Since the exponential growth in recognition of crowdfunding platforms such as Kickstarter and Indiegogo, business startups have been provided a viable avenue in which to pursue their entrepreneurial projects. Spearheading the creation of new market categories are projects such as the first commercially successful smartwatch, the Pebble Time, raising a record-breaking total of $20,338,986 and achieving an approximate 4067% increase on their initial goal of $500,000.

With the introduction of the recently passed Corporations Amendment (Crowd-sourced Funding) Bill 2017, unlisted public companies with less than $25 million in assets and turnover will be able to raise up to $5 million through crowdfunding. Though equity crowdfunding legislation has already been implemented by our counterparts overseas for a while now, these new equity crowdfunding laws represent a significant step into a niche market of Australian investors.

What implications will this have on the Australian market?

What is crowdfunding?

Crowdfunding is the act of raising capital by soliciting funds from a large quantity of investors, typically as a consequence of a start-up’s inability to access conventional means of investment via bank loans or angel investor-backing. Most people are familiar with rewards-based funding which as the name suggests, rewards investors with pre-order bonuses and early versions of products in return for their pledges.

By using online platforms, entrepreneurs have access to a larger pool of prospective investors who deem the concept viable and contribute capital to see the project into fruition. They operate similarly to “fans” as opposed to “investors” that have a vested interest to see its success.

This practice can be beneficial to early-stage startups as it can allow for the testing of the market. They can gauge the amount of public interest in a product or service and gain insight into its potential reception at launch.

The rise of equity-based funding

This type of crowdfunding allows investors to acquire an equity stake, or partial ownership of the company in anticipation of potentially profitable investments, in return for financial backing. It is an alternative to traditional crowdfunding but similarly carries the same level of risk as with any kind of investment.

While crowdfunding can operate as a marketing tool in validating a product and getting a project off-the-ground, equity crowdfunding concentrates on raising working capital, and dealing with expenses for day-to-day operations. Established startups may benefit from this by acquiring the necessary capital for operational purposes such as fulfilling of product orders and restocking of inventory. This may allow for the streamlining of business.

What does this new legislation mean?

Currently under the new legislation, we can see an exclusion of proprietary companies, a structure utilised by 99% of businesses in the country. Though the Labour Party has made several failed attempts to expand its scope, with the aid of crowd-funding platform, Equitise, they are continuing to cooperate with the government to establish a framework to incorporate proprietary companies.

Another troubling obstacle with this model as stipulated in one amendment, is the implementation of a 5-day cooling period in which investors have the capacity to revoke their investment. This can generate certain levels of uncertainty and make the market open to manipulation.

As Jo Burston, CEO and founder of Rare Birds, commented to Business Insider Australia, “Whilst it's a step in the right direction…I am concerned about the amount of red tape and and restrictions the current laws pose on startups who wish to raise funds through [equity] crowdfunding.”

Should I use equity crowdfunding?

Equity-based funding offers a promising alternative but lacks accessibility to a large majority of businesses right now. This is a fairly new concept and is unexplored territory for Australian investors.

If the international markets lead by example, with the success of campaigns such as Elio Motors and Snapwire, there is a lot of opportunity down under. Furthermore this offers a wealth of new employment opportunities with this potential influx of growing businesses.

The future of crowdfunding

Australia is falling behind the other markets considering the legislation has already taken a whole 15 months to cross the finishing line, but at least the foundations have been set. Hopefully with proper guidance and direction of legislation over the latter half of the year before the framework is set, we will soon see the flourishing of this new form of crowdfunding.

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