Crowd Sourced Equity Funding (CSEF) provides opportunity, it stimulates growth and most importantly it democratises finances. Added to that, it gives investors the ability to invest in early stage and previously inaccessible private ventures which in turn gives these people the ability to access diversification within their investment portfolios.
CSEF is going to be “legalised” very soon in Australia and has already opened up in New Zealand as a means for entrepreneurs and small business owners to access capital that they otherwise couldn’t.
Before we discuss what to expect in the future, it’s important to understand the current legislative environment for CSEF in Australia and New Zealand:
CSEF cannot currently occur in Australia due to regulatory barriers faced by intermediaries. These barriers include:
- Limitations around the involvement of ‘retail/unsophisticated’ investors; and
- The classification of what constitutes a public company (limitation of private company shareholders); and
- Marketing of private placement deals to the market (i.e. socialisation which is the pure essence of how crowdfunding works).
However, a report released by the Corporations and Market Advisory Committee (CAMAC) in April this year (written to provide advice to the Federal government on implementation of Equity Crowdfunding) showed very strong support for the implantation of CSEF. This report also briefly outlined benefits to key stakeholders. Equitise defines CSEF key stakeholders as:
- SMEs: Underfunded and under capitalised Small and Medium sized Enterprises (SMEs); and
- Investors: Everyday (retail and sophisticated) investors seeking greater diversification in their portfolios.
Most notably, the CAMAC report closely considered recent initiatives in key overseas markets such as the UK, US, Canada, New Zealand and Europe when formulating it’s position on Equity Crowdfunding in Australia. Its recommendations included the following:
- Retails investors will have caps on the amount of money that they can invest into private businesses through Equity Crowdfunding. In addition, they will also have cooling off periods and share resale rights through secondary markets.
- Businesses raising capital will have advertising restrictions, the offer will not exceed the issuer cap of $2 million in a 12-month period, information must not be misleading and money must not be lent to investors by the issuers to buy its shares.
- Platform providers must provide risk disclosures; conduct limited due diligence on issuers, check compliance and investor caps on investors and have disclosing fees.
There are additional considerations of what requirements private companies should adhere to if using a CSEF platform. These considerations largely relate to disclosure and free flow of information from private company directors to their new shareholders. I recently discussed these potential requirements with Treasury in a recent trip to Canberra. These include:
- The Directors responsibility around reporting; and
- Company audits; and
- Disclosure and announcements of material changes to the business.
The New Zealand Government has been quick to act on legislation to embrace CSEF and recently issued two licenses to Snowball Effect and PledgeMe. Both businesses currently have live private company placements within the New Zealand market.
The Financial Markets Authority (FMA) requires intermediaries in New Zealand to go through a detailed licensing process to ensure potential platform operators are fit, proper and capable to operate in the CSEF industry.
The directors at Equitise believe the process adopted by the FMA is a robust and well thought out. It is an approach that mitigates exposure to key risks associated with the introduction of this new asset class if just your “average punter” had the ability to start a platform. We will be advocating for a similar approach in Australia to ensure:
- Key stakeholders are protected; and
- “Cowboys” are deterred from launching a platform to make a “quick buck”; and
- Intermediaries are forced to take on responsibility for educating platform users.
Current legislation in New Zealand enables retail investors to invest through licensed providers and take ownership of their potential ventures. However, licensed providers in New Zealand are required to educate investors by taking them through various processes and checks to ensure they understand the risks of private company investment.
Equitise and the future of the Equity Crowdfunding Industry
While the Australian Government decides on a path forward that is credible to both the longevity of a new asset class and the longevity of intermediaries, Equitise has decided to push forward and launch our business in New Zealand. Equitise currently has a license pending in New Zealand with the FMA and will be one of the first intermediaries. We aim to deliver a trans-Tasman CSEF platform within the next 18 months and open up deal flow between New Zealand and Australia.
Equitise met with The Australian Government and Treasury recently in Canberra to discuss the lack of urgency and timings around release of legislation and when this will occur. Treasury and key representatives from the Federal Government indicated that they are advocates for the rollout of CSEF in Australia. (You can read more about the outcomes of this trip in the Equitise blog.)
From this trip, it as obvious to me that Equity Crowdfunding is certainly on the agenda, however the implementation is being delayed as the Federal Government wishes to ensure that this new legislation is integrated properly and efficiently into the investment marketplace.
As previously mentioned by directors at Equitise, Key stakeholders in the CSEF space need to band together to grow the number of voices in this space. The government is well aware and very supportive of CSEF; however what we are lacking is absolute urgency to get it pushed along faster (but in a positive way).