New Zealand Equity Crowdfunding 1st Year in Review

New Zealand was the southern hemisphere’s first country to introduce legislation that enabled and promoted equity crowdfunding for all investors.

It has now been 12 months since the first equity crowdfunding campaign successfully raised $700,000 and two platforms granted a licence to operate campaigns on 30 July 2014.

In summary, the first year has been a great success – in terms of the number of campaigns, the success of those campaigns and the broadness of the investor base – and the New Zealand government, regulatory body and industry participants should be applauded.

In one year, $12.4 million was successfully raised in over 21 New Zealand companies, with two campaigns reaching the regulated maximum limit of $2 million and another six reaching their own, lower self imposed maximum capital raise targets.

With a population of 4.5 million people, it was an outstanding first year for equity crowdfunding in New Zealand.

In fact, the first equity crowdfunding campaign successfully raised $700,000 in 13 days (Renaissance Brewing).

The Equity Crowdfunding Campaigns

There has been a high level of success in terms of equity campaigns – 78% of completed campaigns - which is very positive given the nature of startups and the historic difficulty in raising capital.

However, there were six campaigns that have failed to reach their minimum target and therefore investors were returned their commitment and there are five campaigns presently open (two of which have already reached their minimum investment target and for these purposes, are considered “successful” campaigns).

The average successful capital raise was $590,000 on a pre-money valuation of $3.85 million, equating to an average of 14% equity to crowd investors in the underlying business.

But with equity crowdfunding, there are minimum capital raising amounts (for a campaign to be successful) and a maximum capital raising amount (under NZ law, this is a maximum of $2 million), and the successful campaigns offered between 9% and 18% equity to crowd investors. Only seven campaigns reached their maximum, albeit equating to one-third of successful campaigns, but the average successful campaign reached 100% more than their minimum equity raise. That is, there was generally a wide range between the minimum and maximum capital amounts, with the average successful campaign targeting between a minimum of $280,000 and a maximum of $790,000, or 2.8 times their minimum amounts.

The campaigns that were unsuccessful generally exhibited higher average minimum amounts ($420,000 v $280,000) and higher maximum amounts ($1,050,000 v $790,000) but the pre-money valuation differential between successful and unsuccessful campaigns was negligible. Note that this is from a small sample size of six unsuccessful campaigns.

Industry wise, the technology companies represented the most number of campaigns with 43% whilst the food/beverage raised the most money in New Zealand with $3.8 million despite only 17% of campaigns being companies in this industry.

Given that equity crowdfunding in New Zealand is only one year in, it was interesting to note that there was the first ‘follow-on’ investment. PledgeMe, the equity crowdfunding platform, successfully raised $100,000 in its own company via a crowdfunding campaign at a $600,000 pre-money valuation in 2014 and has reached its minimum target of $250,000 in its second raise that is currently open, at a $2.1 million valuation. Equity crowdfunding investors in 2014 could perhaps increase the valuation of their initial investment by three times.

 

The Platforms

The licencing of two equity crowdfunding platforms, Snowball Effect and Pledgeme, in July 2014 preceded the licencing of another five platforms during the year to July 2015. It has been these early movers, Snowball Effect and Pledgeme that have raised the most amount of funds and had the most number of campaigns, respectively. Equitise and CrowdCube NZ are the other two platforms to successfully raise some monies via their sites. The other three platforms, MyAngelInvestment, Liftoff NZ and Propellar have yet to initiate a campaign at the time of writing having only been licenced in 2015.

Snowball Effect had the first New Zealand successful equity crowdfunding campaign with Renaissance Brewing raising its maximum of $700,000 in just 13 days. In fact, Snowball Effect also had the two largest equity crowdfunding campaigns (both reaching their maximums of $2 million) out of the 10 campaigns on its platform during the year. It successfully raised nearly $8.5m during the year. 

PledgeMe had the more than half the New Zealand equity crowdfunding campaigns on its platform during the year with 16 out of 30 campaigns and also the most success in terms of the number of campaigns. The equity raisings were all less than $1 million as were the three other successful campaigns on the Equitise and CrowdCube NZ platforms.

 

The Investors

A total of 3,503 investors pledged money to equity crowdfunding platforms in New Zealand’s first full year. Although our statistics do not cover those investors who invested in more than one campaign, important information can be gleaned from New Zealand’s newest type of investor.

