What Your Need To Know About Equity Crowdfunding In Australia
Australian Law has made “true” equity crowdfunding impossible, but as part of the new federal budget, this could soon change. It opens up new opportunities for entrepreneurs to fund their startups.
In order for your startup to grow, it’s more than likely, you’ll need funding at some stage.
What do you do though when you’re unable to source funds from the bank?
Or, you lack the right private equity connections to invest in your startup?
Give up…? Of course not!
That’s not true entrepreneurial spirit.
As the old saying goes “where there’s a will, there’s a way.”
You turn to equity crowdfunding of course…
The problem with this though is previously, Australian Law has made true equity crowdfunding next to impossible.
Government policies are an important tool for developing Australia’s Digital Landscape and for promoting the growth of the digital economy.
Australia’s currently facing an issue of how to design and implement strategies to support economic growth, innovation and employment whilst minimising financial risks to investors.
Currently, 96% of Australian Businesses are small businesses. They employ over 4.5 million people and produce $330 billion of our nations economic output per year.
The recent 2015 budget announcement attempts to fix these issues with a large emphasis placed on small business growth.
The Jobs and Small Business Package, along with many tax benefits, brings forward a number of changes to the Corporation Act 2001.
If these amendments are successfully passed in Spring of this year, Equity Crowdfunding will become available as a viable fundraising method for startups.
1. What’s Equity Crowdfunding?
Source: Crowd Fundraiser
Before I go any further, it’s important not to confuse crowdfunding with equity crowdfunding.
Although both follow a similar concept, there’s a difference between the two.
Crowdfunding is the practice of funding a project or venture through raising money from a large number of people.
Each person contributes a relatively small amount, typically by the internet.
Whilst these people don’t gain a share in the startup, they normally receive some sort of reward or discount for their contribution.
Also known as ‘crowd sourced equity funding’ and ‘investment crowdfunding’, equity crowdfunding allows startups to raise funds from investors.
Each investor contributes a relatively small amount in exchange for a stake or ‘share’ in your startup.
Unlike non-equity crowdfunding, contributors actually obtain a stake in the business.
Potential investors must also consider the following when deciding to invest in your startup through equity crowdfunding:
- Financial position and viability of your startup.
- How long have you been in business; and
- Whether your startup has the appropriate intellectual property protections in place.
2. Australia’s Crowdfunding Equity Scheme and Regulations
Source: Virgin
Equity crowdfunding is a much newer concept than typical crowdfunding.
It’s neither barely legal or completely illegal in most of the world.
Why is this the case though? Surely this concept must be one or the other…?
Well, typically, most corporation regulations are based on ‘traditional’ capital raising methods such as bank loans or Venture Capital contributions.
The regulations were also made in a time where there was no internet or social media.
The very thought of equity crowdfunding through technology never even crossed their minds.
As such, there are regulations prohibiting true equity crowdfunding in Australia and much of the world.
What’s true equity crowdfunding…? I’m glad you asked.
Private companies are capped at 50 non-employee shareholders:
The private, limited liability company structure (Pty Ltd) is Australia’s most popular legal business structure.
The problem is that the amount of non-employee shareholders in capped at 50.
Why’s this a problem?
If we start talking international crowdfunding campaigns, the average number of contributions is around 96 in the US and 104 in the UK.
The current cap of 50 non-employee shareholders is a restriction in the ability to encourage meaningful contributions by each investor.
Let’s have a think about this and apply it practically…
Your startup requires $1 million in equity crowdfunding.
If your startup uses the maximum 50 non-employee shareholders, that’s $20,000 contributions from each shareholder.
Do you think many investors have $20,000 lying around to invest in a startup that has a high degree of uncertainly around it? No…
Let’s say that we apply the same scenario but with 200 non-employee shareholders.
That equals $5,000 per non-employee shareholder. The advantages of having more than 50 non-employee shareholders is twofold:
- The lower the capital contribution required, the more likely it is that an investor will contribute capital to your startup. It lowers the risk.
