Enable intends building on first-mover advantage to capitalise on new capital-raising legislation
By Tony Featherstone
September 29, 2017. That is the day entrepreneurship changes forever in Australia. When start-ups can finally harness the power of the “crowd” to raise capital in exchange for equity – and smash longstanding funding obstacles.
September 29 is also when dozens of Australian crowdfunding platforms could jostle to attract high-growth start-ups and connect them with investors.
The significance of this change is not lost on Will Leitch, CEO of the Australian Small Scale Offerings Boards (ASSOB), the country’s largest crowd-sourced equity funding site (it has raised $147 million to date) and the world’s first equity crowdfunding platform.
“Equity crowdfunding will have a profound effect on the ability of high-potential Australian companies to raise capital and grow. It will also create opportunities for mainstream investors to benefit from this growth.”
The change is a result of the Federal Government’s Corporations Amendment (Crowd-sourced Funding) Act 2017. Parliament in March passed the Act, which provides a legislative framework for crowd-sourced equity funding in Australia and takes effect in September.
The much-needed reform will help Australia catch up to international trends. The United States approved equity crowdfunding through the Jobs Act 2012 and the United Kingdom followed two years later. Equity crowdfunding in both markets is booming as more companies use the internet to connect with a much bigger investor base.
Crowd-sourced funding platforms enable investors to raise capital from large groups of people who usually provide small amounts. The best-known global crowdfunding platform, Kickstarter, has raised billions of dollars through crowdfunding campaigns.
Musicians, for example, might raise money from fans to fund production of their next album, in exchange for an early copy of the work. A charity might could funds from the public to fund a social project, through a social crowdfunding platform.
But it hasn’t been possible for Australian companies to raise funds in exchange for shares, through crowdfunding sites. ASSOB has raised equity capital for Australian companies through section 708 of The Corporations Act, but could not advertise offers to anyone outside of the ASSOB database who had not signed up to the relevant terms and conditions.
The new Crowd-sourced Funding Act allows ASSOB and other equity crowdfunding sites to market offers on their platforms to the general investing public, so long as the advertisement is not misleading or deceptive and complies with the crowd-sourced equity funding (CSEF) regime requirements.
“It’s an important change,” says Leitch. “For the first time, equity crowdfunding platforms, such as ASSOB, can promote capital-raising offers to retail investors. Over time, that will create a much larger audience of potential investors for emerging Australian companies. It will also help address a recurring problem for small companies: access to capital.”
Under the Act, retail investors (those with less than $250,000 of income or less than $2.5 million in assets for each of the last two financial years, certified by an accountant) can invest up to $10,000 per company each year through an equity crowdfunding campaign. Wholesale investors have no restrictions on the amount they can invest.
Reduced disclosure requirements will make it easier and cheaper for companies to raise capital via equity crowdfunding offers. Also, there are temporary concessions for newly registered or converted public companies, for up to five years, from some reporting, audit and corporate-governance obligations. That should mean less compliance and administrative hurdles for small companies in capital-raising offers compared to their larger peers.
The reforms require equity crowdfunding sites to hold an Australian Financial Services Licence (AFSL) and do due diligence on companies raising capital, their directors and offer documents – a requirement Leitch believes gives ASSOB an advantage over other crowdfunding platforms given its history and higher reporting/governance standards.
“These are good reforms,” he says. “They make it easier and cheaper for companies to raise capital from a much larger audience via equity crowdfunding, while protecting investors. Of course, investing in early-stage companies, by its nature, has higher risk, so it’s important that equity crowdfunding platforms do everything they can to minimise risk.”
Leitch has big plans for ASSOB. Launched in 2008, it has helped dozens of companies raise capital from sophisticated investors, across industry. Under Leitch, ASSOB has new management, ownership and growth potential as equity crowdfunding in Australia gears up for a bold new era.
Here is an edited extract of Leitch’s interview with Forge:
Forge: Will, why are crowdfunding reforms needed?
Will Leitch: Access to capital has been a constant problem for emerging Australian companies. We have a small venture-capital market and there hasn’t been a sufficiently large enough base of angel investors to participate in capital raisings.
Securing bank debt has become even harder for small and medium-size enterprises as regulators require Australian banks to hold capital on their balance sheet. And the Australian Securities Exchange has lifted its net tangible assets test for small and medium-size companies that want to raise equity capital and list through a sharmarket float.
The upshot is it’s getting harder for SMEs to raise capital from traditional sources at a time of unprecedented global change in industry structures and business models. Australia will never drive higher rates of innovation and entrepreneurship if SMEs can’t raise enough capital and good companies do not realise their potential.
Forge: What will the reforms mean for investors?
WL: Investing in high-growth private companies has typically been the preserve of professional investors, such as venture-capital funds, or high-net-worth investors or family offices with connections in this market and able to participate in offers. It’s always been difficult for retail investors to invest in this part of the market.
