Crowdfunding is not just about raising capital

Australian one hundred dollar bills.

The Corporations and Markets Advisory Committee (CAMAC) report in relation to changes to the process for capital raising for SMEs is attracting a lot of exposure, especially as the recommendations have been backed by the federal government.

There have been a number of other comments made by the Australian Private Equity and Venture Capital Association Limited (AVCAL) and similar organisations that see value in the proposals, especially as Australia has been lagging behind other developed economies in this area.

CAMAC has recommended that crowdfunding candidates be required to set up an exempt public company and be limited to raising $2 million a year, while investor stakes should be capped at $2500 in any company in a year and $10,000 across that market to reduce the risk of rip-offs.

Investing is easy – exiting is hard

The statement may sound glib, but lots of forecasts are made by company founders while capital raising which could best be described as wishful thinking.

Let’s look at Michelle and Dave, the founders of a company seeking to make use of this new opportunity, assuming it’s what is adopted. They complete all the requirements and raise their $2 million and welcome with open arms the 800 new shareholders. The first year goes beyond what they planned, and consideration is given to another round of funding, and so they work towards this to welcome yet another 800 shareholders along with their $2m of funds.

All the legal obligations have been met; the company is solvent and continues to trade above expectations.

There is a sting in the tail, however, in that how do the additional 800, or the now 1600 plus shareholders, have an opportunity to exit their investment?

In the information provided via the compliant documentation to the new shareholders, Michelle and Dave outlined that they were seeking to sell the company via a trade sale or even an IPO. But that is at least three and may be five years down the track.

But I want to sell my shares!

Due to all sorts of unknown and unplanned events, investors invariably want to exit their investment before the “intended event”.

What do they do?

How do they go about this?

In many cases they can’t and have to sit tight and go for the ride, wherever it may take them.

Remember, the investment is into an unlisted public company, and as such, a secondary market via an exchange is not an exit option.

So do these disgruntled investors now place ads in the paper, offload them onto friends or family or try and sell their shares on eBay or Gumtree?

The missing link

Directors of a number of unlisted companies who have already faced this challenge, have now made provision for regular trading of their securities in an annual or twice annual secondary market trading events. Gone are the days of ads in the paper or listings of shareholders, their holdings and the selling prices on the company website, these do little to engender confidence in the professionalism of the company or value of the equity in it.

For unlisted entities, the missing link is the need for a fair, transparent and orderly framework for secondary trading in the company securities. Unlisted entities don’t need to be on an exchange to achieve a secondary market that is compliant and achieves a cost-efficient and credible method of offering value to their shareholders.

A word of caution

Investing is easy and exiting can be difficult. If as an investor you are unaware of the issues around selling shares after the company raises capital then ask the hard question. Directors of unlisted entities need to ensure that they offer a clear and unambiguous process for secondary trading of their shares. Such a process is about respect, in offering investors a fair, transparent and orderly market for those seeking to exit.

Andrew Young is the founder of SME Trade, which facilitates secondary market trading processes for unlisted entities.

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