A capital idea for crowdfunding
Posted 3 years ago
The way Australian businesses can raise capital has just changed, with SMEs now able to raise up to $5 million a year via crowdfunding.
Impact Innovation’s John Mathew (DBiotech – Crowdfunding) explains what this means for innovation investment in Australia.
Under the Corporations Amendment (Crowd-Sourced Funding) Act 2017, which takes effect from 29 September 2017, an unlisted public and proprietary company with less than A$25 million in assets and annual revenue can now make offers of ordinary shares.
Eligible companies can raise up to A$5 million in any 12-month period through a licensed crowdfunding platform.
This offering can be to retail investors through the platform using a CSF (crowd-sourced funding) offer document containing a reduced level of disclosure compared to a prospectus.
The retail investor can invest up to A$10,000 per company per year (after completing a prescribed risk acknowledgement and a five-day cooling off period).
If you’ve never considered crowdfunding before – because you thought you weren’t eligible or it seemed too new-fan-dangled, here’s what you need to know.
Crowdfunding is a multi-faceted process predicated on the campaign manager’s ability to meet the expectations of ‘donors’ and sell directly to a non-sophisticated investor pool – people who are used to purchasing based on consumption as opposed to investment.
I presented an overview webinar on crowdfunding earlier this year, which you can listen to here (or click on the image).
The novelty of crowdfunding has led to numerous media posts about successes, the ease of crowdfunding and the unending generosity of the general public.
Since the passing of the JOBS Act in 2012 in the US, crowdfunding’s popularity and application have sky-rocketed, making it a legitimate funding channel for companies globally.
Contrary to popular belief, crowdfunding has a very high failure rate, with only a third of crowdfunding campaigns meeting their funding targets (The Crowdfunding Centre). Consequently, many crowdfunding “investors” have been frustrated, disillusioned and apprehensive to support other campaigns, causing businesses in need of money to opt for more traditional forms of funding (venture capital, grants, bank loans, etc.)
The fluid format and low barrier to entry that crowdfunding offers are very attractive for small businesses looking to raise capital. However, given the high risk, failure rate and unstructured format often associated with campaigns, synthesising its processes to legitimise the practice has been an ongoing effort for those keen to meld the best of traditional and 21st century funding formats.
The Australian Securities and Investment Commission (ASIC) has released a regulatory guide for Australian businesses looking to equity crowdfunding as part of their funding practices.
The new laws extend to equity-based crowdfunding platforms or “intermediaries”, and defines the parameters and legal requirements they must adhere to in order to operate as equity crowdfunding platforms.
These guidelines, coupled with the Act, define how equity crowdfunding will operate in Australia and has addressed the glaring issue that has impeded previous attempts to legalise equity crowdfunding: protection.
As opposed to other models of crowdfunding, where “investment” into a crowdfunding campaign yields a pre-purchase of a new piece of technology or a good feeling by donating to a social cause, equity crowdfunding offers ownership into an unlisted public company with the assurance of some level of financial return.
Unlike the non-financial models of crowdfunding, e.g. donation and rewards-based (pre-purchasing) that offer a social cause or a product or prize as the incentive, equity crowdfunding exchanges equity for capital, with the incentive of a financial return.
The protection and approval processes under the new Act mean that campaign investment is more sophisticated and structured to limit failure and to protect investors if the campaign does fail.
If you’re thinking of running a crowdfunding campaign, here are some of my expert tips based on how I ran campaigns during my doctoral research on this phenomenon at The University of Queensland:
– Know who you’re selling to or who you want to sell to.
- How do they communicate?
- What do they find important?
- What are they interested in?
- How deep are their pockets?
- How do I keep them interested?
– Know your product and how to sell it to this crowd.
- What’s the value proposition?
- How do I translate it into something this crowd understands?
Once you have this base-level understanding, the choice of platform, communication, integration and campaign growth becomes a streamlined process.
A crowdfunding campaign’s survival is based on the size, nature and dynamic of the crowd. The ability to communicate your message and value proposition to incentivise them to make an investment is singular to how successful your campaign will be.
Fostering and cultivating your crowd is central to maximising investment momentum and requires intimate knowledge about their expectations, their needs and how they engage.
The crowd of an equity crowdfunding campaign will be initially composed of retail investors who have been approved and vetted by a licensed crowdfunding platform and who are responding to a crowd-sourced funding offer.
Already, the level of financial sophistication is higher than donating $5 to a movie or the next digital dog collar, meaning the level of communication and information needs to change to meet the expectations and complexity of potential investors. These investors will be looking for viability, profitability, long-term growth, outcomes and ultimately return on investment.
The Act solidifies crowdfunding as a legitimate funding channel and capital raising tool; but like with any tool, unless you know how to use it, you can end up causing more harm than good.
Having a strategy for how your crowdfunding campaign will come together will maximise your chances of reaching your campaign target (or exceeding it!). There’s no guarantee when it comes to capital raising, but being aware of what you need to do and how to do it puts you ahead when it comes to crowdfunding.
Business will always need cash to survive, and with more and more businesses competing for the attention of VCs, angel investors and government grant bodies, the list of unsuccessful candidates will continue to grow. Equity crowdfunding offers the SME sector the opportunity to bypass a funding bottleneck and market directly to investors, with the promise of financial gain and long-term benefit.
The passing of this Act is a landmark decision that will impact the funding landscape of Australia for the better.
If you would like advice about funding options to get your innovative idea of the drawing board and into the market, call us on 61 +7 3041 1128.
– John A Mathew, Project Coordinator