About raising funds by Australian startups.
It’s a tough choice when it comes to raising funds for a startup anywhere. Firstly we need to recognise there is two types of investors, the mum and dad (whom elected leaders wants to protect because they are incapable of protecting themselves from fraudsters) and the sophisticated investors who are free to cherry pick their way through lines of startups (it takes one fraudster to know the other?). For the benefit of the curious, “sophisticated” investor is defined as “A person who has aggregated net assets of $AUD 2.5 million or has aggregated gross income for each of the last two financial years of at least $AUD 250,000 a year” in Australia (s 708(8) of the Corporations Act 2001). In the US this is known as “accredited” investors and is classified as one with a net worth of at least one million US dollars, excluding the value of one’s primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year. (See Rule 501 of Regulation D of the U.S. Securities and Exchange Commission (SEC) and Securities Act of 1933, §230.501, for terms and definitions). Looking at both definitions and using income as a guide, both US and Australia appeared to be at par, save for the fact that US has more “accredited” investors than Australia based on her population. Accordingly there are 12.41 million accredited investor qualified households in the United States during 2013, according to the SEC’s qualifications (The source for this data is from a presentation the SEC gave in December 2014 (slides 9 and 11) in http://www.crowdfundinsider.com/2014/12/60121-number-accredited-investors-deck/
In the US, there are a number of websites that allow fund raising open to the non-accredited or sophisticated investors. For example https://republic.co/learn/issuers/who_can_raise and is open to all US registered companies. There is one important issue though which is often overlook and that is the entity when aggregated with its other crowdfunding offerings in the prior 12-month period, the amount the company seeks to raise on Republic must not exceed $1 million (required by JOBS Act Title III). Also, investors with an net worth or income below $100,000 can invest either $2,000 or 5% of their annual income or net worth — whichever is lower.
However, this is probably where Australia stands out because its latest crowd-funding (for non- sophisticated investors) initiative is far better than the US. Known as Crowd-sourced Equity Funding BILL or CSEF, it allows a max of $AUD 5 mio per year from a large number of individuals in return for equity in their company (must be a public company). This is because the Bill only allows public unlisted companies with share capital to rely on this form of finance which basically means less than 2% of ALL entities out there. To overcome this and to get more on-board, the proposed rules also provide a five year exemption from the normal reporting and disclosure requirements that apply to public companies. Further, an eligible company is not required to hold an AGM and they do not need to appoint an auditor where that company raises less than $AUD 1 million. Some say these may still be insufficient as unlisted public companies still have heavy disclosure obligations like half-yearly reports and so on. CSEF will be available to Australian public companies with a turnover and gross assets of less than $AUD 5 million. Individuals seeking to invest using the CSEF platform can contribute up to $AUD 10,000 per company, per year. See http://www.innovation.gov.au/page/access-crowd-sourced-equity-funding
The Bill also provides for intermediaries (online platform soliciting funds) to conduct due diligence on issuers, enforce investors protections such as 5 days cooling off period, and hold an AFSL for crowdfunding services. Looks like passing the gatekeeper bucket here will likely see higher cost for issuers. The fact is, that it is incredibly hard to conduct due diligence on any start-ups due to the reason that a start-up has no track record at the outset. Its a blank page. Its owners or backers may have track-records from a previous life but that does not mean their track-records are equivalent of the start-up in any measurable sense. A start-up needs funds to solidify and take-off by building a team aiming towards a goal. Generally one can still audit the technology behind the start-up to see whether it ‘works’ but beyond that it is impossible to tell if it is going to be successful as there may be other technical issues with the design and unknown competitors like the saga between Netscape and Microsoft Internet Explorer then.
As for due-diligence on the backers/owners, they are usually out of college with the only identifier being a driving license to their names. There are those with extensive experiences but mostly in collaboration with others which may or may not be useful in a different startup.
Obviously by issuing equities, an information memorandum may be required to explain or flesh out the potential of the technology coupled with the business but other than this, it is no better than a marketing paper or a business plan at best.
In short the current Bill is seeking a mini version of getting an IPO ready (normally costing a minimum of $AUD 250,000 as a ball-park), the costs for a mini would not be less than $AUD 100,000 which is still huge chunk due to the fees charged by professionals like lawyers and accountants working with the intermediary trying to protect itself. Coincidentally Australia is now flooded with too many lawyers and accountants graduates without jobs. They simply can’t get their foot into the door to acquire the experiences needed to be a fully qualified professional (usually this means 2 years as a trainee or a restricted practitioner).
In my view, the due diligence or vetting costs should be charged as a fee by the intermediary say 3% of $AUD 5 mio collected (sliding scale) which is clearly lucrative basically acting as an underwriter as well. This means there is no upfront costs by the issuers. Each issuer is also required to contribute say 1% to an open fund (representing all the issuers) where other investors could participate and trade. This allows others to access a portfolio rather than individual entities and to share in the prosperity and risk.
So what is the catch ? Sorry folks, this Bill has lapsed due to dissolution of parliament for the 2016 election despite being tabled back in December 2015 known then as “Corporations Amendment (Crowd-sourced Funding) Bill 2015”. (see http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5588)
In my view this is great shame. There are only 2 months to go before the end of the year (Christmas break) and there is no way of re-hearing in the current sitting of parliament. In short, we are still behind the rest of the world. This leaves me (Violater.com) not much choice but wanting to move to the US to raise funds.