Despite some early controversy regarding no investor caps for retail investors in equity crowdfunding, of the 3,503 investors, the average commitment on any campaign was $4,300 and the successful campaigns averaged slightly less, at $4,100 per campaign. This indicates that investors are placing smaller amounts in relatively large numbers – most likely as the New Zealand government had hoped for equity crowdfunding. Whether this suggests that investors have read the disclaimers and risk disclosures and are investing smaller amounts, or whether this indicates, as is most likely the case, that people can simply make their own decisions.

Of the 3,503 total investors, 3,194 have committed monies to successful campaigns, whilst 224 have had their money returned as the company failed to reach their minimum (currently 85 investors have committed monies to campaigns that have yet to reach their minimum or close).

The average number of investors per successful campaign was 152, with the outliers of Collect and TRNZ Digital Travel Guides raising their minimum from only 33 and 30 investors respectively, while the highest investor numbers were seen in the campaigns of Invivo and Punakaiki Fund with 439 and 392 investors respectively (note that these two campaigns were also the two largest campaigns in terms of capital raised).

 

The Valuations

As noted, the successful campaign’s business had an average pre-money valuation of $3.85 million and offered 14% equity in their businesses to crowd investors.

The highest valuation for a business was the Mexican restaurant chain, Mad Group, with nearly $10 million as its pre-money valuation, however it failed to reach its minimum capital target of $750,000 and the $458,900 pledged was returned to the crowd investors. The lowest pre-money valuation was actually the first round of funding in PledgeMe with a pre-money valuation of $600,000, and a $50,000/ $100,000 minimum / maximum capital raise target.

In terms of equity offered to crowd investors, the average minimum and maximum capital raise would provide between 9% and 18%. But the range was high with as low as 2% offered at a minimum capital raise and as high as 56% for the maximum capital raise.

 

Summary

With such a promising start, it will be interesting to see how the New Zealand equity crowdfunding market develops over the next twelve months with seven competing platforms, increased confidence in this form of equity raising and the general international growth in equity crowdfunding expected to be over 100% per annum for 2015/2016.

 

Calling For Submissions - Australian Treasury

The Government confirmed its commitment to introducing a legislative framework to facilitate crowd-sourced equity funding (CSEF). The consultation paper which the Government has released outlines key elements of the Government's CSEF framework for public companies and seeks feedback on whether the CSEF framework should be extended to proprietary companies.

http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2015/Facilitating-crowd-sourced-equity-funding

CrowdReady will be making a submission before the deadline on 31 August 2015. Please contact us for your views.

Key Features of the proposed Australian Equity Crowdfunding Framework:

 

Issuers

Issuers must be incorporated as a public company in Australia.

Limited to certain small enterprises that have not raised funds under existing public offer arrangements.

Relief from certain public company compliance costs would be available to newly registered or converted public companies. Reliefs include: 

    exemptions from disclosing entity rules; 

    allowing annual reports to be only provided online; 

    exemption from holding an annual general meeting (AGM); and 

    exemptions from the need to appoint an auditor and have financial accounts audited, subject to a cap of $1 million raised from CSEF or under a disclosure exemption.

Exemptions will be available for a period of up to five years, subject to annual turnover and gross assets thresholds of $5 million (excepting the audit exemption).

Issuer may raise up to $5 million in any 12‑month period, inclusive of any raisings under the small scale offerings exception but excluding funds raised under existing prospectus exemptions for wholesale investors.

Permitted securities are one class of fully paid ordinary shares per CSEF offer. All shares in a particular CSEF offer must have the same price, terms and conditions.

Reduced disclosure requirements, including a tailored CSEF disclosure document. Required disclosures will relate to: 

    facts about the company and its structure, including financial statements; 

    facts about the CSEF raising; and 

    mandatory risk warnings.

 

Intermediaries

Must hold an Australian Financial Services Licence.

Intermediaries would be responsible for monitoring compliance for investments made via their platform.

Must undertake prescribed checks on the issuer.

Must provide generic risk warnings to investors.

No restrictions on fee structures; however, fees paid by an issuer must be disclosed.

Permitted to invest in issuers using their platform; however, details of any investments must be disclosed.

Prohibition on the provision of investment advice and lending to CSEF investors.

 

Investors

Investment caps for retail investors of:

    $10,000 per offer per 12‑month period; and

    $25,000 in aggregate CSEF investment per 12‑month period, self‑certified by investors.

Signature of risk acknowledgement statements prior to investment, including that:

    investing in early stage companies is risky and the investor may lose the entirety of their investment;

    investors may not be able to sell their shares;

    the value of the investment may be diluted over time; and

    investors have complied with the investor caps.

Unconditional right to withdraw for 5 days after accepting offer.

Additional rights in relation to material adverse changes during the offer period.

