Equity Crowdfunding needs to embrace tomorrow not yesterday to get traction

One of the questions in the Australian Equity Crowdfunding discussion paper (CSEF) got me thinking. Are regulators building this for yesterday or tomorrow?

Here was the question:

“What are the implications for the corporate law framework of permitting proprietary companies to do so?

The question should have been …

“How can we change the corporate law framework to make investing in dynamic future paced Australian proprietary company businesses as easy as contributing to a Kickstarter campaign”

Jason Best and Sherwood Neiss of Crowd Capital Advisors, pioneers from the beginning of the Jobs Act, and advisors to many regulators world wide, (and nice people too), have a matrix anyone can use in evaluating a regulatory framework that will get traction in equity crowdfunding and allow equity crowdfunding platforms to operate.

It goes like this …

In the Australian Discussion Document the proponents are pitching legislation at a traditional funding space (read yesterday) that doesn’t reach the thousands of businesses, seeking a few hundred thousand dollars. These companies just want the ability for their mates and friends of mates and a few more following them to invest say between $50k and $1 million.

Here is the current regulatory framework positioning …

The involvement of licensed intermediaries normally in this sector means that a raise would probably have to be at least a million dollars before it is worthwhile to them. Normally they have retainers of at least $5k a month or an amount starting with $20k up front.

Any new regulations need to look to the future on how they will best empower investment in Startups and small business in the bottom left of the diagram.

If we take a recent “Demo Day” at Angel Cube in Australia where six companies pitched … the report in StartUpSmart details the amounts being sought.

• Peer Academy Raising: $1.5 million
• Coin Craft Raising: $750,000
• Jack.io Raising: $500,000
• CurveUp Raising: $750,000
• Tribe Growth Raising: $400,000
• SweetHawk Raising: $500,000

The pitch amounts for these companies are mostly under $1 million. These companies have had the luxury of being mentored through an intensive 90 day program to help them build better products, accelerate their growth and gain access to an incredible network of mentors, investors and advisors. They are probably well on their way to top right.

Startups and SME’s seeking this level of funding, and not having the luxury of going through the excellent process above, definitely do not fit into the upper right quadrant above where the regulations are being pitched. In reality the companies are more valuable after going through this mentoring so other startups that do not go through this process are probably seeking on average $300k.

Lets look at the possibilities in the four areas detailed by Woody and Jason that may get better traction for this startup and SME sector that do not yet meet the analyticals of financial service advisors and accredited investors and would be killed in their tracks by the regulatory ways of the past.

On a recently published paper called “Pivotal Principles for Development in the 21st Century” the authors made it quite clear that the future is not based on champion based organisations like regulators.

“Since the new millennium in particular, the emergence of data of all forms and quality residing in a global information-technology network, has created unprecedented opportunities for rethinking governance of human affairs in the 21st Century. The authors propose that the confluence of these phenomena presents a pivotal moment in history to enable real-time, accelerated and integrated action that can adequately address such 21st Century challenges. This will involve transitioning from ad hoc, champion-based problem solving by a relative few, to holistic and integrated problem solving that involves crowd-sourced, community participation as a core component.”  excerpt from “Pivotal Principles for Development in the 21st Century”

Here are suggestions on how I see Australia could use the four areas of the CCA Stakeholder Balanced Framework™ to get traction

1. Protection for Investors:
   • Clear unambiguous risk warnings that must be physically acknowledged by the prospective investor
   • Minimum standard templated information on the funding portal for each offering
   • Investor education videos mandatory before investing
   • Able to invest directly with full offering transparency and ability to communicate directly with offering proponents
   • Ability to balance risk by investing via an investment vehicle if directly investing doesn’t suit them
   • Complete transparency of company performance
   • Shareholders can continually check on the status of their investments and company compared to the silence they get at present.
2. Capital for SMEs and Entrepreneurs:
   • Needs to be obtained as easily as a Kickstarter raise from friends, fans, family and supporters
   • Process is not so onerous that businesses are discouraged because the cost and time requirements make it unviable for them
   • If regulations are too restrictive, then the very targets of this legislation will never be able to benefit from it.
3. Transparency for Regulators:
   • An open, shared zero cost transactional and recording environment needs to be created to provide full clarity
   • Everybody can see everything (Full Transparency for the regulator and everyone else)
   • Suggestion is share registries powered by the blockchain allow the regulator, issuer, accountant, tax office, shareholders, media and public to use and have access to the data they are entitled to see
   • There are several people developing register systems in the block chain and they are reportedly around 3 months away at the time of writing this blog.
   • Data can be synced with regulator’s database on a force synced basis as a back up system until full confidence in the blockchain system (Recent Status Backup)
   • Share transactions must be updated within a prescribed time (same day?) so that any trends like unusual issue traction and price jumps can be monitored by the regulator and others
   • Funding platforms have all documentation used in the raise permanently available and time stamped so all parties including regulator can check if need be.
   • If all the above were achieved regulators would have access to secure, standardised, timely, and periodic data from all crowdfunding platforms so they can provide oversight and enforcement of the rules. They would not be custodians of the data but participants in it.
   • Oversight is “data intensive and prescriptively light” using leading edge big-data techniques and this means that by using technology for frequent monitoring of the system, there is an opportunity to react much more quickly if there are concerns regarding an issuer, investor, or transaction.
4. Enabling Crowdfunding Platforms:
   • Crowdfunding Platform is a publisher not a policeman. Like eBay, RealEstate.com and a myriad of other platforms the user or subscriber publishes the information. The moment a platform is responsible for content it costs more to raise the funds
   • Crowdfunding Platform must meet minimum publishing standards and need to register their site but they need not have any licences as they are not recommending, advising or hawking.
   • A crowdfunding platform must have the opportunity to build a profitable, growing, long-term business, meaning that the regulatory burdens must be such that there is proper and appropriate oversight, while providing enough room for platforms to grow.

So if there was a moral to this story it would be … Should we align #equitycrowdfunding proprietary companies to a regulatory past or embrace a shared data intensive and prescriptively light future.

My view?  Retail #equitycrowdfunding must transition from regulators to crowdsourced recording & monitoring as a core component

Dont believe this could happen?

Read this ….   BRW

… and watch this …

and if you really liked Vinay’s presentation here is a deeper look at the blockchain and Ethereum.

The stated purpose of the Ethereum project is to “decentralize the web” by introducing four components as part of its roadmap.

1. Static content publication
2. Dynamic messages
3. Trustless transactions and an
4. Integrated user-interface

Each of these services are designed to replace some aspect of the systems currently used in the modern web, but to do so in a fully decentralised and pseudonymous manner.

 

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