Equity crowdfunding – EXPLAINER

Legislation on the floor of the Australian senate could have a profound impact on the ability for start-ups to raise capital, and exposes the tricky balancing act the government needs to pull off.

As part of Malcolm Turnbull’s innovation agenda, the government, after community consultation, has introduced legislation to the floor of the senate which would allow start-up companies to dole out equity.

The bill is referred to as the “Corporations Amendment (Crowd-sourced funding) Bill 2015”, and a senate committee looking at the bill has just reported back.

It works like this: instead of a garage start-up receiving a loan to get their idea up and running, the company would essentially take on shareholders.

For example, a start-up receiving a $250,000 loan from family would be able to make those family members shareholders in the business rather than just loan holders.

So, what would this legislation actually do and what are the arguments for and against? We’re glad you asked.

Why is it a big deal?

Access to capital, especially at the early stage has been identified as one of the big hurdles to fostering a start-up culture in Australia.

The government, risk-averse, has until this point not really had a mechanism for introducing an equity system into the mix.

After all, people are much more likely to invest in an idea if they have equity in it.

The government introduced a bill (in December) which would allow exactly that.

Sounds like a pretty uncomplicated idea, but once you drill down into the issues you start to see a conflict between the desire to allow easier capital to flow and wanting to protect potential investors.

What are the key sticking points?

At the moment, the key sticking points of the legislation appear to come down to three main topics:

• Who should be able to participate in equity raisings, with the government proposing only ‘sophisticated investors’ with more than $2.5 million in investable assets able to participate.

• The amount in equity a start-up can raise, with the government proposing it put a $5 million cap on the companies per year, with individual investors only able to put in $10,000 per year.

• The government is also seeking to put legislation in place which would make companies participating in equity placements become a public unlisted companies – with all the disclosure requirements that entails.

Why are people against the proposal?

The whole thing, according to critics of the legislation is that it runs counter to its stated aim.

The government promised to make access to capital easier for start-ups, but on the face of it the legislation would make it awfully hard to do so.

It effectively closes off people with less than $2.5 million in assets (an awful lot of people), from being able to participate directly in the start-up boom the government is trying to foster.

It also closes off a huge chunk of the market for start-ups, with them needing to find the money men to do deals.

The cap on raisings, meanwhile, limits the growth of these start-up companies. Also, if the offer is restricted to those with more than $2.5 million in assets – is this not a class of investor who would be looking to tip more than $10,000 into the pot?

On the final point, isn’t the government looking to make it easier for start-ups to get cash to drive their ideas? Innovation tends to get killed off by paperwork, after all.

Is the government just looking out for the little guy?

Critics may call the legislation ‘protectionist’ and against the lassaiz-faire attitude which has made both the US and Israel hot-beds of innovation.

Another look at the legislation, however, may reveal a government just keen to ensure people don’t get ripped off.

After all, while there’s more innovation here than in the US there are also fewer bankruptcies.

Start-up ideas are inherently risky in their nature, and the government may be seeking to make them less risky for investors.

While restricting the offers to people with less than $2.5 million in assets may come off as the government calling people without that amount in assets as unable to weigh the risks properly, the requirement for start-ups to become a public unlisted company has some merit.

It would require the start-up to put together, at the very least, a document carefully outlining the risks in the investment – much like a listed company might if they’re looking to raise cash from shareholders.

While there’s more water to go under the bridge, the debate on this legislation essentially opens a broader point: can you have the full effect of a free and open market and access to capital that implies full consumer protection?

Where’s the line here? That’s the overriding question of the legislation, and one which will be confronted as the ‘innovation boom’ starts to click into gear.