 

Berries by Astrid

 

SWE Special: Twig and…. And/or Smoother than a baby’s…

Hej frå Sverige! Another day, another sparkling Stockholm sunrise to invigorate the crowdfunding juices. We’ve been in the land of the rising Elk, navigating our way around civil decency (and maybe the archipelago). God dammit it’s so polite here you feel like apologising to yourself for getting in your own way. Sweden has been out in front on the equity crowdfunding scene for quite a while. The exact regulations and mechanisms are still a little murky and with a few days still to go on the campaign, we’ve decided to run it anyway as it looks the goods.

 

CampaignBerries by Astrid

PlatformFundedByMe (Stockholm)

Campaign style: Equity

Capital pledged: €244k (capital maximum €100k)

Equity offered: 10.72%

 

What is it?

Berries by Astrid.

Berries in the form of lovely fresh smoothies made with Swedish yoghurt and organic ingredients including indigenous Nordic delights such as the blueberry and the…wait for it (Rear Admiral) Seabuckthorn. Astrid in the form of a colon cancer researcher with a doctoral degree. Smart lady that she is, whilst simultaneously engaged in an entrepreneurship course and a doctorate, the idea to create a stand-alone mobile smoothie vending machine was born.

From what we can gather they utilise a ‘bag-in-box’ method – similar to our regional favourite, the silver chook – presumably with individually cryovac’d smoothies in single use plastic packages ready to be ripped open and dispatched by the machine (although we could find no specific mention of this – probably why its patented and don’t tell anyone how they do it).

Fully wired, you order your smoothie on the touchscreen, pay for it via an app on the smart phone and hey presto, seabuckthorn spouting forth before your very eyes.

 

What did investors get for their money?

10.72% of common shares at a pre-money valuation of €832k.

 

Why was it successful?

The idea simmered, PhD completed, knocked back a position at Stanford and went it alone, culminating in the first prototype, external funding and the founding of the company mid-2010.

Astrid certainly put her money and all of herself on the line to drive this through – working since 2009 with no salary. From founding to the successful 2015 crowdfunding raise, it certainly seems she has paid her dues.

The campaign itself simply, elegantly and professionally conveys the story with a beautifully shot video to cap it all off. The elegant simplicity of the design, implementation and roll-out is amply demonstrated in the pitch material as are the partnerships and prototyping that have already gone into the product.

The valuation isn’t outrageous either, unlike some other campaigns we’ve seen, and the path to market well defined. All in all a very slick campaign laid out in a very user friendly manner that’s as easy to digest as one of those supremely sippable smoothies.

 

The wrap

Who quits a full-time job after schlepping away for 5 years doing a PhD and living below the poverty line? A crazy person. A brilliant person. And in reality, probably a bit of both.

That’s the kind of daring and risk taking we like to see in entrepreneurs (similar to James Dyson and his vacuum empire). This isn’t a company just looking for a hand-out. From prototypes to partnerships, market testing, product development and patenting this all adds up to a very mature and confident pitch.

One note about the offering however – these represent a ~10% stake holding with 1/10 voting ordinary shares meaning little rights other than holding on tight and hoping not to be diluted out pre-exit. Astrid seems like a lovely lady though so finger crossed, it’ll be alright on the night.

Well that’s it from us as we head into the long run home via silicon valley and the birthplace of grunge. We’ll be reporting for duty from HQ next installment so stay tuned for some updates on the lessons learned and the chances spurned as we reflect on the season that was. Until then, check the CrowdReadywebsite, join our mailing list and email us.

 

Global Chronology of Equity Crowdfunding

We have previously delved into the black box that is defining equity crowdfunding and proposed a simple definition based on three criteria. We noted there are myriad mechanisms and models applicable in each unique jurisdiction to allow for equity crowdfunding, but at a minimum, “true” equity crowdfunding must satisfy the criteria that it be instigated by anyone, open to all, advertised publicly through an online portal offering equity-style financial reward.

In this article we have applied this criteria globally to present a chronology of “true” equity crowdfunding uptake thus far with a portent of what may be to come.

In the beginning, there was Switzerland - which has always been so cool they don’t need no extra rules for equity crowdfunding. It was a relatively slow start for other equity crowdfunding countries on a global scale as evidenced by the fact that only Sweden and Italy came on board in the three years since the Netherlands boldly led the pack out in 2011. Much of this reticence undoubtedly came about as a result of mass confusion on the part of the regulators.

