Small businesses crowdfunding change

Perth venture capital firms have welcomed government measures today that will allow small businesses to raise money by crowd-sourcing, but criticised them for not going far enough.

Legislation introduced to parliament today will let unlisted public companies with less than $5 million in assets and turnover to raise $5 million in funds over a year.

Previously, only wealthy investors with a minimum of $2.5 million in assets could participate in equity crowdfunding.

Jeff Broun, the managing director of Perth-based crowd-backed venture capital firm Fat Hen, said the long-awaited legislation would enable members of the public to take equity positions in unlisted Australian companies, just as general investors were already doing in the US, UK, New Zealand, Canada and Germany.

Mr Broun, who is also a director of Sydney-based Crowdfunding Institute of Australia, said while the legislation was a step in the right direction, he believed the $5 million cap on a company’s assets and turnover should be extended.

He said setting the cap at $20 million, or preferably $50 million, in company assets and turnover would allow small to medium businesses to attract more conservative investors that may not be interested in investing in start ups.

“In our opinion, there is a crisis in Australia in the small unlisted company sector,” Mr Broun said.

Increasing the cap would also address a gap in the current private equity market, he said.

Mr Broun said companies with annual revenues bigger than $5 million but smaller than $100 million often couldn’t get enough bank debt to finance projects or growth ambitions.

However, they couldn’t turn to venture capital funds and private equity firms either, as these groups tended to invest from a minimum $10 million threshold, and often mostly into larger companies.

Jack Quigley, chief executive of Perth based real estate crowd funding platform CrowdfundUP, said the legislative changes were a positive step forward, but also a missed opportunity because of their exclusions.

“Overall the new legislation is of limited benefit to crowd funding providers, investors and project sponsors, who will be forced to continue to operate under the existing and outdated legislation, Mr Quigley said.

It’s anticipated small to medium businesses and members of the financial industry will continue to lobby federal government to broaden the scope of the legislation, which is expected to pass early next year.

Small Business Development Corporation Minister Kelly O’Dwyer said the proposed new laws widened the pool of capital businesses could draw from, but also provided protection for mum-and-dad investors.

"While investors will be able to invest an unlimited sum in crowdfunding, there will be a cap of $10,000 per issuer per 12-month period to ensure that mum-and-dad investors are not exposed to excessive risks," she said.

Prominent Perth investor Anthony Grist told Business News he believed the $5 million cap provided useful safeguards for start ups. 

“Five is a nice balance,” he said.

“I think if you gave early stage companies with low governance thresholds more than $5 million, because of the naiveté they may end up crossing the boundaries of what’s appropriate governance. They need time to come up the learning curve of treating investors with the appropriate transparency."