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Matthew Pinter, Paul Niederer and Chris Gilbert were guests on Switzer this week on Sky News for an interview on Crowdfunding. While the panel primarily included equity crowdfunding or investment crowdfunding representatives pledge, reward and realty crowdfunding were also covered.

Peter Switzer asked if we had come across any circumstances where smart alecs get involved and deceive people. I replied that after 300 odd raisings we were fraud free. What is important to note though is that times have changed. In the 1930’s Securities legislation was strengthened because people were sold things (stocks and shares) when they had no way of checking out if the investment was as the promotor said. When they investments turned sour, and the person that sold them the stocks and shares was long gone, the regulators stepped in with a heavy hand.

The heavy hand is no longer needed. With the transparency and due diligence opportunities the internet provides any rip off merchant can no longer hide once they have deceived people. A simple internet search will stop them becoming a director or promotor of an opportunity listed on a crowdfunding platform. Both platforms on the Switzer show, ASSOB and Equitise perform due diligence on the people, the IP and the entity behind the raising which includes both bankruptcy and bad actor checks though formal channels and google.

See the video here!


The Crowdfunding Institute of Australia (CFIA) is the peak body for Crowd Funding in Australia.

Learn more here!
Members can stay connected for industry news, discount member/platform insurance, speaking opportunities, journal opportunities, member introductions, pre-booked ticketing, promotion, press releases, publications and whitepapers, eLearning, meetups, luncheons, seminars, new members networking and more.

The CFIA recently completed a survey on equity crowdfunding to measure interest and awareness for the budding Australian investment crowdfunding industry. The purpose of the survey was to provide a nationally representative response to the Australian government’s recent discussion paper titled “Crowd-sourced Equity Funding”. The paper outlined three potential directions for equity crowdfunding in Australia for 2015. This discussion paper was published in late 2014 and will be the focal point of regulatory discussions later this year. The consultation by the Australian Treasury and the Small Business Minister Bruce Billson follows a report by Corporations and Markets Advisory Committee (CAMAC) that was generally considered as “totally unworkable“. Subsequent to this the Treasury produced “Crowd-sourced Equity Funding” report has taken a more balanced perspective and has brought in for discussion the operating crowdfunding regime in New Zealand. The New Zealand rules have been met with a more positive response as New Zealand has chosen a more light touch regulatory approach however they have still chosen a licensing path which will permit only well heeled platform backers and curated issuers to take part.

Results of the CFIA survey were presented to Treasury.

While in Thailand on holiday I noticed that having your own stall, stand, shop or business is often the difference between survival and poverty. There are hundreds of thousands of businesses like this. Imagine if you had a business that was valuable to the village and you wanted to raise funds by getting a some village folk to invest. Equity Crowdfunding. Imagine your disappointment if you were told your business is part of a potential “new asset class” and as such  you may pay up to $80k to enable a few mates to invest in their business!

Sounds incredulous but it happens every day.

As you look around the world country after country is bogged down with governments, regulators, intermediaries and financial service friendly (read well heeled) prospective platforms seduced by the possibility of a new asset class. Weren’t mortgage-backed securities (MBS) and collateralized debt obligations (CDO) new asset classes also?

A new asset class appeals to those that have written regulations for financial services or have operated under financial services regimes.

Look at the Jobs Act for example.

Trumpeted for its ability to grow small businesses and create jobs in the unaccredited investor space it (Title III) hasnt got of the starting blocks.

What has though are raises under existing or modified financial regimes (Title II) that have operators with financial services licenses that hand pick deals for accredited investors and instead of a rolodex they have an excel spreadsheet of contacts or use a CRM system and have a “crowdfunding platform” to harvest a few new clients or appear very modern.

For unaccredited equity crowdfunding to be successful it needs to have light touch investor regulation and the investor needs to certify they are responsible for their own gamble. This empowering opportunity for small businesses should be driven by the small business ministers or small business representatives in the government rather than those responsible for writing financial regulations.

Here is the spectrum …

So in your country who is driving the discussion for unaccredited or Title III crowdfunding? Is the Small Business part of the Government or the Financial part of the government?

And when you drill down are they in the “New Asset Class” team or in the “Small Business Empowerment” team?

Do they understand that only a very few companies, maybe 1 in a 100 will ever qualify to suit an “asset class” regime. For stats look at the Angels. Most Angel groups look at a couple of hundred deals, they get a short list of say 10 and maybe invest in two. Only these two would probably suit an ‘asset class” regime. The rest are ordinary small businesses that wont offer the possibility of a 10 bagger or 10 times your money back. To further strengthen this argument … of the ten the Angel Investor invests in  … usually only one or two work out. On my calcs thats one or two in a thousand.

After 300 Small Business raises one thing I have learnt ….

If an equity crowdfinding  raise IS ATTRACTIVE to an Angel or a VC, and that is maybe 5 out of 100 raises then it may be a candidate for an “asset class” quality raise. Needle in a haystack. For evidence we can see that one of the most active companys in the secondary sales of unlisted stocks, SecondMarket.com has moved from providing a trading venue for unlisted stocks to offering technology that companies can use when conducting share sales. “We are not focusing on connecting investors with the companies or these opportunities,” Silbert Second Market’s CEO, said. Which basically say’s while Facebook and Groupon were unlisted shares that were attractive there are thousands of companies that are better off managing their own secondary sales with SecondMarket’s assistance rather than running an exchange or platform for a supposed large “new asset class” that simply isn’t there. This is ASSOB’s secondary sales experience also.

