Australia was late to the game when it came to allowing startups to raise capital through crowd-sourced funding. But according to the latest global survey, it grew rapidly and became the second largest market per capita by 2021.
Five years later, it is undoubtedly a huge success, with more than $240 million invested in 320 successful offerings and more than 140,000 individual investments.
Industry regulator ASIC agreed that the industry was operating efficiently with an increasing reliance on what it described as a “robust alternative for smaller companies to raise up to $5 million in 12 months with the right investor protection.”
And yet, despite the recognition, a gap remains between Australia and the best-performing and longest-running UK market.
In 2021, Australians invested the second highest amount through crowd-sourced finance platforms ($2.12 USD), after the UK ($17.70 USD), according to the global crowd-sourced finance opinion leader’s research, law professor and Fulbright Scholar Andrew A. Schwartz.
With the data revealing that Australia’s CSF could be at least seven times larger than it is today, we need to get serious about how to unlock this opportunity for Australian startups and their funders – starting with improving incentives, expanding security types and addressing current liquidity concerns.
Improving incentives for companies and investors
To date, wholesale investors have enjoyed lucrative tax breaks for investing in early stage companies through an Early Stage Venture Capital Limited Partnership (ESVCLP). Comparable incentives for retail investors are sorely lacking.
To foster a thriving ecosystem and encourage wider participation, it’s time to level the playing field.
Similar tax incentives for retail investors encourage greater participation and ensure that all investors have an equal opportunity to benefit from the potential growth of early-stage companies in which they invest.
The existing incentives available under the Early Stage Innovation Company (ESIC) regime, while commendable, have not been widely used in conjunction with the CSF regime.
Therefore, it is imperative to raise awareness and simplify access to these incentives to maximize their impact.
By aligning the CSF regime with incentives that attract both retail and wholesale investors, we can unleash a wave of investment and support for dynamic founders.
Growing investment with more types of security
Currently, the CSF regime only allows the offering of fully paid-up common stock.
It is a solid foundation, but it is time to strengthen the regime and meet the diverse needs of companies and investors.
Overseas crowdfunding industries have successfully facilitated a wider range of securities types, such as SAFE notes and bond-type instruments.
By following their example, we can make the CSF scheme more attractive to companies that may prefer debt-based financing options to equity rounds.
Allowing the inclusion of additional security types within the CSF regime not only gives companies more flexibility, but also attracts a larger pool of investors.
It enables companies to tailor fundraising strategies to their unique circumstances, making the CSF regime more accessible and attractive to a wide range of companies and lenders.
A continuing concern of CSF investors is the limited ability to sell or transfer shares acquired through the regime.
Unlike stocks listed on established exchanges, CSF stocks are not easily traded or sold. This problem is inhibiting the growth of the CSF market.
To address this concern, minor changes should be made to the existing exemption to increase liquidity for CSF securities.
For example, by enabling limited ownership CSF companies to take advantage of exemptions from the Australian markets licensing regime so that they can serve low-volume markets, we can bridge the gap and provide investors with the ability to easily buy CSF shares. to trade.
Such changes would better align the CSF regime with traditional market practices, allowing investors to easily exit their investments if necessary.
There is no denying the pace at which Australian founders and investors have moved to embrace crowd-sourced financing. And its value has never been clearer, with the sector showing resilience over the past year as other sources of funding dried up.
However, to unlock the full potential of this funding model and foster a vibrant ecosystem, it is time to take bold steps to further improve the current regime.
By improving incentives for businesses and investors, expanding the range of security types and addressing liquidity issues, we can close the gap and solidify Australia’s position as a leader in investment crowdfunding.
Let’s take this opportunity to create a more inclusive and dynamic investment environment that benefits businesses, investors and the Australian economy as a whole.
- Matt Vitale is the co-founder and CEO of Birchal.