New equity crowdfunding legislation
A new bill has been put before parliament to bring about changes to the current equity crowdfunding regime in Australia. This bill is Australia’s second attempt to introduce crowdfunding-specific legislation, after a similar proposal was knocked back by the Senate earlier this year.
What is equity crowdfunding:
To put it simply, equity crowdfunding is the online offering of shares in a private unlisted company to a group of people for investment. It is the process whereby people (i.e. the ‘crowd’ in crowdfunding) invest in an early-stage unlisted company (a company that is not listed on the stock market) in exchange for shares in that company. As with regular shareholdings in a company, a shareholder has partial ownership of the company and stands to profit should the company do well. Conversely, if the company fails, investors can lose some, or all, of their investment. Because equity crowdfunding involves investment into a commercial enterprise, it is often subject to both financial and legal regulation.
What are the current regulations surrounding crowdfunding:
The current Australian regulations allow only wholesale or sophisticated investors who earn at least $250,000 a year or have $2.5 million in assets to participate in equity crowdfunding. A bill proposed earlier this year which proposed to allow public companies with $5 million or less in annual turnover, or up to $5 million in assets, to raise up to $5 million a year from retail, or ‘mum and dad’ investors, was knocked back by the senate as being too restrictive and burdensome on small companies.
How does the Coalition’s proposed legislation seek to amend the regulations:
The new proposed regulations would increase the limits and allow unlisted public companies with less than $25 million in annual turnover and less than $25 million in gross assets to use equity crowdfunding to raise up to $5 million in a 12 month period. Retail investors will be able to invest up to $10,000 per company in a 12-month period. Any such investment would come with a 48 hour cooling off period, allowing retail investors 48 hours to change their minds.
Treasurer Scott Morrison described the bill as a “commitment to back small and startup businesses help transition the Australian economy from the mining and investment boom to a more resilient and diversified economy that delivers jobs and growth to all Australians”.
However, there are still a number of concerns with the proposed bill:
- The bill only allows public companies, but not private companies, to use equity crowdfunding. This is in stark contrast to countries such as the US and UK, where private companies are able to use equity crowdfunding as well; and
- Other stakeholders claim the $10,000 retail investor and $5 million company capital raising caps should be raised.
Like most bills, there will be no proposal which attracts unanimous agreement, but this legislation is a good start to ensure Australia properly keeps up to date with the booming crowdfunding industry.
Equity crowdfunding is one of the fastest growing methods of alternative finance in Australia and can be a helpful resource to start-ups trying to raise desperately needed funds. Crowdfunding, along with the other steps involved in starting up a company, can involve complex legal issues and it is imperative that you obtain professional legal advice. Contact Allon Ledder of Warlows Legal’s specialist start-up team today for all your start-up needs.