Q. I have recently read about changes to the law around Crowd Sourcing or Crowd Funding. I am interested in investing in “start-up” companies. What is the minimum and maximum I can invest and how do I do it?
A. Crowd Funding or Crowd Sourcing (CSF) is the process of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount. New legislation came into effect late last year that enables ‘mum and dad’ investors to invest in small Australian unlisted Public Companies who seek investment funds via CSF.
Traditionally small investors have been restricted to investing in new ventures via an Initial Public Offerings (IPOs) on the share market. The new rules provide retail investors with access to a range of investment opportunities they have traditionally been unable to reach due to the large capital requirements to be considered a “wholesale” or “sophisticated” investors.
Under the new CSF legislation, retail investors are generally able to invest as little as $50 up to a legislated annual limit of $10,000 per investment. An investor can, however, invest in an unlimited number of CSF offers.
Some offshore CSF models allow investors to receive an investment return in the form of product or services, however, the Australian CSF Legislation specifically states that the investor is acquiring shares in the unlisted Public Company in Australia.
Using a web-based funding framework, small unlisted Public Companies with less than $25 million in assets will be able to seek CSF investment funds of up to $5 million a year via CSF platforms licensed and regulated by ASIC.
ASIC has currently licensed seven CSF platforms to operate in Australia; Big Start, Billfolda, Birchal Financial Services, Equitise, Global Funding Partners, IQX Investment Services and OnMarket Bookbuilds. Further licenses are expected to be issued further enhancing competition in the market.
Typically a CSF platform will list an offer to invest for 90 days on their website. If the target funding is not reached within that time period, all funds raised will be returned to the investors without charge but with no interest. If a funding target is reached, the platform may close the offer or continue to raise funds up to the funding cap of $5 million. The application process for an offer will include a risk acknowledgement and a five-day cooling off period.
Estimated fees for companies seeking to raise funds start at around 6% plus set up costs, but could be substantially higher depending on the scope of work and services provided by the CSF platform.
Transaction costs to investors can include Credit card and transaction fees of approximately 3% of the amount invested and may include future performance fees based on the success of the start-up company.
Whilst companies operating CSF platforms are licensed and regulated by ASIC, many of the normal reporting and corporate governance requirements for Public Companies under the Corporations Act are relaxed. The new regulations require an offer document, but it will be quite short compared to a traditional IPO.
CSF platforms must comply with a range of obligations such as vetting the quality of the companies seeking to raise capital, undertaking due diligence on issuers and providing risk warnings to investors.
CSF platforms may offer access to deals in particular niche market sectors; for example, Big Start specialises in Fintech whereas IQX’s niche is biotech.
Whilst the opportunity to invest in “start-ups” is appealing to many investors, it is still important to recognise the inherent risks in investing in early-stage ventures; You may be unable to liquidate your investment for a number of years and you may also run the risk of losing 100% of the fund’s you invest.
Questions for investors to consider: Has the company seeking funds clearly explained what they will do with the funds raised? Have they been clear and transparent in their fundraising campaign and business plans? Have they answered clearly any questions raised by prospective investors?
Investors wishing to consider investing in CSF should consider the risks and only invest as part of a broader diversified portfolio. Consider the likely timeframe for a return on your investment and your liquidity requirements. Be mindful of investment costs and your ability to exit an investment at a time in the future. Do your homework on any investment opportunity and seek advice.