In September last year, ASIC introduced its new equity crowdfunding regime with much fanfare. Just 12 months later it looks over-hyped and under-utilised.
We thought it would become a serious alternative to traditional forms of capital raising like IPOs and venture capital investment. New Zealand and the UK have thriving crowdfunding scenes and many predicted that Australia would follow suit. In anticipation, innovative finance professionals set up their deal platforms ready to support the start-up community.
But the excitement and buzz around initial coin offerings (ICOs) has gazumped the interest in crowdfunding.
Has all the red tape made crowdfunding unattractive?
ASIC has issued only a small number of crowd-sourced funding licences. There are several reasons for this:
Aside from the legal costs, platforms often charge success fees of up to 6% as well as campaign costs of up to $8,000. Start-ups generally don’t want to spend more money on their capital raising than they do on their tech, especially if there’s no guarantee that their campaign will be fully subscribed.
Alternative funding options are more attractive
As crowdfunding is not the agile and effective investment tool we hoped for, crowdfunding platforms are diversifying. Many now offer a range of capital raising options.
For example, Equitise was one of the early players in Australia and New Zealand. It now has initial public offering (IPOs) and wholesale/sophisticated investor offers on its platform. This includes Series A, Series B and Convertible Note rounds. While there’s a big jump from crowdfunding to IPO, the process for investor disclosure and raising capital is quite similar. So, it makes sense for platforms to offer these deals to attract investors and start-ups.
The small investment threshold (just $10,000) for crowdfunding encourages a lot of small investors. This may not be appealing to start-ups who expect to attract VC investment in future rounds because most VCs will prefer a small cap table.
Alternative fundraising options like ICOs are appealing. They offer greater flexibility and less regulation. Several successful ICOs have taken place in Australia already this year. Some start-ups have even ventured offshore - Switzerland and Singapore are popular jurisdictions. This option isn’t for the faint-hearted but it can be more appealing to investors and start-ups.
When it comes to regulating the sector, we clearly haven’t got the balance right yet. If we want crowdfunding in Australia to be successful significant changes need to be made. Some things that would make a difference include:
These changes would help start-ups justify the cost of crowdfunding without compromising the standard of investor disclosure. It would also make it a more flexible and serious capital raising option for early and late stage investment.
Author: Charmian Holmes