Caitlin Fitzsimmons Online editor

Caitlin covers social media, marketing and technology and is BRW's social media editor. She has worked as a journalist in Sydney, London and San Francisco, writing for titles including The Guardian and The Australian Financial Review.

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Government review into crowdfunding: why retail investors could become the new venture capitalists

Published 04 December 2013 11:47

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Government review into crowdfunding: why retail investors could become the new venture capitalists

Pozible co-founder Rick Chen says there is huge demand among start-ups in Australia for equity-based crowd-funding. Marija Ivkovic

Australian crowdfunding platform Pozible is keen to offer equity-based fundraising to local start-ups if the government relaxes the rules on investment next year.

Public submissions to the Corporate and Markets Advisory Committee review on crowd-sourced equity funding closed last week, with most submissions calling for a liberalisation of the existing regime.

Pozible co-founder Rick Chen, says Australia will “lose out” if it fails to seize the opportunity.

“We as a nation can’t afford to lose this - it’s about how to make Australia more investment-friendly to attract start-ups here or to attract start-ups who are here already to not go offshore,” Chen says, speaking on a panel on “innovation of money” organised by consultancy How to Impact in Sydney this week.

The current rules mean that a start-up can’t raise more than $2 million or transfer equity to more than 20 people in any given 12 months, a system that restricts risky early-stage investment to so-called ‘sophisticated investors’.

However, this is currently under review with CMAC, which includes representation from the Australian Securities and Investment Commission, due to report to government by the end of April 2014.

The United States, Canada, United Kingdom, Italy and New Zealand have already enabled crowdfunded investment in the past year or so, albeit with different regulatory rules. Peer-to-peer debt financing is also available in many jurisdictions.

The committee received submissions from the Australian Securities Exchange; the legal community, including Norton Rose Fulbright, Minter Ellison and the Law Council of Australia; crowd-funding sites such as Pozible and iPledg; and representatives from the start-up community, social enterprise sector and investors.

There was general consensus that Australia should enable crowd-sourced equity investment in some way, but different suggestions on how to manage disclosure requirements and the risk of fraud.

Demand from start-ups

Globally Pozible is one of the biggest crowd-funding sites, behind the likes of Kickstarter and IndieGoGo. Kickstarter recently launched in Australia.

Crowd-funding has traditionally been about donations rather than investment. Project creators are encouraged to offer rewards for different levels of donation and many entrepreneurs have effectively used this as a pre-order channel.

The advantage for entrepreneurs in non-equity based crowd-funding is that it offers effective market research to test ideas and the potential for good publicity, without relinquishing ownership or control of the business or taking on onerous reporting obligations.

However, Pozible’s Chen says there are a lot of entrepreneurs who are willing to trade equity given the tight financing environment in Australia.

“The demand is really there,” Chen says. “Running a start-up in Australia isn’t very easy especially the money environment.

“Investment and VCs is at a very early stage so to be able to unlock a different type of capital is really beneficial for the start-up environment and people doing things in Australia so we don’t keep on losing start-ups. DesignCraft.com, 99designs, all these companies started in Australia and should be located in Australia not San Francisco.”

However, Chen says the government would need to adopt straightforward rules that are less complicated as a traditional public listing on the ASX, otherwise it would be too onerous for entrepreneurs.

Crowd-sourced equity funding was enabled in the US this year as part of the JOBS Act and is offered by the likes of CircleUp.

CircleUp founder Ryan Caldbeck has criticised the current US system as too onerous, creating a two-tier system where the most attractive start-ups use traditional venture capital to avoid taking on the regulatory burden and retail investors are lumped with the leftovers.

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