Equity Crowdfunding: An Ideas Boom or Bust?

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Table of Contents

• What is Equity Crowdfunding?
• What Are the Types of Crowdfunding?
• What Are The Upcoming Changes?

On 7 December 2015, the Federal Government unveiled their proposed spending of $1.1 billion in the next four years to promote business-based research, development and innovation. The package includes over $100 million in tax incentives for angel investors, who provide seed funding in a startup’s foundation years. Equity crowdfunding by public investors, however, has not yet received the same support. So, what is the status of equity crowdfunding in Australia?

What is Equity Crowdfunding?

Businesses today are more likely to operate online than in traditional brick and mortar type structures. Social media continues to increase an individual’s interaction with businesses and is redefining communication in the 21st century. Crowdfunding is then the newest way for individuals to involve themselves in businesses. This novel approach defies the parameters of traditional financing channels and allows startups and small businesses to broaden their investor base.

What Are the Types of Crowdfunding?

Crowdfunding provides a platform for companies to meet individual investors, for investors to have the opportunity to invest in new businesses, and connects businesses with potential clients who have an interest in their business.

There are three key types of crowdfunding:

1. Equity-based crowdfunding: Financial contributions are made in anticipation of a growing business.
2. Lending-based crowdfunding: Financial contributions are collected and offered as a repayable debt with interest.
3. Donation-based: Financial contributions are collected for a social cause.

Equity crowdfunding enables startups and small businesses to source equity capital and issue shares to many individual and small business investors. It also permits potential investors to access startups and small businesses. 

What Are The Upcoming Changes?

At the end of November 2015, the Government revealed draft crowdsourcing equity laws which included that startups would only be able to raise money from the general public if they are a public company with $5 million or less in assets and turnover. Furthermore, the crowdsourcing limits are capped at $5 million a year. The draft legislation limits public investors’ investment to $10,000 per company, per year.

There are considerable administrative burdens for a company moving from a private company to a public company. The industry reaction is that the public company requirement is regulatory overkill.  It is a widespread view from the startup industry that the cost and administrative burden of being a public company would be a real deterrent for businesses.

The  cap of $10,000 is also seen as a significant handbrake on equity crowdfunding. Commentators note that there are no real limits on the amount that a person can gamble, and ask why we seek to impose a cap on the amount that a retail investor can invest in a startup.

Questions? Get in touch with LegalVision’s startup lawyers on 1300 544 755.