For many ASSOB raises the companies are making things like plastic wine barrels, network solutions, bottles of fruit juice, pension portals, titanium welding systems and children’s furniture so it will take many years for the company before an “asset class” regime is appropriate. Setting the bar this high from day one is a total disincentive, not appropriate, and given an “asset class” regime they simply wouldn’t have raised the funds to get to the asset raise stage. “Catch 22″.

Viewing unaccredited equity crowdfunding investment through the eyes of regulators, intermediaries, regulated platforms and accredited investors eyes is like signing a death warrant for them. If we want this small business environment to flourish like eBay, Kickstarter and other platforms that matchmake transactions under say two million dollars, where the majority of the funding comes from friends, fans, family and followers of the entity raising funds, small business representatives need to be the drivers not the regulators. The premise or driver should be investors know what they are getting into. They know it is a gamble. It should be treated like a gamble. All that needs to happen is that every investor clearly and unequiviclaly signifies to the world that they are fully prepared to lose the money and acknowledge that it is a total gamble.

Country after country is trying to shift responsibility for this onto the platform or intermediaries. Why should they be responsible for someone who is actually gambling. In many jurisdictions following an ‘asset class” mentality to get a platform licensed and operational, costs at least $100k up front and high monthly operational costs from then on. In the U.S. it is estimated that each raise will cost over $80,000 just to raise say $200,000. Obviously neither the platform nor the small business is going to take that route.

This means that only participants at the “Asset Class” end of the spectrum can firstly afford to run a platform and secondly only raises that are attractive to accredited investors get off the ground. Why? It takes the same time to run a small raise through the platform as it does to run a large raise, and usually small raises actually take more time as the capital raising team is smaller and less versed.

Unless countries shift the unaccredited crowdfunding opportunity for small business empowerment away from the minisiter or government representative handling financial services to the minister or goverment representitive responsible for small business growth and job growth any new regime is doubtful of success.

Only those firmly in the “new asset class” side of the table will use it for their handpicked curated raises that probably would have got funded any way.

Thats why anything in the bottom left of the diagram below has little traction other than the occassional high profile raise. Licensing unaccredited investor equity crowdfunding read (Title III) on the basis that every unlisted company raising capital is part of a new asset class is overkill and counter productive.

All the time and money that is being invested by government, regulators, support industries and platforms to create a supposed “asset class” based crowdfunding regime in countries around the world  will be if no use if the objective is to create a climate for small businesses to be more easily funded. Shiny new regulations may be in place but they will be inappropriate for this sector of the market. See my article on “Holistic Crowdfunding


Do the maths yourself. Check out those countries in the bottom left. You can count the unaccredited investor raises they have done on one hand for each country. If you have the numbers work out what it cost per raise to get the regulations in place!

To read why the United Kingdom is not in the bottom left read more here!

Note to those in Government responsible for small businesses and job growth:   Take this once in a lifetime opportunity to substantially broaden funding to all small businesses in your country away from the regulators and find a way to make it easy for followers of a  small business to invest.  Remove the opportunity from the inappropriate “asset class” incumbents and place it in the hands of those responsible for small business and jobs growth. Push for a climate of investor evidenced self responsibility so the securities regulators need not be concerned, Let people support the small businesses they love by throwing a few dollars at a mate. If they lose their money they cant say they weren’t warned.

Holistic Equity Crowdfunding

If we look at regulatory implementations of the equity crowdfunding around the globe most are not holistic.

Just because you have Equity Crowdfunding Regulations doesn’t mean you have Equity Crowdfunding.

For the most part they are regulated with new regulations totally independent from the environment they are expected to operate in. In other words we seldom see holistic equity crowdfunding. Where it is not holistic we usually have nice shiny legislation but few players.

Whether it be the Italian Hi-Tech sector, American Intrastate or New Zealand’s licensed approach all make compromises in the pivot between investor protection (regulatory environment) and empowerment of the entrepreneurial ecosystem. Result … low traction.

The implementation balance to date tends to favour investor protection which is not unusual as it is regulators and legislators that are primarily responsible for implementation. Often they have no experience or expertise in either the small business and startup ecosystem nor in the early stage investment environment. However in the United Kingdom equity crowdfunding platforms have been coupled to a conducive and empowering entrepreneurial investment environment and that seems to be working the best of all. They were also greatly assisted but a facilitative and hands on involvement of the U.K. regulator.

While New Zealand has the best in class crowdfunding regulations, traction is held back because the cost and time taken to get licensed means only well healed participants can run platforms and these platforms, because they are determined to hold onto their license and seek to enjoy their privileged position, are choosey with the listings they have and it is doubtful volume traction will eventuate. Thus in the chart below it is bottom left for New Zealand although they are nearer to the sweet spot than most.


U.S. Intrastate regulations have heralded in a lighter regulatory environment but confining it to the home state is not so empowering for most entrepreneurial raises. Thus bottom left also.

