Where Equity Crowdfunding regulators are missing $60 billion

Attention and proposed regulatory changes are only being focussed on one half of equity crowdfunding’s potential.

Sadly, this was once again clearly the case in today’s Australian Financial Review.

“Start-ups told to grow up and respect investors in crowd equity funding row” reportedly by High-profile start-up investor Steve Baxter

$5 million raises, Public Companies, AFSL intermediaries were touted as the governments answer to the innovative startups. However even the most successful platform in this space with retail or non-accredited investors, Crowdcube, has an average raise of $388k. Do the sums! After the auditor gets up to $25k, Accountants another $15k, the AFSL intermediary $20 to $40k, offer preparations and deal marketing say $10k  is it really right to tell them to grow up and respect investors?

Total focus of Treasury, the regulator and most of the media is on the crowdfunding half that keeps incumbent financial services intermediaries and their regulator gainfully employed. It is doing little for the innovative businesses that need to raise capital and the innovators ready to bring brilliant Australian platforms to the world to facilitate this.

This is despite examples day after day that regulatory structures dependant upon government sanctioned licensing and protection of the stars quo are disintegrating before our eyes. Witness protaganists Uber, AirBNB, PayPal, ApplePay, Netflix etc etc. There are thousands of organisations working worldwide, day and night, to eat the Banks and major financial services incumbents lunch. And they will … irrespective of what the regulator does. Yet new regulatory structures are being suggested, and funded, based on protected licensed intermediaries while there is ample proof in 2015 the “crowd” will stop a scam long before the regulator or their intermediary will. Disruption is about the democratisation of finance not the increased regulation of it.

Media stories on crowdfunding focus on one half and not the other. See the other half below.

Can’t really blame the journalists because if Treasury only sees one half after 3 years of full time consultation, study and announcements how can we expect anyone else to get a grip of the actual reality. Every one agrees this has been a myopic exercise as there is no shortage of people, including myself, that have contributed too CAMAC and a myriad of meetings believing together we will build something that puts Australia ahead of the world rather than behind it.

However:

As was said in a recent article …  “Treasury is still trying to squeeze in equity crowdfunding legislation to the existing Corporations Act”. Thats a bit like wearing the clothes you had when you were in your teens now! No longer for for purpose or built for the future.

Another recent article said … “Truly “transformational” equity crowdfunding legislation should be the “cornerstone” of the Turnbull government’s innovation statement or startups will fall further behind the rest of the world”.

However truly transformational (democratised) Australia wide equity crowdfunding will not be delivered by ASIC monitored regulatory structures managed by its well moneyed licensed intermediaries who take cuts of the deal along the way.

What is the reality?

One Half: The half being focussed on. Investment opportunities led by “smart investors” managed by licensed intermediaries usually over $1 million where the platform takes either upfronts, commissions, a stake and shares in the upside of the deals (or all of these) with the “crowd investors”invited in to the deal entity by the intermediary rather than investing in the actual entity raising capital.

There are less than 100 businesses a year in this category.

This half is legal now in Australia and all the focus of the regulator is amazingly only in this area. Strange though because the general feeling worldwide is that only between 15% and 20% of extra investment would ever come from “the public”, meaning not smart investors,  in these scheme led deals even if it was totally uncapped. Companies are already operating in this space in Australia now and if you look at annual Australian deal flow for them, where they are understandably choosey in what they “list”,  one wonders how the government can justify spending millions focusing on this half. As we have seen in the New Zealand market traction in this area extrapolated based on population differences would be less than 100 businesses funded a year. 

If the they are that eager to get “the public” or the crowd at large into their deals there are a myriad of Managed Investment Schemes and other devices that can do this. 

Another crazy thing in the hinted new CSEF legislation is that if these intermediaries are ASIC approved why have caps and limits? If they are inviting the public into deals they and other smart investors have invested in why not just have a simple ruling like if x amount of the raise is from sophisticated and professional investors, and the public are adequately warned of the risks, they should be able to invest as much as they like as they are being proffered by licensed financial services advisors!

Now lets look at where the rubber really meets the road in terms of innovation and job growth.

 

The Other Half: Small businesses with a fan base of customers, suppliers, fans and followers that need usually under $1 million to grow their business, employ more people and are NOT yet attractive to smart investors and with appropriate templates and guidance they can manage the raise themselves without a licensed intermediary. (They all have Accountants and the crowd is continually watching and communicating)

There are thousands of businesses in Australia that fit into this category.

The regulations at present make it really difficult for mates to support mates in a business. Whether it be by sweat equity or a few dollars to support them. This is where the true beauty of crowdfunding shines but since Billson’s demise this part has been side-lined to favour the one half above and its expensive incumbent regime.

All the politicians rhetoric …  talks about small business jobs growth, small business innovation and supporting regional Australia etc but you can be assured none of the  one half raising will come from this half once the legislation has passed. Its a big city, existing financial services and keeping the regulator happy play.

It is in the second half that traction and job growth lie and 38% of all investment.

Figures out of the U.S. show that this type of investment (the other halfdwarfs all others sources of funding but legitimisation of it is not amply covered by new crowdfunding regulations, or any regulations in any country as to keep the cost structure low enough to enable it licensed intermediaries need to go.
The proper legitimisation of this $60 billion dollars of investment transactions by friends, fans, family and followers in companies that are not yet ready for smart investment and usually need less than $600k .

Here you can see at Fundable the figures for investment are:

$22 billion. Venture Capitalists  (one half)
$ 2 billion. Customers (one half)

$60 billion. Friends and family (the other half)
$20 billion. Angel Investors (the other half)

Types of Investors – Friends & Family, Angels, VC’s, and Customers

types-of-investors

 

 

Here is a suggested pathway forward without a new CSEF regulatory framework. The CSEF has two major easily solved flaws

  1. At the moment it sidelines any business wanting to raise under $600k,
  2. It doesn’t allow companies like VentureCrowd and OurCrowd the freedom to easily invite members of the public into their deals.

One Half: Let AFSL holders invite the public into their non-prospectus deals, with no caps, no ceilings, ability to use private companies plus the option to work with direct investment and MIS’s etc provided they can show at least 50% of the money comes from sophisticated and professional investors. Whether they do that through a crowdfunding site or not is there own business as long as they adhere to existing regulations.

The Other Half: Update the small scale offerings legislation to allow any Australian business to raise funds from maximum 100 investors if through a platform (old term called class order operator) where the platform must meet minimum mandated operating requirements and uses standard templates to communicate offering details. The offering must be the issuers words and not the platforms and no advice can be given. Warnings as in existing legislation can be updated so they are on-line, interactive and recorded so people and authorities can see what each prospective investor has attested and agreed to.

Both of the above would take no more than a week to sort and no new legislation would be required. Australia would then have the best equity crowdfunding system in the world as n0 other, other than the U.K., even begins to service The Other Forgotten Half.

P.S. A better alternative is to shift the trust system from the regulator to the Blockchain. Details here.

An Alternative Title III / Retail / Non-accredited Investors and Equity Crowdfunding Solution