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Crowdfunding rules to change, help Australian entrepreneurs

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The Age by Nick Abrahams and Daniel Johnson | September 11, 2013

A review of Australia's rules regarding crowdfunding has began. Here Nick Abrahams and Daniel Johnson detail why acceptance of the funding model is paramount for the digital economy.

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US, UK, Canada, Italy, France and New Zealand have redrafted their fund-raising legislation to allow crowdfunding to flourish. Source: The Age

Crowdfunding has been used to finance everything from films to smartwatch prototypes and even a bridge in Rotterdam. The earliest form of crowdfunding was back in 1884 in New York when over 125,000 people donated a total of $100,000 to build a pedestal for the Statue of Liberty.

Australia is short on capital and therefore should embrace crowdfunding to get early stage innovative ideas going. A new discussion paper released this week should see crowdfunding finally get its start in Australia.

Right at the moment the development of crowdfunding is stymied by pre-social media legislation. We are a bit behind as the US, UK, Canada, Italy, France and New Zealand have redrafted their fund raising legislation to allow crowdfunding to flourish.

Crowdfunding involves potentially millions of investors contributing small amounts of money, as little as AU$1, to fund the development of products or services.

It is effective because in theory it’s easy to set up, it has low compliance and reporting requirements and it requires only pocket change on the part of the investor. Many of the entrepreneurs that use crowdfunding would otherwise struggle to raise necessary capital, with banks and traditional investors finding their start-ups too risky or too small.

Entrepreneurs typically use an intermediary, a crowdfunding website such as Kickstarter, where potential investors can view proposed projects and choose to what extent they want to invest. Investments can be donations or can be made in return for discounts or free product samples or in some cases equity. Pebble, a wristwatch company based in the United States, sought to raise US$100,000 via crowdfunding, however their product was so popular that they wound up making US$10.27 million.

ASIC has stated that “crowdfunding, as a discrete activity, is not prohibited in Australia, nor is it generally regulated.” However, current laws make equity-based crowdfunding illegal. Our investor protection laws have been designed for very different financial products. These laws involve onerous compliance and disclosure requirements that make crowdfunding unfeasible.

There has been some recent movement towards reviewing the way we regulate crowdfunding. On 12 June 2013 then Minister for Communications and the Digital Economy Senator Conroy and then Ministers Greg Combet and David Bradbury issued a joint media release announcing reviews into this area.

Great news, however, on the same day, the government announced that it would look into reviewing the tax laws with respect to employee share option plans. ESOP is another area of legislation where Australia significantly lags the competitiveness of the rest of the developed world. The issues paper subsequently prepared by Treasury and offered to the public for comment failed to address the key issues of ESOP - namely taxing point and complexity.

The question of the appropriate regulatory response to crowdfunding was sent to the Corporations and Markets Advisory Committee. A discussion paper was released by CAMAC on Tuesday. It addresses the issue more pro-actively than Treasury did for ESOP.

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