As the evolution of equity crowdfunding was an unknown quantity, critical mass and/or peer pressure from other countries appears to be the likely factors in the opening up of regulations to equity crowdfunding – as evidenced by the drive from an inter-connected Europe to progress the necessary legislative changes. But there was also an understanding that equity crowdfunding offers an opportunity for matching startups in the difficult early capital raising phase with significant numbers of unaccredited investors for offerings that were previously the domain of professional investors.

That is not to say that it was all stagnant on the equity crowdfunding front in the interceding period. In a previous article we opined about a form of quasi-equity crowdfunding which in effect functions in much the same way as traditional investment banking and venture capital, accessible to the same people – institutional, sophisticated, high net worth etc.

The only difference is the proliferation of online portals or platforms which act either solely as advertising platforms for private company capital raises or as a sort of Tinder for investor syndicates. This is the model adopted by many countries – including the US, UK and Australia – to allow for quasi equity crowdfunding but under the accredited investor model with strict guidelines and regulations until such time as legislation democratises capital flow for all investors.

As you can see in the timeline, momentum was slow to build but once the cat was truly out of the bag, there has been a veritable stampede amongst the legislatures of the world. Twelve countries have thus far loosened up their regulations allowing for true equity crowdfunding from early 2014 to present.

In particular, we’ve witnessed a particularly rampant start to 2015, with eight countries signing on the dottted line, notably the US with Title IV of the JOBS Act finally coming on line, and the entry of the first Asian countries onto the crowd sourced equity funding scene. We’re also hearing murmurings from the ASEAN bloc of other countries imminently following suit.

This is surely the tip of the iceberg. Figures to hand indicate that equity crowdfunding experienced tremendous growth to date, despite often strict and arcane regulatory environments.

We note that these figures are based on all types of equity crowdfunding (including our quasi- definition) but if you consider that the eight countries that have come online with true crowd sourced equity funding - since the latest 2014 figures were published - have a cumulative population well over half a billion, the latent potential for equity crowdfunding raises for 2015 and beyond is staggering..

As we see equity crowdfunding legislation being liberalised across the world, it is likely that experiences from the success of equity crowdfunding will lead to further reform. Indeed, we anticipate the regulation to become more aligned initially on a regional basis, allowing for greater freedom and alignment in startup fundraising, and truly harnessing the free movement of capital.

So, to our friends across the ditch in New Zealand, who are out in front of us again. In just over 10 months since regulatory approval, the burgeoning equity crowdfunding scene there has raised $9.5m+ in 18 successful equity campaigns. With a population about a fifth the size of ours, and an economy based on Hobbits, our regional counterparts are once again inexplicably excelling in a space where Aussie startups should be equally thriving.


JustPark

UK Special: Come on Baby, Park My Car

Well ‘allo guv’nor ‘ere we are in ol’ Inglun towne where a good 20% of equity raises are now being done through crowdfunding platforms. This week we take a short break from our regular series to bring you a few special features from our international trade mission. In this UK Special Edition we dust off the vestiges of the Newcastle Brown from the evening after the night before and feature the present UK equity crowdfunding record holder and seriously disruptive app revolutionising the way you – in the illustrious words of the late great Tony Greig – park your car [thick Afrikaans accent implied]. Wivvou’ furver’ ado, may we pressen’ yer Lordship wiv’ a place to park ‘is buggy?


Campaign: JustPark

Platform: Crowdcube (Exeter/London)

Campaign style: Direct equity

Capital raised: £3.7m (370% funded)

Equity offered: 15.79%


What is it?

JustPark is a seriously disruptive app that connects parking space owners – be they householders, pubs, hotels, churches (‘allo Vicar!), or clubs – with irate motorists who want to get out of the car.

It’s a bloody good idea.

It’s amazing just how many cordoned off and ‘private’ car parks pop up when you’re driving round in expanding circles, losing your mind wondering if you’re ever going to find a place to park the bleeding car to go pick up your seersucker suit at the drycleaners.

It’s such a good idea, BMW’s venture capital arm chucked in £250k and have even installed the app onboard new Minis scooting around Old Blighty. Once you choose a space on the iPhone app or your car’s dashboard and pay for it you’re sent a map directly to it. Brilliant.


What did investors get for their money?

15.61% equity of ordinary D shares held in trust by an appointed nominee with voting but no pre-emption rights (read some of our excellent, if we do say so ourselves, upcoming educational pieces where we start to break down the major considerations of crowdfunding and crowdinvesting).


Why was it successful?

Let’s start with the founder – Anthony Eskinazi. Represented Great Britain in chess from 11-18 years of age, maths major in the UK and US, taught himself to code, took up a job at Deloitte to quit and start the original JustPark site at age 23. Seems an average Joe.