Italy, which has had regulations for over a year now has not achieved large scale traction and raises are confined to a particular type of company. This is not empowering for most entrepreneurs.

The Jobs Act Title III is trapped in bottom left as the compliance cost of a raise is estimated at around $80,000 so this is hardly empowering for entrepreneurs. Firmly bottom left here.

Title II however is in top left. A lot of these companies would probably have got funding through traditional VC and Angel activity but being online broadens their opportunity into “crowdfunding”. Regulations are still onerous though.

United Kingdom, with their tax advantages to investors creates an empowering entrepreneurial environment while regulators have allowed a conducive regulatory environment to morph.

So whats the answer?

Firstly, to be holistic the implementation of crowdfunding cant be just about crowdfunding.
The entrepreneurial environment also needs to be considered.
So does the investment environment.

At the moment most legislators, including the Australian government, are working off checklists of the best “ crowdfunding regulations” worldwide and attempting to implement them straight up independent of all the other things that are needed to grow businesses and create jobs.

Crowdfunding regulations need be fashioned and intimately linked with what needs to be in place to grow businesses and create jobs.

In summary, crowdfunding regulatory implementation needs to be holistic.

The following areas need to be covered in addition to modifying the best of class in crowdfunding regulations worldwide (the easy road for most regulators).

1) RISK AVERSION: Investor risk aversion through schemes like the United Kingdom EIS scheme

2) STRUCTURES: Corporate structures that make having more than 50 shareholders inexpensive.

3) INVESTOR FOCUSSED: Mentoring for Startups and Growth companies so they pitch well at the “right” investors types for them

4) UNIVERSAL: Recognition that this is not just about Silicon Valley bound companies, thousands of businesses can benefit from equity crowdfunding.

5) COMPLIANCE: Compliant entity structures need to put the onus on the issuer or fund raising company and not on the platform.

6) FAIRNESS: Fairness and transparency for all investors, issuers, intermediaries and platforms

Lets look at each of these in more detail …

1) RISK AVERSION: Investor risk aversion through schemes like the United Kingdom EIS and SEIS schemes empowers the entrepreneurial environment. Witness the United Kingdom. The UK Enterprise Investment Scheme (EIS) is designed to help smaller, higher-risk trading companies raise finance by offering a range of tax relief to investors who purchase new shares in those companies. EIS has become a well established cornerstone of the UK government’s efforts to support the flow of capital to small to medium enterprises (“SMEs”) and is supported by both tories and liberals. The scheme has proven a huge success with over 2,000 companies raising over £175 million of SEIS investment from the time the scheme launched in 2012 up to July 2014. Both schemes have become important contributors to the economy in areas where the banks have been unable to assist. If investors are willing to back startup and early stage growth companies that everyone agrees are the ones that create jobs then the government should assist by lowering the risk threshold for investing.
2) STRUCTURES: Corporate structures are no longer one share for mum and one for dad. Just as more people trade shares online, belong to loyalty programs and own and operate their own pension funds, more people seek to invest, or are involved in the formation of new companies.The concept of mum and dad companies with one share each is well in the past as the multiplicity of skills needed to drive modern entities means our concept of a “private” company is outdated. In the future many people will provide both capital and sweat equity to get a business going. Accommodating them to do so should be easy, certain and inexpensive. Arbitrary figures like 50 shareholders are remnants of the past. Corporate entities should easily accommodate hundreds of shareholders and give them certainty that for their contribution they own a legitimate share of the business.

3) INVESTOR TYPES: Many government assistance programs focus on the production of business and marketing plans. Few focus on becoming investor ready which is often a more valuable initiative. We have seen with the development of incubators and accelerators that becoming investor ready is where the action is. Every investor has different requirements. With equity crowdfunding many regulators are fashioning legislation for the top right in the diagram below. In doing this they are not recognising that every year thousands of businesses obtain investment from friends, fans, family and followers that is handled in an ad hoc fashion and not as well as it would be through a modern equity crowdfunding platform. In the diagram below we can see that crowdfunding raises that may proffer that they will deliver a 10 times return often don’t have the evidence and credibility to support this. Thus in the absence of interest from Angels and VC it will be up to friends, fans family and followers to support the endeavour.


4) UNIVERSAL: Recognition that this is not just about Silicon Valley bound companies. Thousands of businesses can benefit from equity crowdfunding. By far the largest amount of investment in Startups and growing SME’s comes from the crowd around an entity. It’s friends, fans, family and followers. Regulators seem seduced by the figures from reward crowdfunding and have extrapolated them as how equity crowdfunding will unfold. There is no evidence that 100’s and thousands of investors will flock to equity crowdfunding raises. There is plenty of evidence that they wont. Crowdfunding regulations should recognise that it is not just the high profile Silicon Valley bound companies that crowdfunding regulations should fashion regulations around. Regulations should cover investment from the both the companies own crowd and crowds gathered from the the world at large.
5) COMPLIANCE: Compliance structures need to put the onus on the issuer or fund raising company and it’s promotors and not on the platform. If regulators would have put the onus on eBay to check all listings and be responsible for non-delivery, their platform would never have grown to where they are today. The same with Gumtree, Kickstarter, Alibaba and even dating sites. Matchmakers are just that. They match a willing buyer with a willing seller. In all these cases the platform does not write the text for each offering, nor do they selectively market any of them on the basis of recommended offerings. This also should be the case for small scale equity offerings. It is the issuers offering and the platform should not give advice or guidance as to whether this is a good offering or not. The trend regulators like New Zealand and Austraia are taking by licensing platforms and giving them responsibilities for offerings will never deliver traction as they can never really assess an early stage opportunity. Licensing puts the breaks on and destroys innovation and initiative. Even Angel investors that operate on the top right of the above matrix only usually get one in ten right so how can we expect a licensee will make any difference. The Corporations Act should be the Police here not the Platform.

