It’s time to refine crowd-sourced equity funding

We thought it would become a serious alternative to traditional forms of capital raising like IPOs and venture capital investment. New Zealand and the UK have thriving crowdfunding scenes and many predicted that Australia would follow suit. In anticipation, innovative finance professionals set up their deal platforms ready to support the start-up community.

But the excitement and buzz around initial coin offerings (ICOs) has gazumped the interest in crowdfunding.

Has all the red tape made crowdfunding unattractive?

ASIC has issued only a small number of crowd-sourced funding licences. There are several reasons for this:

- The disclosure requirements are complex: While these are necessary to protect consumers, the bar has probably been set too high.

- It’s too costly: Start-ups and platforms have to invest heavily in legal advice for a one-off raise. ASIC has tried to bridge this gap with an offer template that shows what level of disclosure is required. But start-ups still need legal advice to make sure their offer document is adequate. This has slowed the pace and made capital raising unaffordable for many.

Aside from the legal costs, platforms often charge success fees of up to 6 per cent as well as campaign costs of up to $8,000. Start-ups generally don’t want to spend more money on their capital raising than they do on their tech, especially if there’s no guarantee that their campaign will be fully subscribed.

- The deal cap is relatively low: Start-ups can raise up to $5 million through crowdfunding. This is relatively low compared to the time and money required.

- Proprietary companies were excluded: This was completely at odds with promoting crowdfunding as a primary form of early-stage investment. This has now been fixed with a legislative amendment, but it will take some time before we know if this will make a significant impact to deal flow.

Alternative funding options are more attractive

As crowdfunding is not the agile and effective investment tool we hoped for, crowdfunding platforms are diversifying. Many now offer a range of capital raising options.

For example, Equitise was one of the early players in Australia and New Zealand. It now has initial public offering (IPOs) and wholesale/sophisticated investor offers on its platform. This includes Series A, Series B and Convertible Note rounds. While there’s a big jump from crowdfunding to IPO, the process for investor disclosure and raising capital is quite similar. So, it makes sense for platforms to offer these deals to attract investors and start-ups.

The small investment threshold (just $10,000) for crowdfunding encourages a lot of small investors. This may not be appealing to start-ups who expect to attract VC investment in future rounds because most VCs will prefer a small cap table.

Alternative fundraising options like ICOs are appealing. They offer greater flexibility and less regulation. Several successful ICOs have taken place in Australia already this year. Some start-ups have even ventured offshore - Switzerland and Singapore are popular jurisdictions. This option isn’t for the faint-hearted but it can be more appealing to investors and start-ups.

ICOs have:

- Less regulation and red tape;

- The ability to raise more capital quickly;

- Strong investor appetite both overseas and locally; and

- The ability to leverage blockchain/distributed ledger technology and its benefits of transparency and immutability.

When it comes to regulating the sector, we clearly haven’t got the balance right yet. If we want crowdfunding in Australia to be successful significant changes need to be made. Some things that would make a difference include:

- Raising the minimum investment threshold for professional/high-net-worth investors;

- Raising the deal cap above $5 million; and

- Streamlining and simplifying the offer documents further.

These changes would help start-ups justify the cost of crowdfunding without compromising the standard of investor disclosure. It would also make it a more flexible and serious capital raising option for early and late stage investment.

Charmian Holmes, solicitor director, The Fold Legal