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Journal of Banking and Finance Law and Practice: Why Should Australian Policymakers Care About Crowdfunding?

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Paul Fletcher, Australian MP | December 3, 2014

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Why should Australian policymakers care about crowdfunding – the use of the internet to raise funds for new projects or business ventures, often involving relatively small amounts raised from large numbers of people?

One reason is that other countries are establishing streamlined regulatory regimes to permit crowdfunding – removing or simplifying the normal prospectus requirements which would otherwise impede or prevent its occurrence.  For example, New Zealand legalised crowdfunding in April and other countries like the US, UK and Canada have recently changed their laws to permit it.[1]

By contrast, as the law presently stands in Australia crowdfunding would breach various provisions of the Corporations Act. The consequence is that crowdfunding businesses – such as Equitise – are establishing in New Zealand with a view to raising money for Australian companies. That is economic activity being lost to Australia.

A second argument which is put sometimes is that crowdfunding could be a new way for entrepreneurs in the technology sector to raise money. In Australia it is often hard to raise early stage capital, in contrast to markets like the US where there is a much deeper market for the provision of capital at all stages of a technology company’s growth.

The most powerful reason that crowdfunding should matter to policymakers in Australia, however, is the positive change it can bring to our markets for the supply of debt and equity capital to businesses. Crowdfunding offers the potential to increase competition, reduce transactions costs, and increase the supply of capital.

Related:  Crowdfunding is essential for SME innovation and job creation

This matters because today it is hard for businesses, particularly small and medium sized businesses, to access finance in Australia. Debt is expensive and there are few options other than going to the banks, which provide over 75% of lending to small businesses.

The debt product most commonly used by small businesses is credit card debt – meaning high interest rates.[2] In addition, small business people are typically required to put up their family home as security to get a loan product such as a long term loan, overdraft or line of credit.[3]

As for equity capital, it is close to impossible for small and medium businesses to raise equity externally – instead it comes from family, friends, and from retained earnings.[4]

These constraints mean that new businesses fail to get going; and existing businesses fail to expand.  According to Deloitte Access Economics, 30% of SMEs missed out on a growth opportunity last year because they were unable to raise capital.[5]

But just as internet based offerings like Uber and GoCatch are disrupting the traditional taxi industry, and Airbnb is offering customers new, better value alternatives to traditional hotels, so too the internet offers new ways for businesses to meet their financing needs.

In the economists’ jargon, the traditional banking oligopoly faces ‘disintermediation.’ As one example, rather than banks being the only source of personal loans, and the only place an investor can put funds on deposit, peer to peer lending delivered over online platforms such as SocietyOne offers a new way for someone with spare cash to connect with someone else needing a loan.

Similarly, the traditional process by which a business goes to the equity markets to raise capital is time consuming and expensive. The costs are so great that for small businesses it is not a practical option.

But using the internet to publicise your business and pitch for capital can make it feasible to raise equity in smaller amounts – and from a larger number of investors – than is possible using traditional methods.  This is so for two key reasons.  First, the internet lets you publicise the investment opportunity to a large number of people for a very low cost. Secondly, the transactions costs per investor are much lower than traditional methods – making it feasible to attract relatively small sums from a large number of investors as a means of raising the desired amount of capital.

View:  OSC proposes four new capital raising prospectus exemptions

Today however the law in Australia prevents the use of crowdfunding to raise equity. To start with, a proprietary company is generally prohibited from making a public offer of its equity (subject to some exceptions, none of which are very helpful for crowdfunding.) A public company, while free to raise equity, must meet expensive and time-consuming disclosure requirements (that is, issue a prospectus or offer information statement) and ongoing financial reporting requirements.[6]

Late last year, the Corporations and Markets Advisory Committee produced a report on the potential for crowd sourced equity funding.  It recommended that businesses could be given the legal status of an ‘exempt public company’ allowing them to raise up to $2 million in a twelve-month period via crowdfunding.

Anybody could be a ‘crowd investor’ – you would not need to be a ‘sophisticated investor’ for example – and you could invest up to $2,500 in any one company, and $10,000 in total, in a twelve month period.[7]

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada crowdfunding hub providing education, advocacy and networking opportunities in the rapidly evolving crowdfunding industry. NCFA Canada is a community-based, membership-driven entity that was formed at the grass roots level to fill a national need in the market place.

Join our growing network of industry stakeholders, fundraisers and investors. Learn more About Us | Crowdfunding | Support


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