6) FAIRNESS: Transparency and informed investor commitment assists fairness greatly. If the compliant structure and the Corporations Act empowers compliance then every stakeholder needs to be welcomed into the transaction in an informed manner. That means that investors receive all the information they need to make the decision and then acknowledge by an action that they have received sufficient information. By doing so they admit this is high risk, they confirm they understand they could lose all their money and unless the promotors have breached the corporations act they are effectively on their own and have no recourse against the platform nor the promotors.

To summarise: Governments worldwide are pushing crowdfunding regulations independent of startup ecosystems and other small business, job growth and investor initiatives. They are doing this as crowdfunding alone is politically popular but when pushed within a holistic framework it is too much like hard work. If in the implementation of a crowdfunding regulations the regulators recognise that …

  1. Investors should be supported to take risks within a supportive entrepreneurial ecosystem
  2. Corporate structures detach from the old adage of private and public and recognise today’s stakeholders including sweat equity
  3. Crowdfunding regs should match emerging investor types not traditional top right investor types
  4. Crowdfunding is not just for companies in the fast lane.
  5. The onus to be complaint should be on the issuer with the platform being the publisher and investors should be afforded transparency but when they commit they commit and take responsibility for their decision.

… then we will have holistic crowdfunding and a lot more traction than we have today.

Hope’s role in Equity Crowdfunding

At a recent Angel Investor event I overheard an entrepreneur seeking capital ask an Angel Investor the following question.

“What sectors do you specialise in when selecting investments?”

The Angel Investor said he had no special preference as he was primarily after “anything that had enough in it to back up a 10 times return”.

That got me thinking.

Maybe a “Hope Matrix” like the one below would be a quick way for an entrepreneur or founder to work out where there particular opportunity is best pitched.

If they definitely have something that fits squarely in the top right then why bother with equity crowdfunding. Just go straight for the money!

  • Top right: Near 10 times return and all the paperwork to back up a rational decision
  • Top left: We believe you’ll get up to 10 times your money back but we have not got all the proof you need
  • Bottom right: There will be a good return, maybe 5 times your money back and here is the proof
  • Bottom left: We believe you’ll do well investing but we have no proof at this stage other than our self-belief


In my experience, after over 300 equity crowdfunding raises, most issuers seeking capital believe that they are firmly in the top right square and sincerely believe that just putting the raise on the platform will have well-heeled investors flocking.

If you look closely at the matrix though there are two things that are needed to achieve this:

  1. The perception that their opportunity will deliver a 10 times return (the easy part)
  2. The figures, evidence, support, credibility etc to back up this belief. (the hard part)

It is in the second “hard” part that they usually fall short. Thus despite persistent pitches to those in the top right no investment results.

It would save the issuer and prospective investors a lot of time if they realised where they were in the matrix, improved their position where they could, then pitched accordingly.

This is where equity crowdfunding and unaccredited investors come in.

Where there is hope and no evidence … passionate supportive followers are needed for a successful equity crowdfunding raise. These backers wont be from the top right unless they have a strong emotional connection with the people, technology or geography of the raise.

In the U.S.,  Title II platforms (Accredited Investors), pretty much operate in the top right and their is fierce competition for the good deals. It is also an easier road to travel to find investors. In countries where unaccredited investor platforms are operating the raises that reach the platforms are sometimes in the top right but more often in one of the other quadrants.

In anywhere but top right the founders, the capital raising team and the platform need to roll up their sleeves and direct as many followers as they can to the profile page on the web site. In our experience around 600 on average per raise.

Plus during the raises journey any information or updates that can move the perception of the raise along the line from emotional to rational will increase the odds of getting investment.

To me, this is true equity crowdfunding. Top right / Title II platforms follow a mechanisation of investment processes built on analysis and terms sheets. Other quadrants are built on hope, trust, connection, belief and continual communication.

After the money from an equity crowdfunding raise is invested in the business it is often likely that they can then move to the top right quadrant and get the expansion capital they need. Until then it is best that the founders work out where they are in the matrix, pitch accordingly, choose the right platform and flourish.

This BRW article by Adir Shiffman inspired this post! “Why equity crowdfunding for start-ups is wrong for Australia: entrepreneur Adir Schiffman”

Whenever I read “alternative investment class” and “crowdfunding” in the same sentence I get nervous.

Having been invited and discussed equity crowdfunding with many overseas security regulators, including the U.S. SEC and FINRA, the regulators are all trying to protect retail investors using a trading protection mindset. Obviously the majority of their time and the financial  journalist’s time is spent in the listed / traded stocks space so that is where their knowledge and expertise is. In reality they should look at how startup, early stage and growth businesses actually get funded, who funds them, in what amounts keeping their focus on the ones that are NOT destined to be the next Facebook.

