The Australian Securities Exchange and legal experts have urged the government to relax laws preventing start-ups from using online equity-based crowdfunding, warning that the local tech sector risks being outpaced by rival countries with less restrictive regimes.
The calls were made in submissions to a review by the government’s Corporations and Markets Advisory Committee, as early stage venture capital firm Artesian announced it would launch Australia’s first online equity-based crowdfunding platform in February.
Online equity crowdfunding is already an option for start-ups in the US, UK, New Zealand and Italy, but is unviable for most Australian-based players, as raising funds privately is limited to 20 investors or a total of $2 million.
It is seen as a increasingly important method for start-up tech players to get their ideas funded in the crucial early stages of product development.
In its submission to CAMAC, the senior manager of regulatory and public policy at ASX, Diane Lewis said the company was concerned about a “market failure” in Australia, where the venture capital market was not developed enough to fill the start-up financing gap, where bank financing and public listings were not a feasible option.
ASX warned exceptions to the Corporations Act, which would mean only so-called sophisticated investors, with significant assets or earning power could partake in crowdfunding, were too restrictive. It said the government would need to put in place a new statutory and compliance regime with crowdfunding in mind.
“ASX is of the view that there is merit in considering measures that would provide relief for this type of fundraising activity – so long as such relief is effectively targeted and not allowed to undermine the broader fund-raising provisions,” Ms Lewis wrote.
“Increasing the number of investors may facilitate the sort of crowdsourced equity funding envisaged without undermining the general capital raising rules.”
However, she said more careful consideration would need to be given to what constituted a reasonable maximum funding limit. ASX said the existing $2 million limit was in line with the approach taken in other jurisdictions.
Artesian announced on Wednesday that it would launch VentureCrowd, an online platform aimed at facilitating crowdfunding. The site will allow pitches from start-ups that have been pre-screened by its partners in the early stage start-up industry.
Artesian managing partner Jeremy Colless said VentureCrowd would be viable even without changes to the law, due to the number of local sophisticated investors.
“Only a very small proportion of wealthy Australians are currently investing in venture capital, so even without a change to legislation there is still a massive opportunity for a platform to attract accredited or wholesale investors that aren’t currently investing in this space,” he said.
Law firm Minter Ellison told the CAMAC review that Australian entrepreneurs were at a competitive disadvantage to overseas counterparts because of funding restrictions. It suggested the creation of a new stand-alone regime for regulation.
This would be able to police issues such as over-subscribed offerings and encourage communication among the crowd of investors in individual companies.
“The key to effective crowdfunding regulation is recognising that all crowdfunding investors are subject to a higher risk of issuer default because crowdfunding issuers are generally not well established,” the legal firm wrote.
“A key priority should also be to cultivate crowd equity funding as a vehicle for economic growth and innovation, with appropriate protection for investors, while minimising compliance obligations, legal complexity and uncertainty and liability risks for issuers.”