The company has also been trading since 2006 with over 8 years experience at the point of launching the campaign, over 650 000 registered drivers and 25 000 property owners already signed up to the site. Chuck in some heavyweight VC backing from BMW and a top European tech startup backer, Index Ventures, and this all starts to add up to something pretty significant.

To labour an already brimming point, JustPark hit the maximum EU limit of £3.7m (€5m) in just one month, a full month ahead of schedule - at it’s peak, garnering 2.5 investments a minute!

Of course the campaign was top notch as well. This is a fully-fledged and professional pitch with all elements – from identifying the problem, solution, market size, users etc. – absolutely on point. The video is extremely slick and professionally produced and absolutely nailed the disruptive potential of the business to leave the viewer with little doubt that this could be the Airbnb or Uber for finding a carpark.


The wrap

Whoa - some pretty heavyweight business right here! In the words of Montell Jordan, this is how we do it. This is a very, very exciting proposition with an enormous market and huge potential for global growth.

As an investor, one look at the offering should tell you this. The original raise was £1m for a 4.76% equity stake which gives a £20m pre-money company valuation. If you recall our Valuing a Startup article, this isn’t a seed, start-up or even early growth company. We suggested that a company on large valuations like this should be well and truly in the growth phase, with momentum, market acceptance, profitability and expansion plans. JustPark nails these and more with a large and growing customer base (650k+ users), high profile partnerships with Barclay’s Premier League, Novotel, BMW and others, and first-mover advantage with global expansion potential.

You can see why with such runs on the board they’d be unlikely to give up a huge chunk of the business. It is important to note the terms of the offering though for future investors. The shares on offer in this case are Ordinary D shares with voting but no pre-emption rights. There are implications but it’s too much to go into right here, although it is something we think is important to know – for both investors and entrepreneurs - and will expand upon in future articles.


Well that’s it from us signing off on our first European update. As always, check the CrowdReady website, join our mailing list and email us and tell us how much you love equity crowdfunding. Til anon.


Country and Western:

Two types of equity crowdfunding


True equity crowdfunding

As we alluded to briefly last time, there’s equity crowdfunding and then there’s equity crowdfunding. Equity crowdfunding models may all look the same cosmetically but they definitely don’t bark the same. The most liberal model, and the path many countries have already headed down, is the ‘true’ equity crowdfunding model we talk about, allowing great flexibility in capital raising across a diverse suite of investors including the retail-level mums and dads that characterise the vast majority of the global population. This looks and feels pretty much the same as the tried and tested rewards-based crowdfunding, but instead of a FlowHive, a Swatch Cube or an Oculus Rift, you receive shares in a company – and often, as a very effective sweetener, you get a few rewards thrown in as well!

At the other end of the equity crowdfunding scale is the effectively rebranded venture capital (VC)/investment banking model where private company capital raising is pitched towards the same VCs, banking and angel groups, albeit now on shiny new front ends. But, in essence, the investment flow to entrepreneurs is the basically the same – less liberal.


Over regulation?

From a regulatory perspective, retail-level investors were often excluded from this type of investment from a hegemonic ‘father knows best’ bureaucratic perspective. This pervasive paradigm patronisingly assumes that most people can’t make informed decisions on their own, and is generally reflective of the approach to investment regulation. This heavy-handed top-down over-regulation, purportedly in the public interest, is all well and good but comes with a concomitant stifling of the creativity, adventure and daring that results in cutting-edge innovation.

Of course, there needs to be investor protection and education – and the availability of quality entrepreneur businesses that have been historically the domain of professional investors. At CrowdReady, we’re advocating for decentralisation and liberalising capital flow through empowerment of individuals to make their own choices generally, especially when it comes to their own hard earned.


Democratisation of Capital

Equity crowdfunding provides a very transparent medium of engagement in this regard. And regardless, the immediacy and longevity of electronic media and commerce nowadays has inherent checks and balances as it puts every aspect of the entrepreneur and their deal in the public domain. It is up to the investor to decide, firstly, whether there is sufficient disclosure, and secondly, if what is disclosed represents value for money. The state’s role should thus be limited to providing appropriate guidance to facilitate sound decision making on the investors behalf, and assistance in the prosecution of any fraudulent cases on the entrepreneur’s side of the deal.

So what then are the implications for investors and entrepreneurs in the brave new world of liberalised capital and freer access to start up funding that ‘true’ equity crowdfunding brings? Broadly, there is a binary distinction in equity crowdfunding models – investor-led and entrepreneur-led. In simple terms:


Investor-led (let the experts decide)

Investor-led equity crowdfunding is based on the ‘traditional’ investment banking model and is typically operated by venture capitalists, angels or intermediaries that negotiate with the entrepreneur on funding terms, the novel twist being these deals are then promoted generally to accredited investors only through a (often subscription-only) crowdfunding platform (website).