Take these quotes from the article:
1) “allowing retail investors to place small bets on start-up businesses”
2) “a retrograde step to permit totally inexperienced and unqualified individuals to personally invest in risky assets”
3) a “curated” list of opportunities

As Matthew Henninger, CEO of CEDI-US, Inc. (The Collaborative Economic Development Initiative) said recently ”We have gone from an investing society to a trading society and we need to get back to being an investing society”


Only 5% of the ASX transaction volume actually ends up in actual businesses. The rest is “pass the parcel” or gambling. Before trading dominance took over we had 12 Stock Exchanges in Australia where their primary purposes was matching investors and entrepreneurs.The figures were probably tilted the other way back then. 95% investing 5% trading.

Regulators, legislators and most articles in financial publications are written from the viewpoint that crowdfunding will be a new asset class and it is best that someone else uses mum and dad’s money to invest in this new asset class.

However this doesn’t recognise the fact that most businesses actually start with the “friends and family” money. No-one else will fund them in these early stages. In the U.S.38% of Startup funding or $60 billion comes from this source. Contrast this with VC’s $22 billion, Angels $20 billion and Banks $14 Billion.

Not everyone that “invests” is after a 10x return and the opportunity isn’t curated because the investor has some connection with the business and the investor isn’t after flipping the investment in the near future. They invest because they are supporting someone or something they know or care about. It is in the legitimisation of this investor type that fairer investments and job creation lies.


Australia has adopted the term “crowd sourced equity funding” rather that equity crowdfunding but let’s break it down.

1) C = Crowd  = Equity crowdfunding statistics show that this is primarily the entities crowd not random mum and dads
2) S = Sourced = The investors are sourced from that crowd
3) E = Equity = Shares are issued directly in the entity
4) F = Funding  = Funding comes from share sales

ASSOB, an Australian company, has the best stats on this. Some were used in the recent World Bank report on Crowdfunding. What we see is that the majority of companies raising funds through equity crowdfunding would never make a “curated” list, or would never raise funds if they relied on “small bets on start-up businesses”.

They are businesses eager to make their way in the world but they need the support of a network of people around the business to get traction.


I agree with the Adir Shiffman’s last paragraph as I have written extensively on this topic.

“Instead, the government must ……. take advantage of Australia’s strong existing frameworks.”

Small Scale Equity Offerings are equity crowdfunding raises. ASSOB stats show that on average a personal “crowd” of around 660 are gathered around a start-up seeking funds. Of those around 200 download the offer document and 20 invest. Statistics worldwide from Crowdcube, Seedrs and ASSOB show that most raises have under 200 investors so this is not a situation where there will be thousands of investors.

Australia has a “strong existing framework” in it’s Small Scale Offerings legislation and adjusting that to allow more than 20 retail investors per annum would do far more for “crowdfunding” than the expectation that thousands of people will queue up to invest $2,500 each. Flawed thinking.

And as to investor numbers. VC’s and Angels often say we don’t want to deal with lots of investors but they forget that without them the business they are thinking of investing in of wouldn’t exist!

Without equity crowdfunding in Australia in the form of Small Scale Offerings people would not be able to buy Preshafruit’s awesome triangular shaped juices in just about every supermarket in Australia, or the U.S. military wouldn’t be using Ocular Robotics cameras, or Opmantek’s 20,000 users worldwide including some of the largest telecoms wouldn’t have add on modules for their network software. There was no curated list for these companies when they started on ASSOB. They gathered their crowd, raised the funds and moved on to the point where they are now on these “curated lists” for the type of investment vehicles mentioned in the article above.

Solution? The government should instruct the regulator to use its “strong existing framework” and update the small scale offering legislation by increasing the 20 to 49, 100 or 200 for the year 2015 instead of as Adir rightly says “following a flawed US model”

Australia’s ‘Small Scale Offerings’ legislation combined with our regulator ASIC’s ‘Class Order’ or exemption to the rules regarding the promotion of these types of equity offers is, inarguably the first equity crowdfunding legislation in the world.

Both the Small Scale Offerings legislation that was enshrined into our Commonwealth Corporations Act in 2000 and the ASIC Class Order 02/273 which came into effect on 11 March 2002 work together to provide an exemption from the prescriptive fundraising provisions of our corporate legislations for companies making direct offers to persons within their network or for those involved in ‘making or calling attention to offers of securities’ through a Business Introduction or Matching Service.

The legislation was purpose designed as part of the government’s policy to encourage small and medium business to more easily raise funds from personal contacts, management, employees and those assisting to raise the capital, with less red tape and financial burden to produce disclosure documents.

The word “crowdfunding” wasn’t trending in 2000 – in fact, it hadn’t even been invented by merging 2 concepts together – but if we look at a Small Scale Equity Offering coupled with the Class Order (the ASSOB way) and today’s Equity crowdfunding raise, they both have similarities…

  • You need an issuer offering equity in its company
  • You need a platform to publish and promote the issuer and its offering
  • You need a number of people (crowd) to deliver the resultant investment

Of course, on the 11th of March 2002 when the Class Order was introduced “personal contacts” were a lot different than they are today. Back in the day, personal contacts were a set of human contacts known to an individual, with whom that individual would interact with at specific intervals for mutually beneficial reasons.

