Crowdfunding is a way of raising finance by having access to a large number of people including traditional financing institutions and structures but also accessing a much broader audience, writes ASSOB's Will Leitch.
Until recently, financing a business, project or venture involved asking a few people for large sums of money. Crowdfunding switches this idea around, using the internet to talk to thousands – if not millions – of potential funders.
They can then use a structured digital marketing campaign, alongside traditional networks of friends, family and work acquaintances, to raise money. There are three different types of crowdfunding: pledge, reward and equity. ASSOB currently operates as an equity-sourced crowdfunder.
Crowdfunding has the potential to be a massive disrupter of traditional financing markets. According to the US-based Massolution, the international research, advisory and implementation firm that specialises in crowdsourcing solutions for private, public and social enterprises, equity crowdfunding has the potential to double in size annually over the next few years. If it achieves this goal, it will overtake venture capital as the largest source of start-up funding by 2020 (US$36 billion).
Equity crowdfunding in Europe has been flourishing for several years, while the US – the birthplace of crowdfunding generally – has been slow in legislating for its introduction.
A crowd can be defined as follows:
1. any large number of persons
2. any group or set of persons with something in common.
As such, any capital raising platform can be defined as a crowd. ASSOB likes to view crowdsourced equity funding (CSEF) as an alternative capital raising platform that gives broad-based access to opportunities that traditionally are reserved for specific client networks, institutions or very high-net-worth investors. In effect, CSEF can disintermediate the capital raising markets in Australia.
Why is crowdsourced equity funding becoming more prevalent in Australia?
The rebalancing of the Australian economy away from resources and towards innovation has shone a light on the difficulties facing small to medium enterprises when looking to raise capital to expand. ASSOB have witnessed that start-up businesses, in particular, are finding it difficult to raise growth capital through to pre-IPO expansion capital from the traditional sources.
Recently both major political parties have indicated that in order to help this transition in the economy and to free up capital, they are willing to alter current regulation to help prioritise sectors of the economy that want to expand and consequently drive investment and jobs growth.
The recent crowdfunding legislation introduced to parliament (the Corporations Amendment (Crowd-sourced Funding Bill 2015) is set for debate and hopefully will be passed by the Parliament in the first half of this year has focussed on the following key points:
1. It will allow unlisted public companies with less than $5 million in assets and less than $5 million in annual turnover to raise up to $5 million in funds in any 12-month period.
2. Increasing the number of retail clients who can invest in CSEF raises to an unlimited number – however retail investors are only allowed to invest up to $10,000 in each raise.
3. Make crowdfunding platforms operate under an Australian Financial Services Licence.
4. Companies that become an unlisted public company in order to access crowdsourced equity funding will receive a holiday of up to five years from some reporting and governance requirements so that companies are encouraged to transition to public companies (rather than private).
ASSOB firmly believes that the above key points will further aid the development of the CSEF space and provide the impetus for strong Australian companies to drive their expansion and help transition the Australian economy away from its dependence on resources.
The opportunity facing all investors who are looking for different investment classes to participate in is expected to grow dramatically and CSEF is one of the lead sectors of capital markets that will promote this.
Will Leitch is the chief executive of ASSOB Australia and New Zealand.
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