As the Federal Government works to pass legislation regulating equity crowdfunding in Australia, now’s a good time to get your head around what this form of investment could mean for you.
Equity crowdfunding has boomed in countries such as New Zealand and Sweden so with the precedent already set, there’s no reason why Australia won’t take to this fairly new investment model like a duck to water.
So, what is equity crowdfunding?
Crowdfunding is a relatively known practice where everyday people put their money where their mouth is to support ideas they want to see come to life. To date it’s been used to fund a huge cross-section of initiatives from educational tools, video games and everything in between.
Equity crowdfunding, however, is a slightly different concept where a higher donation amount is required (usually up to $10,000) to invest in a start-up company in return for shares.
Unlike traditional crowdfunding, where you wouldn’t give a second thought to helping to fund the launching of a tardis into space, equity crowdfunding typically requires the investor to consider the financial viability of a venture and whether they’re likely to have a successful future. This includes looking at how long the company has been operating, performing and is predicted to perform over time.
What will equity crowdfunding look like in Australia?
The Australian Government has approached equity crowdfunding legislation in a way that would heavily regulate the sector. Only companies with assets of $5 million or less who turnover $5 million or less a year will be allowed to participate with a cap of $5 million a year on fund raising through crowdfunding. All intermediary platforms will need to be licensed by ASIC and provide sufficient risk warnings while a five day cooling off period will be implemented to protect overzealous investors.
However proposed restrictions on the way funds raised through equity crowdfunding can be bunched together by companies has infuriated potential business users of the model. As Tim Heasley, COO of Australia’s first equity crowdfunding platform VentureCrowd, wrote in the Financial Review, new laws would mean that start-ups would be burdened with handling potentially hundreds of different investors, making equity crowdfunding an unattractive option to companies not resourced to deal with a large amount of investors and the administration costs that come with this.
Instead, Heasley believes legislation should focus on investor protection by providing requirements for equity crowdfunding management and practice. Despite this the Turnbull government looks set to push ahead with legislation in its current form and it remains to be seen how many companies will take the plunge and sign up to take advantage of the platform.
Equity crowdfunding success stories
While the possible success of equity crowdfunding in Australia is a mystery for the future, our neighbours in New Zealand have embraced the practice and have successfully funded multiple start-up projects. With a government-imposed limit of $2 million a year that can be raised, most companies have gone for significantly less and with the help of sites such as “Snowball Effect” have reached their set goals. In fact, the first equity crowdfunding project launched by Renaissance Brewery attracted $700,000 in 13 days demonstrating the fervour with which Kiwis have embraced the new investment option.