Nowadays, the internet has enabled people desirous of flocking around all types of meaningful activities to gather far more easily and effectively, extending the ‘personal contact’ concept beyond the immediate peer group. The internet has also provided enhanced abilities for the dissemination of information so that those contacts can be directly communicated and kept in the loop about activities they have expressed interest in.

It can be said that our Small Scale Equity Offerings legislation has not kept pace with changes in technology that has resulted in the evolution of our personal connections.

ASSOB’s experience is that around every small scale offering equity raise, a “crowd” gathers. Statistics for the last 14 successful raises on the ASSOB platform show that the average raise was $800,000 and the crowd size or ‘followers’ for each of these ranged between  335 and 991 people. The average being 667, meaning the “crowd” for each raise was 667 on average.

For those who say “equity crowdfunding” legislation doesn’t exist in Australia, it is easy to get fixated on the fact that only 20 ‘personal contacts’ (retail) investors are permitted to invest in an equity raise. However, this is not a limit on the size of the crowd, it is a limit on the number of retail investors you can accept from that crowd in any 12 month period.

If we revisit what is needed for a crowdfunding raise:

  • You need an issuer offering equity in its company
  • You need a platform to publish and promote the issuer and its offering
  • You need a number of people (crowd) to deliver the resultant investment

Is it the size of the prospective investor crowd that legislators should focus on, or the number of investors that are able to invest, that it is important? Meaning should we build a system for hundreds and thousands of potential investors to invest, or a reasonable number of actual investors?

Taking off our rose-coloured glasses, let’s look at reality …
Both ASSOB and Crowdcube’s equity funding platforms have been operating for a number of years with retail (“unaccredited”) investors. In ASSOB’s case 63% of investors are retail or unaccredited.

Recently I scrolled through 101 completed raises on Crowdcube. Most companies that had raised the funds they sought had obtained under 100 investors to achieve their targets. And with Crowdcube you can invest as little as a hundred pounds if you choose!  Seedrs the U.K. platform that works on a slightly different equity crowdfunding model where investors in the entity raising capital don’t receive shares directly in the entity but are represented by single shareholder nominee structure but even in their case the average number of investors is around 180. Compare this with reward raises.

1) Star Citizen 34,397 backers

2) Coolest Cooler 62,642 backers

3) Ubuntu Edge 27,635 backers

4) Pebble Watch 68,929 backers

5) Pono Music 18,220 backers  (Neil Young)

6) Wish I was here 46,520 backers (Zach Braff)

7) Veronica Mars 91,585 backers (Rob Thomas & Kristen Bell)

The reality is … equity crowdfunding is small scale equity offerings with low investor numbers an area in which Australia and its regulator ASIC is a world leader, underpinned by our Class Order regulations to strengthen investor confidence in these types of raises.

In small scale offerings, friends, fans, family and followers buy equity as retail investors to support the business, while later the high net-worth investors (sophisticated / professional / angels) join in. There is no evidence of “the crowd” flocking to invest in these types of equity raises, however according to American statistics 38% of investment in small businesses come from friends, fans, family and followers and it is on the legitimisation of this that regulators should be focussing.

One of New Zealand’s first raises under its new equity crowdfunding legislation, facilitated on the platform Snowball Effect has an overfunded status. High profile movie stars were involved in the promotion of “The Patriarch“.  $391,000 raised from 157 investors. No stampede from the crowd here in the region of hundreds and thousands of investors waving $100 notes! The numbers would probably have worked under a system where the 20/12 was expanded to 100/12 and 60 more people from the crowd took part under whatever “crowdfunding” appropriate legislation based around CAMAC eventuated.

Having monitored our own 310 raises for $140 million in this area and kept an eye on the only other platform in the world working directly in this area (UK – Crowdcube) there is no evidence that the hundreds and thousands of investors CAMAC have allowed for in their recommendations will ever materialise. The belief CAMAC embraced has manifested a response that doesn’t accord with the reality.

Equity offerings, with retail investors, seldom have over 100 investors.

And … why would they want to?

How would a startup or early stage company manage the governance processes of hundreds of investors on a startup or early stage company budget?

Is that wise practice when directors should be focused on growing the company, not the politics of investment?

Should it be supported?

Especially with an exempt public company that doesn’t even need to report for 3 years.

The “Crowd” with reward crowdfunding is generally believed to be people in the world at large.
However if you listen to  Slava Rubin of IndieGoGo or other leading reward platforms participants, they all maintain that there is no point putting up the project unless you know where 40% of your funders come from straight up. The rest of the funding is hoped to be generated by additional marketing efforts.

Slava Rubin … ” Some people want to believe that there are leprechauns with buckets of gold that just start jumping around from campaign to campaign and they just fill your baskets with gold. Now that’s not to say that you can’t get a stranger that you’ve never met to give you money. That happens all the time.  But what you need to do is move that snowball down the hill. You need to get that first 30 or 40% through your own effort or your own work and lots of contacting people”.

