This BRW article by Adir Shiffman inspired this post! “Why equity crowdfunding for start-ups is wrong for Australia: entrepreneur Adir Schiffman”
Whenever I read “alternative investment class” and “crowdfunding” in the same sentence I get nervous.
Having been invited and discussed equity crowdfunding with many overseas security regulators, including the U.S. SEC and FINRA, the regulators are all trying to protect retail investors using a trading protection mindset. Obviously the majority of their time and the financial journalist’s time is spent in the listed / traded stocks space so that is where their knowledge and expertise is. In reality they should look at how startup, early stage and growth businesses actually get funded, who funds them, in what amounts keeping their focus on the ones that are NOT destined to be the next Facebook.
Take these quotes from the article:
1) “allowing retail investors to place small bets on start-up businesses”
2) “a retrograde step to permit totally inexperienced and unqualified individuals to personally invest in risky assets”
3) a “curated” list of opportunities
As Matthew Henninger, CEO of CEDI-US, Inc. (The Collaborative Economic Development Initiative) said recently ”We have gone from an investing society to a trading society and we need to get back to being an investing society”
Only 5% of the ASX transaction volume actually ends up in actual businesses. The rest is “pass the parcel” or gambling. Before trading dominance took over we had 12 Stock Exchanges in Australia where their primary purposes was matching investors and entrepreneurs.The figures were probably tilted the other way back then. 95% investing 5% trading.
Regulators, legislators and most articles in financial publications are written from the viewpoint that crowdfunding will be a new asset class and it is best that someone else uses mum and dad’s money to invest in this new asset class.
However this doesn’t recognise the fact that most businesses actually start with the “friends and family” money. No-one else will fund them in these early stages. In the U.S.38% of Startup funding or $60 billion comes from this source. Contrast this with VC’s $22 billion, Angels $20 billion and Banks $14 Billion.
Not everyone that “invests” is after a 10x return and the opportunity isn’t curated because the investor has some connection with the business and the investor isn’t after flipping the investment in the near future. They invest because they are supporting someone or something they know or care about. It is in the legitimisation of this investor type that fairer investments and job creation lies.
Australia has adopted the term “crowd sourced equity funding” rather that equity crowdfunding but let’s break it down.
1) C = Crowd = Equity crowdfunding statistics show that this is primarily the entities crowd not random mum and dads
2) S = Sourced = The investors are sourced from that crowd
3) E = Equity = Shares are issued directly in the entity
4) F = Funding = Funding comes from share sales
ASSOB, an Australian company, has the best stats on this. Some were used in the recent World Bank report on Crowdfunding. What we see is that the majority of companies raising funds through equity crowdfunding would never make a “curated” list, or would never raise funds if they relied on “small bets on start-up businesses”.
They are businesses eager to make their way in the world but they need the support of a network of people around the business to get traction.
I agree with the Adir Shiffman’s last paragraph as I have written extensively on this topic.
“Instead, the government must ……. take advantage of Australia’s strong existing frameworks.”
Small Scale Equity Offerings are equity crowdfunding raises. ASSOB stats show that on average a personal “crowd” of around 660 are gathered around a start-up seeking funds. Of those around 200 download the offer document and 20 invest. Statistics worldwide from Crowdcube, Seedrs and ASSOB show that most raises have under 200 investors so this is not a situation where there will be thousands of investors.
Australia has a “strong existing framework” in it’s Small Scale Offerings legislation and adjusting that to allow more than 20 retail investors per annum would do far more for “crowdfunding” than the expectation that thousands of people will queue up to invest $2,500 each. Flawed thinking.
And as to investor numbers. VC’s and Angels often say we don’t want to deal with lots of investors but they forget that without them the business they are thinking of investing in of wouldn’t exist!
Without equity crowdfunding in Australia in the form of Small Scale Offerings people would not be able to buy Preshafruit’s awesome triangular shaped juices in just about every supermarket in Australia, or the U.S. military wouldn’t be using Ocular Robotics cameras, or Opmantek’s 20,000 users worldwide including some of the largest telecoms wouldn’t have add on modules for their network software. There was no curated list for these companies when they started on ASSOB. They gathered their crowd, raised the funds and moved on to the point where they are now on these “curated lists” for the type of investment vehicles mentioned in the article above.
Solution? The government should instruct the regulator to use its “strong existing framework” and update the small scale offering legislation by increasing the 20 to 49, 100 or 200 for the year 2015 instead of as Adir rightly says “following a flawed US model”