Australia is the latest in a host of countries to introduce a scheme for crowd sourced equity funding (“CSF”); with variations of CSF already adopted by many countries including the United Kingdom, Canada, the United States and New Zealand. What is interesting to observe is that while the driving purpose behind the introduction of CSF in each country is typical, the approach of the legislature in regulating CSF has varied greatly.
Crowd-sourced equity funding is used to raise funds, often from a large number of small investors. The key difference from other group driven investments is that it allows investors to own a part of the company they invest in. It is emerging as a popular way to fund innovative business ideas and is appealing as it allows smaller, less inexperienced investors the opportunity to be involved in new and emerging industries. For the most part these types of investment were previously only available to wealthy or more experienced investors.
Comparing the schemes
Each scheme imposes a heavy burden on the third party provider who hosts the offering. Both the United States and New Zealand require portal providers to obtain written certification from each investor that they understand those risks. In Australia, it is the intermediary who is responsible for ensuring that an investor invests no more than $10,000 per issuer per year and the intermediary will be required to hold and AFS Licence.
Protecting the investor
As can be seen in the table above, each scheme has each taken a different approach to how much an investor can contribute to a CSF scheme. Placing such a cap on an investment can be viewed as a somewhat paternalistic bid to protect retail investors, essentially from themselves. The New Zealand approach has been criticised as not giving enough protection to retail investors because it has no legislated cap. However it is interesting to note that New Zealand contributors invested an average amount of $4,300 in the first year and $7,100 in the second. These relatively modest amounts seem to show that investors have, so far, taken a cautious approach CSF investment.
Relaxed vs. Regulated Approach
The New Zealand and United States schemes are up and running, with the New Zealand scheme raising NZD$12.4m in its first year. In New Zealand, 75% of issuers have received the funding they sought compared with 25% in the United States. Admittedly the United States scheme has been operational for a much shorter period than that of New Zealand, having only being implemented since May 2016 compared with New Zealand’s introduction in 2014. Nonetheless some commentators have suggested that the United States model as it stands may be too strict to succeed. There are significant administrative hurdles for an issuer proposing to raise equity through crowd-sourced funding in the United States, indeed it has been estimated that it costs an issuer $15,000 in compliance costs to raise $100,000. If tight regulation pushes companies away from CSF and back towards the current funding models, retail investors will once again find themselves unable to able to invest in innovative and new opportunities. It would be unfortunate if the SEC’s intention to protect retail investors pushed opportunities back out of their reach.
Australia’s approach seems to be something of a middle ground between the two models. However, the decision to limit CSF investment to public companies has been criticised as a barrier to many companies from accessing CSF. The Australian legislature was made aware of this concern through the Bill consultation process and have included an exemption in the scheme that allows companies (those that become a public company in order to access the CSF scheme) a five-year exemption from the normal reporting and disclosure requirements that would usually apply.
The criticism remains however, that the cost of becoming a public company is still too high for many small to medium entities looking for funding. In response to this criticism the government has released a consultation paper seeking input to the proposal of extending the scheme to proprietary companies. The proposed amendments would remove the need for proprietary companies to transition to being a public company, thereby reducing cost and compliance burdens. The consultation paper proposes additional obligations that CSEF proprietary companies will be required to uphold in order to afford investors additional protections.
The New Zealand approach has been both praised and criticised for its more ‘relaxed’ approach to CSF. The model requires less disclosure from the companies involved and concerns have been raised with the fact that the FMA does not investigate the companies proposing to raise funds through CSF, only overseeing the licensed portal providers. It may be that while this would be dangerous in a larger market, New Zealand’s relatively small size will allow close enough oversight by the FMA to offset these risks. As with all of the models, time will tell whether a relaxed approach achieves the goal of the scheme.
What is clear is that each jurisdiction is unlikely to legislate effective CSF from inception. Monitoring the successes and failures of the respective models and making regulatory adjustment to reflect these will hopefully mean that the purpose of CSF is realised and a greater pool of people will have the ability to invest in dynamic and creative ideas for the future.
Crowd Sourced Equity Funding is set to be introduced in Australia thanks to the Corporations Amendment (Crowd-Sourced Funding) Bill 2016, which received Royal Assent on 29th March 2017.
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