My view after many conversations with leaders worldwide, the consensus is that if ASIC shifted the 20/12 to 100/12 and permitted platforms like ASSOB to display limited information about the offerings, we would be 90% of the way towards the best equity crowdfunding legislation in the world. CAMAC recommendation by themselves wont work but would be a bonus of perhaps 20% of each raise with the 100/12 in place.

At the end of the day our experience shows that if you had to rely on hundreds of people investing up to $2,500 each, in say a $500k raising, you would need around 400 of them which simply won’t eventuate unless you are Neil Young or Zach Braff!

However if you really think about who is investing from the crowd, if you can secure 80 investors (Friends, Fans, Family & Followers) at say, $10k average under a 100/12 rule small scale offering, even securing 20% from accredited investors who are not included in the count, a simple raise could secure up to a million dollars, all workable under existing legislation.

20/12 no longer works as it was envisaged due to technology advancements, however before we completely disband legislation and exemptions that achieve the fundamental goal of retaining investor confidence relying upon platforms like ASSOB, wouldn’t it be more efficient for the tax payer and quicker for those businesses desperate to access this type of funding, to simply change the 20 to 100?

Because reward crowdfunding came first most regulators are fashioning their equity crowdfunding legislation for unaccredited investors around the pathway and figures reward crowdfunding has trodden.

They are two different animals though.

1) Reward crowdfunding is based on instant gratification (You get the DVD, watch, cooler etc as a reward)

2) Equity crowdfunding is based on hope. (You will wait years for an outcome and in the meantime you live on hope.)

However regulators, including advisory bodies like CAMAC in Australia, are building legislation recommendations that are built to handle volume (extrapolation from rewards) rather than recognising that the equity raises built on hope and protected by securities legislations will seldom have hundreds and thousands of investors. Why? If you pump up hope you mislead investors and there is plenty of legislation to prevent this. Directors are liable for misleading statements.

What start up or growth SME wants hundreds and thousands of investors and more importantly what would they need to say (pump up) to get hundreds and thousands of “retail” or “unaccredited investors.

Both Crowdcube and ASSOB’s equity funding platforms have been operating for a number of years with “retail” or “unaccredited” investors. In ASSOB’s case 63% of investors are “retail” or “unaccredited.

Recently I scrolled through 101 completed raises on Crowdcube. Most companies that had raised the funds they sought had obtained under 100 investors to achieve their targets. And with Crowdcube you can invest as little as a hundred pounds if you choose!

So why spend months working out how to build legislation to allow for hundreds and thousands of investors? Why not focus instead on the 95% of raises that will have under 100 shareholders, will create jobs and benefit society.

If we look at the American statistics for external funding sources the $60 Billion from Friends and Family is as much as all the other sources put together. It is in the legitimisation of these funds through proper share certificates and holding statements and loan documents that the bulk of equity crowdfunding potential lies for society. Yes there will be additional investors beyond this due to the raise being empowered by “equity crowdfunding” but for a raise based on hope I doubt it will be over 20% of the funds raised for 95% of raises. Friends and family funding will still provide the majority of funds raised.


Startup_Funding___FundableThis is where the regulators should be focussing. On the reality of equity crowdfunding as evidenced by existing platforms.

How can regulators empower startups and growth companies so that they can accept legitimate investment from friends, family, fans and followers of businesses plus say an additional 10 to 25% more from “the crowd”.

In Australia’s case there is over 20 years experience with friends and family funding through the small scale offerings legislation. Why not just modify it tomorrow, as you would in any lean startup environment, and and see if shifting from 20 to 100 retail investors per annum is a good start.

Ask any advocate of the lean startup.

Bringing in totally new legislation for equity crowdfunding based on the best unproven equity crowdfunding  legislation around the world is high risk.

It may only suit the 1 to 5% of companies that get thousands of investors and thus be a failure.

These  1 to 5% of companies would probably have been picked up by angels or VC’s anyway.

Surely regulations should be focussed on the companies that make up the 95% that will have less than 100 shareholders.

Equity Crowdfunding and Regions

A hundred years or so ago regional funding was all the rage. Crowdfunding legislation is again looking at regions as one state after another legitimises intra-state crowdfunding.

In the video below I detail the shift in funding from regions to one central point and back again.

Stock Exchanges used to be primarily funding matchmakers

The future of economies will be determined by the success of its new businesses developing from the nursery into fully-fledged functional businesses.

In the mid-1800’s there were six stock exchanges, one in each of Australia’s state capital cities, Melbourne, Sydney, Brisbane, Adelaide, Perth and Hobart in Tasmania.

There were also smaller exchanges born out of the gold rush days of the 1860’s such as the Bendigo and Ballarat exchanges in Victoria. Then there was the Newcastle Stock Exchange founded in 1937 that in the past had listed as many as 300 local and regional companies. A number of these went on to become significant businesses.

These regional stock exchanges were all serving their local communities and fulfilling their original purpose as an exchange. Not to trade shares, but rather to raise money for local businesses in the most cost-efficient and effective way.

Since then all these regional stock exchanges have disappeared, being merged into a single entity, the Australian Securities Exchange (ASX) affectively closed them as they didn’t have a huge volume of transactions, and trading is now centered on the ASX.

However, like the 1860’s the need for capital to grow new businesses and create jobs, particularly in rural and regional Australia is greater then ever. The mission of the Regional Funding Hubs is to assist local small and medium sized enterprises gain better access to growth capital.