The reforms are particularly significant for the Self-Managed Superannuation Fund (SMSF) sector. The potential is to connect the $674-billion SMSF sector to Australian SMEs that need capital to grow. SMSF trustees typically have a multi-year or decade investment horizon and emerging companies usually want patient, long-term shareholders.
Also, SMSF trustees tend to be more hands-on in their investment decisions. Emerging companies tend to have a closer relationship with their shareholders. The opportunity for SMSF trustees is to allocate a small proportion of their portfolio to early-stage investments and attempt to spot the next star company, while acknowledging the higher risks of this style of investing. They need a diversified, long-term approach.
Forge: Why would an investor back a company through an equity crowdfunding site when there is a long tail of small listed companies on ASX?
WL: There are three main reasons. First, many companies that raise capital through ASSOB are from information-technology, lifesciences or other sectors that are not well represented on ASX. Sectors such as technology are hugely important for long-term investors, given the potential for tech companies to disrupt established markets and create wealth for early investors.
Second, some private companies benefit from generous tax concessions. New government legislation provides favourable tax concessions, such as capital gains tax exemptions or other tax offsets, for investors in companies that meet innovation tests. I doubt that enough investors realise what’s available in tax concessions or how attractive some of them are.
Finally, early-stage companies have potential for higher returns. Essentially, investors have an opportunity to get set in these companies much earlier and benefit if the valuation increases or if the business is bought through a trade sale or lists on ASX through an Initial Public Offering (IPO). There is potential for very high returns, but with that comes potential for higher risk. This form of investing is speculative by nature.
Forge: Is there a risk that SMEs think that raising capital via equity crowdfunding is too easy – just launch an offer and let the “crowd” do the rest?
WL: Yes. ASSOB does a lot of due diligence on companies via our IMENCA Business Evaluation Calculus before we allow them to raise capital via our platform. That is no guarantee every company will succeed, but it means we are raising capital for companies that have the right attributes and doing everything we can to minimise risk for investors.
Companies still need offer documents, advisers who can help them structure and promote their offers, and reputable equity crowdfunding platforms that can connect them with the right investor base. It’s not as easy as just broadcasting a capital-raising offer via the internet and hoping it attracts lots of investors. The government’s reforms, quite rightly, require a lot of checks and balances on companies from equity crowdfunding platforms.
Forge: Will SMEs have to choose between dozens of equity crowdfunding sites and will there be big differences between these platforms?
WL: It depends on how many crowdfunding sites receive licences from the Australian Securities and Investments Commission (ASIC). Our expectation is that there will be many equity crowdfunding sites, most of them small and with limited due-diligence, reporting and governance capabilities, and a limited track record in crowdfunding.
ASSOB thinks about equity crowdfunding in six growth stages. We believe all crowd-sourced equity funding companies are in stages two or three: that is, they match earlier-stage companies with investors through an online platform.
To our knowledge, ASSOB is the only equity crowdfunding site in stage four. Here, crowdfunding platforms provide extensive due diligence on companies on their platform, and a high level of compliance, reporting and governance required of companies. This stage looks a bit like a “stock exchange-lite” where there are more rules and investor safeguards.
We are quickly progressing to stage five, where equity crowdfunding platforms become a one-stop shop for investing in earlier-stage companies. By next year, ASSOB will be raising capital for companies at very different stages of growth and facilitating early-stage takeovers and reverse listings. It will almost be like a stock exchange for early-stage unlisted companies.
Stage six is where we introduce share liquidity into the platform and take it to a global audience. It’s an exciting trajectory for ASSOB, Australian companies and investors. This country has never had a large equity capital-raising platform for outstanding early-stage Australian companies or a channel to expose them to a global audience.
Forge: What should companies and investors look for when choosing an equity crowdfunding platform?
WL: Companies should look at the equity crowdfunding platform’s record, capacity to raise capital and the people behind the organisation. They should also look at the quality of other companies on the platform and if it is a good match for their needs.
Investors need to think about the integrity of the platform and the type of companies that are raising capital. That integrity comes from multiple sources: the level of due diligence the equity crowdfunding site does on companies; the extent of reporting required and other governance obligations. Also, how selective the crowdfunding platform is when allowing companies to raise capital on its platform and whether it has sufficient investor safeguards.
ASSOB, for example requires companies on its platform to have a board and to produce quarterly reporting. We put each company through IMENCA, a world-first business-evaluation tool developed at Swinburne University through years of academic research and exclusively licensed by ASSOB. We will turn away companies that want to raise capital if we do not think they are ready or their business model is not sufficiently attractive.
Forge: What’s next for ASSOB?
WL: We have some big changes planned as more companies raise capital via ASSOB and more investors are attracted to our platform. It’s not well known that ASSOB was the world’s first equity crowdfunding platform – and is currently among its most advanced.
There’s huge interest in equity crowdfunding in Australia now, but we’ve been doing it since 2008 and have raised $147 million, albeit only to a qualified ASSOB audience. We intend to build on this first-mover advantage, helping companies and investors, as the new rules come into force in late September.