In general, entrepreneurs will be optimistic with regards to their own valuations and forecasts; VCs, angels and their ilk, pessimistic. The end result is generally that the entrepreneur will end up exchanging more equity than they were willing to give up. Examples of this type of crowdfunding proliferated in the US e.g. AngelList and EquityNet, prior to the passing of Title IV of the JOBS Act which will allow for retail crowdfunding. Many of the current investor-led platforms will likely open the opportunities to retail investors as legislation allows. However, the costs associated with these transactions will remain similar and are generally incurred via an intermediary vehicle with management fees, performance fees (i.e. carried interest) and upfront (platform) fees.


Entrepreneur-led (let the crowd decide)

Entrepreneur-led equity crowdfunding is the ‘purer’ form and most recognisably crowdfunding as it shares similarities with the rewards model. The equity offers tend to be pitched towards retail investors, but increasingly companies are using this model to fast-track capital raises and it is not uncommon for retail investors to invest on equal terms alongside accredited and institutional investors. This is the target model much of the world is already pursuing and we in Australia are aspiring to.

This model places the onus on entrepreneurs to set valuations and determine the terms of the offering to crowd investors. As there is generally no downward pressure on the entrepreneur to exercise cautious ambition - apart from a great motivator: failure - there can be a temptation to overvalue. However, the system is self-regulating as the online nature of crowdfunding campaigns means that the relevant capital raising details are laid bare for the investors to weigh up the relative merits of the offering. We foresee the entrepreneur-led platforms having more involvement in the valuation process over time, including ensuring further investor protection in the terms of the equity raise. Cost wise, this type of equity crowdfunding is generally lower than investor-led deals and incurred mainly via success-based (platform) fees plus ancillary service charges.


Towards a definition of ‘true’ equity crowdfunding

At present, confusion reigns in defining equity crowdfunding given the proliferation of “equity crowdfunding” platforms in jurisdictions where there is no enacted legislation specifically targeting this issue. However, in essence, equity crowdfunding is about democratising capital flows and as such to our thinking is fairly easy to define based on the three criteria below:

  1. Democratise capital – a campaign created by anyone and open for all investors (over the age of 18);
  2. Drawing a crowd - publicly advertised via an online crowdfunding platform; and
  3. Delivering equity - offering equity-style financial interest.

Beyond this there are an almost infinite number of permutations and combinations in implementation mechanisms and term sheet clauses but essentially the three tenets above are the key features of what “true” equity crowdfunding is. There may be restrictions on the amount raised by equity crowdfunding campaigns and/or investor caps (maximum amount an investor can make) and even the disclosure requirements by Issuers. However, if legislation exists around any of these, it implies that there has been jurisdictional consideration and oversight and therefore we consider this to be true equity crowdfunding: open to all.

Whether a campaign is entrepreneur-led or investor-led will inevitably be determined by the crowds’ needs (assisted or unassisted) but we do foresee some shifting sands as the equity crowdfunding eco-system matures.

  

What is the expectation for Australia?

At the moment we are working very much within the current legislative requirements on raising capital, with equity crowdfunding allowed under an investor-led model but only for wholesale, sophisticated and professional investors (accredited investors) with a cap of 20 retail investors.

‘True’ equity crowdfunding is still on hold and will require a legislative change to allow entrepreneurs to raise money from an unlimited number of non-accredited investors while limiting the compliance, regulatory and cost burdens of public company structures. Until then we’ll continue to keep an eye on the global ranch so that we’re all ahead of the pack when the horse bolts from the stable on equity crowdfunding here in Australia.


Editors note: apologies to Blues Brothers’ fans for the reference to ‘country and western’ in the era-defining movie - https://www.youtube.com/watch?v=cSZfUnCK5qk


Renaissance Brewing and Yeastie Boys


Part IV: A Tale of Two Ales

We’re now halfway through our series on crowdfunding campaign successes and hope you’re as giddy with excitement as we are at the prospects of the enormous potential of emerging crowd sourced equity funding for startups and SMEs. In the first half of the series we profiled three rewards-based campaigns, with the last example, the Oculus Rift gaming headset, illustrating perfectly that sometimes some equity in the hand may be worth a couple thousand headsets in the bush.

