Crowd Funding – the NEW economy (Part 2)

crowd funding, raising capital, grants, fundsLast week we looked at Crowd Funding from a pledge or donation perspective, this week its the turn of Crowd Funding from an investment perspective.

I won’t go over what Crowd Funding is again, you can look at the last blog to get that information. What I will focus on now is Crowd Funding legislation for investment purposes and how it will fundamentally change the way small business raise capital in the next few months, or 2 years in Australia’s case.

Most people know (or should know) that you are not allowed to raise money from Tom, Dick or Harry unless you have registered a prospectus with ASIC or if you have managed to operate under another ASIC class order such as CO 02/273 which the Australian Small Scale offerings Board (ASSOB) uses, which allows companies to raise up to $5 million from up to 20 “sophisticated” investors in any 12 month period. This basically cuts out over 95% of the population from being able to participate in these investment opportunities.

Well, the above landscape is about to change in a big way, well in the US anyway, and hopefully sooner rather than later in Australia.

Barack Obama recently enacted his US Jobs Act to promote jobs growth in the US economy following the GFC. He recognised that to to do this the US Government needs to help small business as they are the back bone of the US economy (much like Australia). The biggest constraint for small business in the US is their ability to raise capital as credit policies are too restrictive meaning that the small business owner cannot easily access capital to grow his or her business (much like Australia – hmmm a common theme is occurring!).

As a result it was proposed to allow companies to use Crowd Funding as a means for businesses to raise up to $1 million from the “Crowd” where the maximum amount from any one individual will be capped at $10,000 per annum. Essentially meaning that you can stand on a street corner and promote the sale of shares in your business to everyone passing by without breaching the Corporations Act, PLEASE don’t try this now!

This bill passed through the House of Representatives with a huge amount of support (over 90%) and is now sitting in the US Senate awaiting approval. As you can imagine the Securities & Exchange Commission (the US equivalent of ASIC), are very concerned that investors (the man in the street) will be fleeced by unscrupulous business people promising spectacular returns in exchange for your trust, faith and oh yes your money! BUT as a number of supporters of Crowd Funding have pointed out, you can go to Las Vegas tomorrow and put $100,000 on RED and nobody will stop you, so why should somebody tell you not to risk $10,000 to buy shares in a business?

The implication for small business in the US is huge if the legislation is passed through the Senate, it will essentially free up the capital markets and give small business a “fair go” to raise capital from the crowd without the onerous paperwork or cost normally involved.

No doubt it will come with its problems including a fair share of unscrupulous business people trying to make a quick buck, but hopefully that will be the exception rather than the rule.

So what needs to change in Australia before similar legislation is considered? Well there are a few things to consider:

  • Cost – A cost-effective share transfer service, there’s no point being able to invest $10 in a company only to get an invoice for $20 to process the transaction.
  • The policy – ASIC won’t change the rules, their actions will be governed by the policy decisions made by the politicians and that does not happen quickly or easily in the current political environment.
  • Governance – What form of governance should a company that has “Crowd Funded” itself be adopting, can they remain a private company or do they have to convert into an unlisted public company?

My money is on at least a 2 year wait before anything similar is allowed in Australia. ASIC are already engaging with some of the existing crowd funding platforms but its early days and I’m pretty sure they won’t want to rush into something like this which can fundamentally change access to the capital markets in Australia.

In the UK and Netherlands there are already investment style crowd funding platforms up and running, notably Crowd Cube in the UK and Symbid in the Netherlands, and they’re doing well.

The point is that Crowd Funding is here, in one form or another, and it’s only a matter of time before it becomes a main stream form of funding for small business.

So what could this mean for your business? Do you think Crowd Funding is a viable source of finance for small business and would you consider using it?

Next week we’ll start working our way up the funding ladder and take a closer look at Grant funding in Australia, what’s available and how to go about getting it.

Contact Lattice Capital on info@latticecapital.com.au for more advice on raising capital.

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About latticecapital
We are an independent Corporate Advisory business based in Brisbane, Australia. We established our company in 2008 in response to a gap in the Brisbane advisory market for independent corporate advice. Our principals collectively have in excess of 40 years of Corporate Advisory experience.

4 Responses to Crowd Funding – the NEW economy (Part 2)

  1. Good points raised.

    Crowdcube has already raised over £2,5m in only one year’s trading via 14 successful business launches. Over 30% of the 8k investors on the site have invested more than £5k and in more than one project which shows there is a growing appetite for a portfolio approach to investment risk in the UK start-up sector.

    I suggest that in the medium to long term, traditional investors and banks will tend to ‘social proof’ an idea through crowdfunding a tranche of the business before agreeing to fund the rest.

    Fin

    • Hi Fin, thanks for the comment. Crowd Cube are going great guns and setting a great example of how crowd funding can work. On the social proof side it’s quite interesting as since most crowd funding sites are free to list a project I think we will see a lot of entrepreneurs using them for social proof, I.e. they won’t mind if they don’t reach their target, as long as they can test their concept or product with the crowd. Once you have social proof the conversations you have with banks and other funders are very different!

  2. Thierry says:

    Nice job!

    In France, we have the same regulation restriction (AMF = ASIC). But since 2009, WiSEED (www.wiseed.fr) propose a crowdfund investing platform for french startups (from now). It works well with + 7500 members and +1500 “micro-angels” investors, for 16 investments (50 k€ to 500 k€) in health, energy and IT fields.

    Crowdfund investing will be the next revolution in venture, sure!

    Thank you for your job.

    Thierry

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