Last week I wrote “Crowdfunding are current regulations enough?” to which I have received feedback and support for the Australian crowd-funding scene.
To clarify I am not against crowd-funding or any other legitimate form of access to SME funds, but the issues of sourcing capital or more specific of the means or platform of sourcing that capital should not be considered in isolation as this leads to over-simplification and at best, naive if not dangerous conclusions.
Imagine my surprise when the day after my blog the mornings online publication of BRW carried the article “Government review into crowdfunding: why retail investors could become the new venture capitalists” (Fitzsimmons, C, BRW, 4/12/13).
The article did not address the question as to “why retail investors could become the new venture capitalists” and instead bemoaned the current capital raising limitations and advocated increasing those limits, specifically for technology platforms such as crowd-funding.
But the existing fundraising provisions of the Corps Act are limit specific for investor type, not technology specific or other fund raising type specific. I don’t see any adjustment to these limits could be made for technology based capital raising alone, it would need to be a consistent lift in the limits.
The purpose of those limits is consumer protection and as such I don’t believe there will be any change to those limits because of funding raising issues, then alone a change just for crowd-funding or other technology platforms.
Perhaps though, there is the need to review those limits for reasons associated with the consumers they are intended to protect, and that shall be the subject of a subsequent article.
It is not enough to say or imply that just because the U.S., UK and other markets have made specific legislation for platform specific purpose that Australia should do the same. How quickly we forget the lessons of the GFC, in particular that a major reason Australia did not suffer as severely as those markets was because of our difference in regulatory standards.
Another over-simplification, or common error, is the statement that only $2m to 20 investors in 12 months can be issued. That is the limitation of issue to non-sophisticated investors (i.e. those not Corps Act defined as ‘sophisticated investors’). You can issue as much as you wish to ‘sophisticated investors’ plus $2m to no more than 20 investors in a rolling 12 months. Assuming crowd-funding platforms do not have the capital raised through their platforms aggregated (which is the real concern) then each individual project on a crowd-funding platform could raise $2m plus as much as it needs (or can) from sophisticated investors (yes, there is a lot of simplification in the example I give but a full explanation would take a lot more space and I am happy to give further explanation if sought).
How much do these platforms expect each project is going to be raising through them, or more importantly are they expecting more than $2m from non-‘sophisticated’ investors for these projects. Unless the intention is that crowd-funding moves up the funding chain almost all investees could be serviced under the current limits.
If the people behind the current crowd-funding platforms, and their advisers, don’t understand how the capital raising limitations work then I grow more concerned about those platforms.
Conversely if they do understand there is no upside limitation to ‘sophisticated investor’ investment but still see a $2m limitation as too restrictive then this must imply that they either know that crowd-funding investment primarily or entirely comes from non-‘sophisticated’ investors, or they don’t want investment from ‘sophisticated investors’. Should that be the case as the regulator I would be concerned that the prudential risk these technology based platforms will create as investment through this means increases will be significant and beyond a point becomes systemic (perhaps another article).
To my thinking the problem is the marketing restrictions on an investment that will take non-sophisticated investors, and aggregation provisions and whether crowd-funding platforms would contravene those.
That is to say that investments seeking non-‘sophisticated’ investor funds much either be under a prospectus or product disclosure statement or else quite restrictive advertising rules apply. If a crowd-funding platform advertises itself and projects seeking funding upon that platform does it, or the owner of the project seeking investment, breach those marketing restrictions?
Aggregation is the situation where the regulator may combine multiple capital raising projects for the purpose of determining is the non-‘sophisticated’ investor limits of $2m, no more than 20 investors in a rolling 12 months have been breached. Imagine a scenario whereby ASIC were to determine that all projects listed on a single crowd-funding platform were deemed to have contributed to this limit.
Beyond the problem for those projects whereby ASIC required all of the investment funds received to be returned to the investors, or at least that those investors should have the right to seek return of those funds, it might also cause problems with regard to the operation of a managed investment scheme.
Capital raising in Australia can be a minefield of legislation but for crowd-funding I do not see the problem being the limits, there are far more important ones needing to be clarified at this time.