Budget - short on details, big on promise


The Federal Government has announced that legislation will be enacted to enable crowd sourced equity funding in Australia in the 2015/2016 budget announcement.

Additionally, the Federal Government has provided startup business concessions for employee share option plans (ESOPs) – a welcome relief by delaying the timing of the tax event from the time the ESOP was issued to when the employee actually receives the financial benefit.

However, the details of the relief for startups in Australia to utilise crowd sourced equity funding has been somewhat scant in details. There’s actually no need to summarise:

The Australian Government will provide $7.8 million over four years from 2015-16 to the Australian Securities and Investments Commission (ASIC) to implement and monitor a regulatory framework to facilitate the use of crowd-source equity funding (CSEF), including simplified reporting and disclosure requirements.

CSEF is an emerging form of funding that allows entrepreneurs to raise funds online from a large number of small investors and has the potential to increase funding options available for entrepreneurs to assist in the development of their business.

The road to this announcement effectively began in August 2012 and should this legislation be passed by both houses given bi-partisan support, Australia could have its first equity crowdfunding site by May 2016, if not sooner:

Why is there a need for equity crowdfunding legislation?

Whilst some countries current regulatory environment is less restrictive for companies raising capital – such as Switzerland’s current legislation effectively allowing equity crowdfunding – others are much more restrictive in raising capital via online offerings and require legislative change. In terms of Australia’s progress for equity crowdfunding on an international basis, we are lagging the US, UK, New Zealand, and many parts of Europe.

In Australia’s case, the current legal framework for start-ups to raise capital without becoming a public company and issuing a prospectus generally begins and ends with the “excluded offer” provisions of the Corporations Act. This allows a company to raise up to $2m from 20 retail investors over any twelve month period (“20/12/2 rule”) through personal offers.  Given that the offers must be personal, they cannot be advertised and are therefore very limited in their reach.

The very nature of the “crowd” in crowdfunding and the virtue of being an online medium would extend a start-ups reach to more than 20 investors and beyond the limited network of the founder(s). In fact, it would be expected that the crowd would be greater than 50 non-employee shareholders, which under the current legislation would require the start-up to be a public company. Public company status brings with it the added costs of compliance, which, for start-ups, whose net assets generally are comprised of sweat, are cost prohibitive.

The expectation for equity crowdfunding legislative change is for more relaxed upfront and ongoing compliance obligations than public companies but more than the 20/12/2 rule requires.

This is welcome news, finally democratising capital and allowing all investors to benefit in Australia’s leading startup companies.