Last year, it was announced that the Federal Government would introduce new legislation to facilitate "Mum and Dad investors" in start-up. Changes include a 5 day cooling off period and an increase in the allowable cap on funds to be raised, and assets to be held, to $5 million.
The Corporations Amendment (Crowd-sourced Funding) Bill 2015 seeks to enable equity crowdfunding against a regulatory background that has traditionally resisted it. The amendments to the Corporations Act 2001 seek to provide recourse for a large number of shareholders to provide but some start-up advocates have articulated resistance to the scheme for being too cumbersome.
As a form of consumer protection the Australian legislation now requires that investors must go through appropriately licenced crowdfunding procedures, and those procedures require a considerably high level of due diligence on the proposal to avoid misleading or deceptive conduct. Moreover, consumers are strongly encouraged to seek their own advice on the potential investment and make their own decisions by the risk acknowledgement statement required to be signed as part of the investment process.
It is interesting to note that the Prime Minister, Malcolm Turnbull, has previously said (before assuming office) that he preferred the model adopted by New Zealand in the middle of 2014.
That model includes a $2 million cap within a 12 month period; however, the number of potential investors is uncapped and not limited to 20, and private companies are included in the arrangement. Accordingly, this provides a significant number of investors to purchase smaller amount of shares in any incorporated company in New Zealand, without the need to issue a prospectus or deal with costly scrutiny from authorities. It has now been some time since the model was adopted in New Zealand and 21 New Zealand companies have successfully raised $12.4 million, with an average commitment per investor of approximately $4,100.00.
The new Australian model, limiting its reference to small public companies, prescribes key elements of operation and compliance to participants. A limit at $5 million, however, is a larger crowdfunding threshold than both New Zealand and the US. If crowdfunding is as successful in Australia as it has been in New Zealand, there are considerable advantages for Australian start ups and investors. We will have to wait and see what happens over the coming months.
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