The focus for the final leg of our article series will be squarely on equity crowdfunding, with two NZ features and one from the UK. We would have liked to profile some home-grown talent on this but given that Australia is lagging behind the eight-ball on this (and many other) front(s), we’ll likely have to wait until the first half of 2016 for all the bureaucratic head-nodding to come to fruition. To kick off our crowd sourced equity funding features, it’s over to those mean cuzzies across the ditch with a seriously choice offering worth throwing some hard-earned merino fleece at.


Campaign: Renaissance Brewing / Yeastie Boys

Platform: Snowball Effect (Renaissance) / PledgeMe (Yeastie)

Campaign type: Equity, with a rewards chaser

Capital raised: NZ$700k (Renaissance) / NZ$500k (Yeastie)

Equity stake: 12.28% (Renaissance) / 12.5% (Yeastie)


What is it?

We’ve profiled 2 in 1 as they’re basically the same thing. Both are breweries targeting the rapidly burgeoning mustachioed and bearded local and international craft beer market and needed cash to expand so they took advantage of NZ’s recent world-leading equity crowdfunding regulations and sold part of the business. Marlborough-based Renaissance used the cash to increase capacity and infrastructure to continue to build local and export markets. Invercargill’s Yeastie Boys did more or less the same but are building on a strong and established UK/EU following and using the crowdfunding cash to push harder into their northern Hemisphere markets.


What did investors get for their money?

Drunk. Plus their own slice of a brewery – how good’s that? Both companies also kick in some sweeteners, or rather bitterners, in the form of free beer, discounts, invitations to brewing days and voting rights. Check Renaissance’s campaign page or Yeastie Boys’ for the nitty gritty.


Why was it successful?

Who doesn’t like beer? No-one in NZ it seems. Thirsty Kiwis ponied up $500k in less than 30 minutes for the Boys and kicked in $700k in less than 2 weeks for Renaissance. It is a useful comparison however if you look at the campaigns side by side. Yeastie Boys got to their maximum overfunding target in half an hour while it took 576 times as long for Renaissance to reach theirs. Why? Eyeball both campaign pages and the difference sticks out like….something fairly prominent.

Renaissance plays it pretty straight – this is what we already do well, this is what we want to do, this is why we need your cash, these are the responsible people (barring the circus escapee with the twirly ‘stache) who will be treating your money oh so wisely and making you a modest return.

In contrast, with a name like Yeastie Boys, the campaign was never going to be dull. Insert some peppy talk, unpronounceable Gaelic and badly drawn profile pics, they’ve even made the boring numbers bits seems exciting. From current performance and global notoriety, through growth, marketing and projected revenues, they spin a very compelling narrative as to why you should invest and get rich and drunk with the Boys in the short to medium term. Whilst you may not market a VC firm like this, given their product they nailed the pitch to the post and hit the ball out of the park in terms of campaigns. One to watch.


The wrap

Interestingly, both of these campaigns threw in some rewards to get people on board and funding equity in the companies. This is a great approach, more so for companies with tangible products, but could also work for innovative services-based enterprises. Who doesn’t love a free lunch, or beer? So if you’re considering going down the equity route, why not think about some tailored rewards to go along with a little slice of your baby? Could be the difference between hitting your target or going back to flipping burgers at a truck stop.


That wraps up the first in our profiles of the regional equity crowdfunding scene. Tune in next time for the CrowdReady roadshow as we hit the hustings on our international trade mission. In the meantime read up at the CrowdReady website and email us if you’ve got a pressing urge to get in touch, or just to say hi…we like people. Until next time, bottoms up!


Global legislation on equity crowdfunding

(aka the crowd moves in mysterious ways)

Whilst donation- and rewards-based crowdfunding are tipped to continue the steady growth observed in recent years, the nascent equity- and loans-based sectors are tipped to go ballistic in 2015 and continue the exponential growth exhibited in the past few years. This is predicated on the fact that more and more countries are coming on line with what we term ‘true’ equity crowdfunding - defined as private company investment available to all investors - and not just professional/institutional/accredited investors as was the case under erstwhile regulatory regimes.

Although Australia has recently (almost) announced via (two lines in) the 2015/16 Federal Budget that equity crowdfunding will be enabled (see here) – in a structure as yet unknown, at a time yet to be announced, in a galaxy…. we thought it appropriate to cast the net a bit wider and have a look at the world landscape in terms of countries that are far more advanced on equity crowdfunding legislation than Australia. (NB also correlates generally very positively with gender equality, paid parental leave, recycling, emissions reduction, anti-bogan proliferation treaty metrics.)