It’s my opinion that, in the future, there are other avenues we can explore to raise capital for new businesses. Why not harness local funding from private investors who want to invest just a portion of their portfolio locally.


Establishing a network of Regional Funding Hubs

I believe this can be achieved by establishing a network of Regional Funding Hubs across Australia to list evaluated companies needing investment and link them with local investors willing to participate.

Local people are encouraged to invest in their own community because their mothers, fathers, sisters and brothers could work there.

So, for example, take a thousand investors in a region each with say $10,000, this would provide a pool of $10 million dollars for a region, without the need of a bank to support it and avoiding the high cost of floating and listing on a stock exchange.

Effectively then, we’re almost recreating these regional sources of investment without the need for volumes of trading.

Once established, Regional Funding Hubs, not only retain investment in an area, but also start attracting inward investment as well.

There are tens of thousands of unlisted “small” companies involved in industrial production on a local and regional scale throughout Australia. Through the establishment of Regional Funding Hubs we can enable direct investment into these to grow productivity and increase employment in Australia.


Without straining the public (tax payer’s) purse

Result? Well, small companies get access to local lower-cost funding from more reliable investors. Regions retain and attract investment capital, and investors gain access to local investment opportunities.

Governments also win, as Regional Funding Hubs nurture entrepreneurship, business building and local job creation without straining the public (tax payer’s) purse.

So what’s not to like?

6000aDay.001Success leaves clues.

I wondered, what is “Best in Class” in raising funds from predominantly retail or unaccredited investors.

Best way to find out was to look at 16 of the most successful, recent Startup equity raises on the ASSOB Equity funding Capital Raising platform. These 16 raised over 11 million dollars together on ASSOB.

Most of these companies were after their first capital, meaning there was usually some sweat equity already, maybe some family money, but most were not ready for Angels or VC’s. Thats why they came to ASSOB.   Bootstrap, then ASSOB, then Angels then VC’s.

Lets determine what is “Best in Class” from the sixteen recent ASSOB raises that raised on total $11.4 million.

  • Raise size. $425,000 to $1,592,000 with an average of $637,666. You may seek to raise less or more than $600k but our experience has shown that an opportunity with a convincing, compelling and credible story, coupled with a balanced, passionate and likeable team generally raises from $500k upward for an equity raise.
  • Average amount raised daily. $680 to $6,076 with an average of $1685. So if you are out to raise some equity funding from unaccredited investors $1685 per day is a good figure to start with to work out how long you will need to raise your money. Best in class $6,076 a day. Lets say $6000.
  • Crowd size. Generally the larger your crowd  the more you raise. Gathering a crowd is essential to a raise. The stats show that the crowd size is usually between 335 and 991 people. These are people that have visited your profile page and have had more than just a brief look. The average crowd size is 667 people. Of these 667 people around 40% actually download details about the offer including the offer document. On average 8% of them invest. Best in class is a crowd of 991. Lets round that off at 1000.
  • Investor locality. 60% of investment comes from the same state or province so geography matters.
  • Investor type. Over half of investment came from retail or unaccredited investors. While the average was 56% the number of retail investors in raises ranged from 32% to 79% Usually the first $200,000 to $300,000 came exclusively from this group. Here is the breakdown.
    • Retail  / Unaccredited investors 56%
    • Existing Shareholders 17%
    • Sophisticated / Accredited investors 15%
    • Overseas investors 6%
    • Associates of he business 4%
    • Professional / Accredited investors 2%
  • Raise Sectors. Not every company is headed for a Silicon Valley exit. Most are not as exciting as the SnapChats and Ubers of this world. The 16 raises included here covered a broad range of sectors. All companies were Australian with Australian innovation. Fitness, Pharmaceutical, Welding technology, Cloud technology, Designer Furniture, Robotics, Wealth Management, Risk Management, Dental Technology, Online Photos, Open Source Software and Senior Welfare.

So what does all this mean if you are seeking equity capital?

If you are preparing for an equity crowdfunding raise, including retail/unaccredited investors, then it is well worth playing around with these “Best in Class” stats to get a feel about where your investment could come from and in what amounts.

Say you want to raise $600,000 based on performing like the “Best in Class”.

  1. If you do a good job, and work hard, the fastest you should be able to wrap it up is in 100 days
  2. You need to gather a crowd of just under 1000. That means you need to drive 1000 interested people to your profile page on the equity funding platform.
  3. Focus at least 60% of your effort on local investors.
  4. Retail investors are needed to get initial traction. By the end of the raise you will have at least 32% of your investment from this group and in some cases as high as 79%.

In a sentence ?

$600k in 100 days from a gathered crowd of 1000 with 60% local investors and over half retail/unaccredited investors.

Andrew Ward and Startup88 recently hosted a discussion on the recent CAMAC Australian report on Crowdfunding.

Here are the closing summaries from Paul Niederer and John Kluver.

The full discussion can be accessed here!

My view is that the report was well researched and well written. However unless there are other changes in the early stage funding environment like more condusive employee share ownership in  startups and lifting the 20/12 to 50/12 or 100/12 it may be legislation that will be largely unused by the majority of startups.