- The pool of potential investors deepens as the capital contributions amount decreases. If the contribution price drops, more people will invest.
Other potential barriers to true equity crowdfunding include the disclosure requirements of information to shareholders.
These requirements are both time consuming and costly.
Under the Corporations Act, companies are prohibited from engaging in non-disclosure of good or bad information to new and potential shareholders.
For new startups, these requirements make it very difficult to attract new investors. Especially when they may not have this sort of information yet.
Luckily though, change is hopefully not far away. Equity Crowdfunding legislation will most likely be introduced this year in the spring sitting of Federal Parliament.
3. Potential Risks Of Equity Crowdfunding
Source: Reacon
Equity crowdfunding does have a rather open and transparent nature. The risk’s also minimised through the smaller amounts required from each investor.
We aren’t talking huge sums of money being invested here.
Like any investment, equity crowdfunding is definitely not risk free for investors. Some of the risks include:
- Risky Investments – Investing in startups is definitely risky, given their extreme uncertainly.
- Illiquid Securities – Your share/s in the startup cannot easily be sold or exchanged for cash without a substantial loss in value.
- Fraud – Fortunately, laws in Australia provide investors with significant protection and recourse. Equity crowdfunding has also proved effective at weeding out fraudulent startups.
- Lack of education – Both investors and entrepreneurs might not know exactly what they’re getting involved with or for that matter, realise the expectations of the other parties.
4. But, I’ve Seen Equity Crowdfunding Websites…
Source: Crowdfunding Science
Currently, there are very few sites which offer true equity crowdfunding to Australian startups.
There are a couple of sites which allow you to raise money from seasoned investors (people with lots of money and assets)…
The unfortunate thing about these sites though is they don’t allow you to harness the true power of the crowd to raise the funds you require.
They don’t put the crowd in equity crowding, so to speak…
When doing my research for this article, I did come across one equity crowdfunding site which I thought would be particularly useful to entrepreneurs such as yourself.
VentureCrowd aims to connect a new generation of investors with early stage, high growth, Australian Startups.
If you’re the founder of a start-up providing a great product or service that’s looking for investment.
You can gain access to a number of qualified investors who are ready to take your startup to the next level.
Once this legislation has passed through the Senate in the coming months, we will likely see high growth in the number of web platforms offering equity crowdfunding services.
A Final Thought On Equity Crowdfunding
Ultimately, the Federal Government aims to make it easier for startups to raise capital through equity crowdfunding.
Australia’s Crowdfunding Equity Scheme and Regulations are promising for nurturing Australia’s technology startups.
Technology based startups are the types of businesses which we should be encouraging to stay in Australia.
Unfortunately, many Australian technology startups fail to gain funding from Australian investors. They end up seeking international funding and moving overseas.
With the acceptance and changes to the law, hopefully, tech startups will remain in Australia so we don’t miss out on the digital technology revolution.
Equity Crowdfunding is an ever evolving model that’s mutually beneficial to both parties.
- The model provides greater investment choice, helping investors to further diversify their portfolios.
- It helps people contribute to our economy and support our startups.
- It makes it that little bit easier for promising startups to gain capital to fund their operations.
Equity crowdfunding just goes to show how a once disruptive business model has now evolved into a niche market.
Hopefully, once passed by the Federal Government in the coming months, it will help grow and transform Australia’s technology startup landscape.
Equity crowdfunding is an evolving model that provides greater investment choice, helps people to contribute to our economy and supports start-ups.
I’m interested in knowing your thoughts on equity crowdfunding.
Do you plan on using it to help raise capital for your own startup? Please let me know by commenting below.
Alternatively, if you’re interested in regular crowdfunding for your startup, check out these great resources from the Buzinga Blog:
- 11 Surprising Tips For Crowdfunding Your App Project
- 5 Most Popular Crowdfunding Websites
- How To Build A Social Media Strategy For Crowdfunding Campaigns
- 5 Ways To Get Funding For Your App Project
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