New rules open up the market to ‘mum and dad’ retail investors.
The federal government has introduced legislation that will allow ordinary ‘mum and dad investors’ to invest in small businesses and tech startups using crowd-sourced equity funding (CSEF) platforms in Australia.
Crowdfunding platforms allow people to pledge money to a particular business or project, in exchange for some benefit if the fundraising campaign meets its target and the product successfully launches.
However, while reward-based crowdfunding platforms such as Kickstarter, Indiegogo or Pozible have allowed pledgers receive tend to be products or experiences, until now there have been restrictions on companies offering shares as a reward on such platforms.
Previously, investing in companies through CSEF was restricted to ‘sophisticated investors’ who have income of $250,000 for two years running, or net assets of $2.5 million, meaning ordinary retail investors were locked out of the market.
The new legislation is likely to significantly open up the CSEF market, allowing retail investors to pledge money in exchange for shares, increasing the scope for small businesses and startups to raise funds using platforms such as Equitise.
Under the new rules, retail investors will be able to invest up to $10,000 per company in a 12-month period, and will have a cooling off period where they will be able to withdrawal from their investment for up to 48 hours after making a commitment.
The new legislation allows public companies with less than $25 million in both assets and annual turnover to raise up to $5 million per year.
Private companies (companies incorporated as a proprietary limited) at this stage will not be eligible to participate. However, the federal government indicated this is likely to be reviewed next year.
While public companies have stricter reporting requirements than private companies, businesses that become public companies to take advantage of the new CSEF rules will be granted an exemption of up to five years from certain corporate governance and reporting obligations.
Likewise, companies that are already listed on the stock market and investment funds won’t be allowed to be listed on CSEF platforms.
CSEF platforms will be required to be licenced by the federal government, and be obligated to conduct background checks on companies before they list, but may be exempted from existing clearing and settlement licensing laws.
In a statement, Federal Treasurer Scott Morrison said if passed by Parliament, the new framework will take effect six months from the date the bill receives royal assent.
“The legislation will complement the Turnbull Government’s existing financial sector and innovation policies including; the push for an internationally competitive FinTech industry, new tax incentives for angel investors and start-ups and changes to the tax treatment of crypto currencies,” the statement said.
Click here to read BIT’s recent guide explaining CSEF.