Australia’s ‘Small Scale Offerings’ legislation combined with our regulator ASIC’s ‘Class Order’ or exemption to the rules regarding the promotion of these types of equity offers is, inarguably the first equity crowdfunding legislation in the world.
Both the Small Scale Offerings legislation that was enshrined into our Commonwealth Corporations Act in 2000 and the ASIC Class Order 02/273 which came into effect on 11 March 2002 work together to provide an exemption from the prescriptive fundraising provisions of our corporate legislations for companies making direct offers to persons within their network or for those involved in ‘making or calling attention to offers of securities’ through a Business Introduction or Matching Service.
The legislation was purpose designed as part of the government’s policy to encourage small and medium business to more easily raise funds from personal contacts, management, employees and those assisting to raise the capital, with less red tape and financial burden to produce disclosure documents.
The word “crowdfunding” wasn’t trending in 2000 – in fact, it hadn’t even been invented by merging 2 concepts together – but if we look at a Small Scale Equity Offering coupled with the Class Order (the ASSOB way) and today’s Equity crowdfunding raise, they both have similarities…
- You need an issuer offering equity in its company
- You need a platform to publish and promote the issuer and its offering
- You need a number of people (crowd) to deliver the resultant investment
Of course, on the 11th of March 2002 when the Class Order was introduced “personal contacts” were a lot different than they are today. Back in the day, personal contacts were a set of human contacts known to an individual, with whom that individual would interact with at specific intervals for mutually beneficial reasons.
Nowadays, the internet has enabled people desirous of flocking around all types of meaningful activities to gather far more easily and effectively, extending the ‘personal contact’ concept beyond the immediate peer group. The internet has also provided enhanced abilities for the dissemination of information so that those contacts can be directly communicated and kept in the loop about activities they have expressed interest in.
It can be said that our Small Scale Equity Offerings legislation has not kept pace with changes in technology that has resulted in the evolution of our personal connections.
ASSOB’s experience is that around every small scale offering equity raise, a “crowd” gathers. Statistics for the last 14 successful raises on the ASSOB platform show that the average raise was $800,000 and the crowd size or ‘followers’ for each of these ranged between 335 and 991 people. The average being 667, meaning the “crowd” for each raise was 667 on average.
For those who say “equity crowdfunding” legislation doesn’t exist in Australia, it is easy to get fixated on the fact that only 20 ‘personal contacts’ (retail) investors are permitted to invest in an equity raise. However, this is not a limit on the size of the crowd, it is a limit on the number of retail investors you can accept from that crowd in any 12 month period.
If we revisit what is needed for a crowdfunding raise:
- You need an issuer offering equity in its company
- You need a platform to publish and promote the issuer and its offering
- You need a number of people (crowd) to deliver the resultant investment
Is it the size of the prospective investor crowd that legislators should focus on, or the number of investors that are able to invest, that it is important? Meaning should we build a system for hundreds and thousands of potential investors to invest, or a reasonable number of actual investors?
Taking off our rose-coloured glasses, let’s look at reality …
Both ASSOB and Crowdcube’s equity funding platforms have been operating for a number of years with retail (“unaccredited”) investors. In ASSOB’s case 63% of investors are retail or unaccredited.
Recently I scrolled through 101 completed raises on Crowdcube. Most companies that had raised the funds they sought had obtained under 100 investors to achieve their targets. And with Crowdcube you can invest as little as a hundred pounds if you choose! Seedrs the U.K. platform that works on a slightly different equity crowdfunding model where investors in the entity raising capital don’t receive shares directly in the entity but are represented by single shareholder nominee structure but even in their case the average number of investors is around 180. Compare this with reward raises.
1) Star Citizen 34,397 backers
2) Coolest Cooler 62,642 backers
3) Ubuntu Edge 27,635 backers
4) Pebble Watch 68,929 backers
5) Pono Music 18,220 backers (Neil Young)
6) Wish I was here 46,520 backers (Zach Braff)
7) Veronica Mars 91,585 backers (Rob Thomas & Kristen Bell)
The reality is … equity crowdfunding is small scale equity offerings with low investor numbers an area in which Australia and its regulator ASIC is a world leader, underpinned by our Class Order regulations to strengthen investor confidence in these types of raises.
In small scale offerings, friends, fans, family and followers buy equity as retail investors to support the business, while later the high net-worth investors (sophisticated / professional / angels) join in. There is no evidence of “the crowd” flocking to invest in these types of equity raises, however according to American statistics 38% of investment in small businesses come from friends, fans, family and followers and it is on the legitimisation of this that regulators should be focussing.
One of New Zealand’s first raises under its new equity crowdfunding legislation, facilitated on the platform Snowball Effect has an overfunded status. High profile movie stars were involved in the promotion of “The Patriarch“. $391,000 raised from 157 investors. No stampede from the crowd here in the region of hundreds and thousands of investors waving $100 notes! The numbers would probably have worked under a system where the 20/12 was expanded to 100/12 and 60 more people from the crowd took part under whatever “crowdfunding” appropriate legislation based around CAMAC eventuated.
Having monitored our own 310 raises for $140 million in this area and kept an eye on the only other platform in the world working directly in this area (UK – Crowdcube) there is no evidence that the hundreds and thousands of investors CAMAC have allowed for in their recommendations will ever materialise. The belief CAMAC embraced has manifested a response that doesn’t accord with the reality.
Equity offerings, with retail investors, seldom have over 100 investors.
And … why would they want to?
How would a startup or early stage company manage the governance processes of hundreds of investors on a startup or early stage company budget?
Is that wise practice when directors should be focused on growing the company, not the politics of investment?
Should it be supported?
Especially with an exempt public company that doesn’t even need to report for 3 years.
The “Crowd” with reward crowdfunding is generally believed to be people in the world at large.
However if you listen to Slava Rubin of IndieGoGo or other leading reward platforms participants, they all maintain that there is no point putting up the project unless you know where 40% of your funders come from straight up. The rest of the funding is hoped to be generated by additional marketing efforts.
Slava Rubin … ” Some people want to believe that there are leprechauns with buckets of gold that just start jumping around from campaign to campaign and they just fill your baskets with gold. Now that’s not to say that you can’t get a stranger that you’ve never met to give you money. That happens all the time. But what you need to do is move that snowball down the hill. You need to get that first 30 or 40% through your own effort or your own work and lots of contacting people”.
My view after many conversations with leaders worldwide, the consensus is that if ASIC shifted the 20/12 to 100/12 and permitted platforms like ASSOB to display limited information about the offerings, we would be 90% of the way towards the best equity crowdfunding legislation in the world. CAMAC recommendation by themselves wont work but would be a bonus of perhaps 20% of each raise with the 100/12 in place.
At the end of the day our experience shows that if you had to rely on hundreds of people investing up to $2,500 each, in say a $500k raising, you would need around 400 of them which simply won’t eventuate unless you are Neil Young or Zach Braff!
However if you really think about who is investing from the crowd, if you can secure 80 investors (Friends, Fans, Family & Followers) at say, $10k average under a 100/12 rule small scale offering, even securing 20% from accredited investors who are not included in the count, a simple raise could secure up to a million dollars, all workable under existing legislation.
20/12 no longer works as it was envisaged due to technology advancements, however before we completely disband legislation and exemptions that achieve the fundamental goal of retaining investor confidence relying upon platforms like ASSOB, wouldn’t it be more efficient for the tax payer and quicker for those businesses desperate to access this type of funding, to simply change the 20 to 100?
