Crowdfunding reforms open up funding options for private firms

Capital raising through equity crowdfunding has traditionally been just out of arm’s reach for Australia’s proprietary companies.

The funding alternative has been a bonus for unlisted public companies since legislation was introduced by the federal government in 2017, but not so much for private companies which have had to convert to public unlisted status before being able to access equity crowdfunding.

But that’s all about to change with the passing of the Corporations Amendment (Crowd-sourced funding for proprietary companies) Bill this week which will legalise the ability of proprietary, or private, firms to raise money from the general public in return for a stake in their companies, without having to first convert their status.

The legislation – which will take effect next month – allows proprietary (or unlisted private) companies with annual turnover or gross assets of up to $25 million to advertise their business plans on ASIC-licenced crowdfunding portals.

Companies are permitted to raise up to $5m a year to carry out business plans, and individual investors can each contribute up to $10,000 a year – a cap designed to minimise risk ­– to an unlimited number of ideas.

Proprietary companies taking on equity crowdfund investors will be required to prepare annual financial reports and directors reports in accordance with accounting standards.

Where crowdfunding passes the $3m mark, companies will be subject to audit.

Only large proprietary companies – defined as those with any two of either $25 million turnover or above, $12.5 million of gross assets or more, or 50 employees or more – have previously had to prepare such reports.

Alternative financing legislation

Crowdfunding is one of the fastest growing methods of alternative finance in Australia whereby companies seek out investors to fund business-related activities through an offering of shares in a private unlisted company.

Quite often, the company is a start-up with an innovative new product or service, which has been unable to access investment through traditional loans schemes or angel investors.

The investors for each crowdfunding exercise can be many in number, but offer only small amounts of capital per person.

Australia’s crowdfunding legislation was passed in March 2017 as an amendment to the Corporations Act, with one controversial point – proprietary companies wanting to raise money via “the crowd” would have to become unlisted public companies first.

At the time, some start-ups commented that the idea of turning themselves into public companies just to access equity crowdfunding “makes no sense whatsoever”.

Proprietary reforms

By September 2017, a crowdfunding reform was put to the House of Representatives by former treasurer, now Prime Minister, Scott Morrison, with a view to extending the framework of the original bill to cover the majority of Australian businesses which are proprietary companies.

After 12 months on the backburner while other bills dominated Parliament, the changes finally received the tick of approval this week with one amendment from Senator Doug Cameron to let companies access the new funding model one month after the legislation is given the royal assent, rather than in six months’ time.

The amended law will expand funding opportunities available to small, medium and start-up enterprises from October.

It will allow private companies to offer securities to everyday investors via licensed equity crowdfunding portals such as Equitise and Pozible.

Australian private companies are typically limited to a maximum of 50 non-employee shareholders however under the reforms, investors acquiring shares through a licenced crowdfunding portal are excluded from this limit.

Risky business

While the reforms could be a game-changer for proprietary businesses, the crowdfunding concept remains somewhat of a riskier proposition than traditional capital raising avenues.

Equity crowdfunding tends to focus on the “story and community” built around a product idea or business model, rather than just the financial statements or performance of a business.

Australian Corporations regulations on the Equitise website provide detailed warnings of the downsides, such as “crowd-sourced funding is risky” and “issuers using this facility include new or rapidly growing ventures [and] investment in these types of ventures is speculative and carries high risks”.

But not all small ventures are the right fit, and Equitise managing director Chris Gilbert advised businesses to think twice before hopping on the crowdfunding bandwagon.

“If you can’t find any people who [have] marketed a business like yours before, there’s perhaps a reason why that’s happened,” he said in an interview last year.

“If you’re a small corner shop mechanic for example and you’re trying to do a crowdfund through equity, I would probably suggest not to do it because it’s just not the right type of business.

“But if you’re a drone delivery company or a virtual reality business, which has got more blue sky and is a bit more interesting, then that would be fascinating.”

Equity licences

In January, the Australian Securities and Investments Commission (ASIC) issued the first round of equity crowdfunding intermediary licences to online portals Big Start, Billfolda, Birchal Financial Services, Equitise, Global Funding Partners, IQX Investment Services and On-Market Bookbuilds.

Eligible businesses will be able to raise capital by offering shares through the online platforms operated by the seven “CSF intermediaries”.

ASIC commissioner John Price said the awards were a milestone for crowdfunding in Australia.

“Suitable intermediaries needed to be licensed before fundraising under the new regime could commence,” he said in a January statement.

“Intermediaries have an important gatekeeper role which will be key to building and maintaining investor trust in crowd-sourced fundraising, so we are pleased to have now issued the first tranche of authorisations.”