After failing to find some comprehensive stats, Cannon-Brookes tweeted he would maintain his “bearish position” on crowdfunding.
Earlier this month, StartupAUS threw its support behind establishing crowdsourced equity fundraising regulation in its Crossroads report.
“A growing list of countries have already enabled (equity crowdfunding), and StartupAUS encourages the government to move as quickly as possible to enact enabling legislation so that Australian startups are not disadvantaged,” the organisation said.
After releasing its discussion paper on potential crowdsourced equity funding models in December, the government is now considering both models presented by the Corporations and Markets Advisory Committee (CAMAC) – a federal company law panel – and the one implemented by New Zealand as options for feedback and discussion in the market.
CAMAC’s model included caps on the amounts retail investors could invest in crowd sourced equity funding (CSEF) of $2,500 per issuer a year, and $10,000 aggregate investment over a year, allowing small investments into 4 ventures annually.
The approach in New Zealand includes voluntary investor caps, with the level of disclosure to investors dependent upon the level of any voluntary caps and the amount of funds the CSEF issuer is seeking to raise.
Both the CAMAC and New Zealand models limit the amount companies can raise via crowdfunding to $2 million in any 12-month period, excluding any funds raised under certain existing disclosure exemptions.
‘People need to be aware of the risks that they’re taking. You don’t put the rent money into a startup’
Business Insider spoke to Yasser El-Ansary, CEO of the Australian Private Equity and Venture Capital Association (AVCAL) who said data around crowdfunded equity raises in Australia was limited at best.
“It’s hard to get an entire overall read of the numbers, crowdfunding isn’t [always] being exchanged for equity but in exchange for reward,” he said.
Heasley said it was “too soon” to tell if the financing method would produce significant returns for investors. VentureCrowd has closed about seven deals using the platform but Heasley said as for whether they would prove good investments, only time would tell.
“It’s too soon obviously, to tell because they’re very early stage deals,” he said. “It’s more a marathon than a sprint.”
Opening crowdfunding to retail investors is something that needs to be handled with care, a point Heasley says he “undoubtedly” agrees with, saying the risks and time frames involved with investing in startups needed to be grasped.
“Our model is very much around education and encouraging people to diversify their investments,” he said about VentureCrowd. “There needs to be a lot of education and people need to be aware of the risks that they’re taking. You don’t put the rent money into a startup.”
Nonetheless, Heasley says the law needs to be changed which has already happened in New Zealand, the UK and the US.
He’s expecting the legislation to be passed during the spring session and while the draft hasn’t been released, he’s hoping it takes its inspiration from the laissez faire style New Zealand has adopted rather than what was detailed in the CAMAC report last year.
“I’m hoping that it falls much closer to the New Zealand approach,” he said, adding: “CAMAC was quite restrictive…It was generally very thoughtful but there were four or five provisions in there that looked like it had come from academic rather then someone with a commercial background.”
He said ideas like limiting the amount investors can chip in to $10,000 a year across four companies is “pretty nanny state” and suggesting startups must become exempt public companies to participate in crowdfunding creates an “administrative nightmare”. (Although Heasley added he would be “pretty surprised” if the latter survived.)
The other idea CAMAC raised was flat fees for fundraising platforms, rather than on a commission basis.
“That’s ridiculous,” he said, adding VCs should be “paid relative to the value that they’re adding”.
The federal government’s competitiveness agenda last year outlined a number of changes to enable equity crowdfunding in Australia.
“At the end of the day, we are very supportive of changes that would improve the landscape for startups here in Australia,” El-Ansary said.
“Anything that has the effect of slowing that trend [of startups moving overseas] and encouraging more of our best and brightest entrepreneurs to stay in Australia is a good thing.”
He says the regulatory framework needs to strike a balance between opening up a marketplace for broad-based equity crowdfunding in Australia while minimising the risk of fraud, and ensuring retail investors are equipped with information about the risk of investing in a nascent market.
“The last thing you want to do in this context is put in place a very rigid, complex, compliance heavy regulatory framework,” El-Ansary said. He points out that startups don’t have the resources to spend bucketloads of money on lawyers and accountants to work through regulations. Too much regulation will simply strangle many of them.
“Ultimately, I think there is a very compelling case for us to adopt a more open equity crowdfunding policy framework here. I think we are lagging behind other jurisdictions around the world but this won’t be a silver bullet,” El-Ansary said.
“Very early-stage seed funding rounds are improving year-by-year and what we’re seeing, in parallel to that, is a drop off of the slightly later stage funding rounds of between $2 million and $20 million.
“That’s where we need to be focusing most of our effort in addressing that challenge, because the so-called valley of death, that’s the single biggest challenge of startups. That’s when they develop their concept, they turn it into a commercial reality and they are at that critical infliction point where they need to start thinking about scale and global reach, bringing on more resources and starting to feel and operate like a sophisticated business, it’s at that point that they start struggling here in Australia to attract enough interest from potential investment.”
Paul Niederer, CEO of the Australian Small Scale Offerings Board, estimates about 90% of the transactions are done on the rewards side, rather than equity.
“On the equity side, it’s very early days, we’ve been doing it since 2005, it wouldn’t be over $20 million a year on the equity side of it,” he said. adding, “We’re really waiting for treasury to set some rules.”
As for where crowdfunding sits, Niederer said was an important mechanism which sits between founders using credit cards or sourcing family money and when the company is ready for Angel investment.
Federal treasurer Joe Hockey said last week that there would be “more to say” about incentives for startups in the budget, which will be handed down on May 12th. Regardless of whether specific crowdfunding methods are announced that night, the coming months are likely to be a critical period in shaping the future of this emerging investment trend that many believe holds so much promise for unlocking the potential of innovative Australians with ideas they want to export to the world.
Just ask the Andersons.
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