable chance of success and to reward their crowd investors, their promoters and controllers should principally focus on using their time, vision and skills to develop the project, not disproportionately on legal compliance. Equally, however, the success of CSEF for issuers rests on the level of take up of equity offers by crowd investors. Sustainable growth, productivity and competitiveness through CSEF are only possible if investors have confidence in investing through that process.
Various proposals in the report involve monetary maximums or caps. For instance, CAMAC proposes limits on how much an issuer may raise, or a crowd investor may expend, through CSEF in any 12 month period. The specified figures have been chosen from the perspective of CSEF being principally designed for, and to be utilised by, the innovative start-up and other small scale enterprise sector of the Australian economy. However, any monetary cap can be arbitrary in some respect, and there is always room for discussion on where caps should be set. Also, caps could be adjusted in light of experience with CSEF, if introduced.”
In my view, the Federal Government absolutely must address this area as soon as it possibly can. This is a similar situation to the Employee Share Option Plan (ESOP) issue. In short, Australia is completely free to leave this situation as it stands — startups will not be able to be funded though crowdfunding equity. However, if it does, many startups will simply seek funding in other countries, and Australia will lose the benefit of hosting them. Globally, we need to be competitive in this area — because if we’re not, some other country will be.