The Financial System Inquiry’s recommendation that the government should implement fundraising regulation to facilitate crowdfunding for debt and equity, and eventually other forms of financing, has been welcomed by a number of startup industry figures.
The recommendation, one of a number contained within the Financial System Inquiry’s final report which was released on the weekend, continues Australia’s long march towards an Australian equity crowdfunding regulatory framework. Currently, crowdsourced equity funding is only available to wholesale investors with more than $2.5 million in investable assets or annual earnings of around $250,000
The inquiry stated that “a well-developed crowdfunding system can aid broader innovation and competition in the financial system”.
Chief operating officer of Artesian Venture Partners Tim Heasley, the venture capital firm behind equity crowdfunding platform VentureCrowd, says it’s yet another voice of support for introducing equity-based crowdfunding in Australia.
“It’s correct in recognising that crowdfunding will incentivise innovation and competition in the financial system, while noting the measures needed to protect retail investors,” he says.
That said, Heasley also noted that months after the Corporations and Markets Advisory Committee made its recommendation to introduce equity-based crowdfunding, there has yet to be any firm action.
On Monday, Minister for Finance Mathias Cormann signalled further consultation on the issue, calling for submissions to a discussion paper which will examine the possible makeup of a regulatory framework.
The long wait for regulation
“Australia is falling behind the United States, New Zealand, Canada, and the UK and others in being slow to adopt equity crowdfunding, which has the potential to more than double the amount of early-stage investment in Australian companies,” Heasley says.
Chris Gilbert, the founder of equity crowdfunding platform Equitise, which recently left Australia to operate in New Zealand, where regulation is more favourable, agrees.
“Democratising capital through crowdsourced equity funding is an easy win for the government to implement in Australia,” Gilbert says.
“We are pleased to see further momentum for equity-based crowdfunding and support from the inquiry and hope that we can bring Equitise to Australia very soon following our imminent launch in New Zealand.
“As we are now in the day and age where technology is becoming smarter, faster and more secure by the day, we think that government should be supporting and subsequently becoming early adopters of disruptive measures which are democratising finance in our markets. This is particularly important when 30% of small and medium-sized businesses find it difficult to access expansion capital to grow their business.”
What exactly is “the crowd”?
Australian Small Scale Offerings Board chief executive officer Paul Niederer was pleased the inquiry noted startups generally have limited access to external financing and higher funding costs. However, he was concerned it provided no definition of “the crowd”.
“Things like caps and investor limits are clearly defined but in reality the crowd that invests is not the huge worldwide crowd that invests in startups needing equity, but the entities own crowd and those around that crowd,” he says.
Niederer would like to see the number of retail investors allowed to invest in a startup through the Small Scale Offerings legislation increased from 20 to 100.
“Preparing legislation for the world at large to invest in a startup is counterproductive,” he says.
“Thousands of Australian startups and businesses have their own crowd around them and enabling them to more easily receive investment from them will create far more jobs than writing legislation to allow for random members of the public to find them and invest.
“There is no evidence to show that any crowd-based equity raise has attracted a crowd of thousands outside of the entities own friends, fans, family and followers. History will show that crowdfunding (the word) was an investment process improvement like ‘ecommerce’ rather than a brand new ‘fad’ that needed totally new legislation.
“All countries and American states that have taken the path of full legislative rewrites for ‘retail crowdfunding’ have had little or no traction.”
Establishment of a new innovation committee
In addition to supporting equity-based crowdfunding, the inquiry also recommended the government establish a permanent public-private collaborative committee, ‘The Innovation Collaboration’, to facilitate financial system innovation and coordinated policy and regulatory response. The committee would include representatives from the startup industry, government, consumer groups and academia, among others.
The head of fintech accelerator AWI Ventures, Toby Heap, says the establishment of such a body makes a lot of sense.
“Increasing the level of communication, awareness and understanding between the government, regulators and the fintech community is crucial to ensuring Australia can keep pace with other markets in the region in fintech,” he says.
The inquiry also called on government regulators to remove unnecessary impediments to innovation, by “graduating functional frameworks”. That is, providing lower-intensity regulation for new entrants that pose smaller risks to the system, an approach Heap describes as “excellent”.
“I look forward to seeing this play out in a number of fintech spaces as it will lead an acceleration of disruptive fintech innovation that ultimately will greatly benefit consumers,” Heap says.