 
 

So where does all of this place Australia? Apart from well behind New Zealand… again (we REALLY need to start taking this seriously!). On the regulatory front, CrowdReady considers this as imminent equity crowdfunding. Funnily enough (not ha ha, but strangely), there was no announcement in the Federal Budget about what the equity crowdfunding legislation would look like.

Will the structure of Australian equity crowdfunding be as per the Corporations and Markets Advisory Committee (CAMAC) report recommendations or per the current New Zealand model (read: copy and paste NZ for Australia)? Surely, there’s been sufficient industry feedback (82 published submissions) on the two structures? The fact that the Federal Budget has allocated the Australian Securities and Investments Commission (ASIC) an equity crowdfunding budget for the next four years ought to be encouraging, so we’ll forge on assuming it’s all systems go… imminently, in the fullness of time, at the appropriate juncture.

In the meantime it’s a wait and see here at CrowdReady although we do have our own thoughts (see Treasury submission) and expectations on timing (see timeline).

 

Oculus Rift

 

Part III: A Rift in Time

Welcome back to Part III in our series on crowdfunding successes. In our first two articles we profiled that beekeeping game-changer the Flow Hive, and the savvy little colour oracle, the SwatchMate Cube. Staying on a tech theme we go outside Aus for the first time to set up the backend of our series which highlights why it may be useful to go beyond rewards-based crowdfunding and into the brave new world of crowd sourced equity funding. Without further ado, we present the short history of the company that used to be a company and is now part of Facebook.

 

Campaign: Oculus Rift (US)

Platform: Kickstarter (US)

Campaign type: Rewards

Capital raised: $2.4m

 

What is it?

Despite sounding like the Transformer that was adopted out at birth, Oculus Rift is the next-gen virtual reality headset that has so much latent potential Facebook bought it for a lazy USD$2 billion. We’re not sure what Facebook plans to do with it but in the words of its’ illustrious developers, the Rift is “the first truly immersive virtual reality headset for video games”. Fair enough. In other words it allows gamers full 360 degree head tracking, stereoscopic 3D view and, reading between the lines, is like totally whacked out awesome!

 

What did donors get for their money?

Anything from a virtual pash ($10) to a VIP all-expenses paid trip out to Long Beach CA to hang out with the Oculus gang and get your game on ($5,000). Most of the rewards are some version of the headset including a DIY kit you can assemble (read: mangle) yourself. Full list here.

 

Why was it successful?

Designed by gamers for gamers, which is why we here in the CrowdReady cowshed are still struggling to understand the finer points, but all reports are that the Rift experience is so immersive you can literally see yourself changing your mind. In an $80b+ annual industry, this is big. It’s…..disruptive. It’s not surprising that the biggest crowdfunding campaign of all time is a video game, the Star Citizen behemoth, and has raised over $74m to date and counting. The Rift is a groundbreaking product in a huge market, with an equally huge and loyal following. Basically all they had to do with the pitch was to show up and not vomit on camera and the sexiness of the Rift did the rest.

Tip: if you’re a gamer and have an awesome idea that other gamers will think is awesome too, crowdfunding its development and sell the IP to a big tech company call CrowdReady and we’ll help you out with that.

This leads us very nicely into why you might want to consider crowd sourced equity funding – both as an entrepreneur, but in this highly-publicised case, especially relevant to the investor.

Imagine instead of a crappy beta version of a now obsolete headset, your $300 instead bought equity in the company. A company that later scored a cool two billion in the Facebook buyout. Estimates for return on investment are around 100-200x which makes your $300 worth about $45k if we take the midpoint of the ROI. Not life-changing by any means, but would certainly facilitate one mother of a hangover.

This is not to suggest that this offer was ever on the table, despite the outpouring of sour grapes when Oculus Rift hit paydirt. However, this amply illustrates the fact that equity crowdfunding has the potential to revolutionise investment and open up deals with huge earnings potential to the retail-level investor which were hitherto available only to the pointy-shoed small-batch gin swilling set in investment banks and VC firms. As with all investing, buyer beware and any liberalisation of equity crowdfunding is likely to have modest caps to protect the gullible, but nevertheless represents a huge opportunity for ventures and younger and savvy retail investors to get together and get jiggy.

 

The wrap

Well that rounds up part three in our series and hopefully gets the grey matter swirling in the direction of the rewards- versus equity-based crowdfunding argument. Thanks for coming and again avail yourself of the shameless plug for the CrowdReady website for pithy insights, links and articles and email us if you’re feeling increasingly toey on the crowdfunding front. Until next time, hope the crowds are beating down your door and throwing cash at you quicker than you can get the intern to pick it up.

 

 

SwatchMate Cube - Cyantifically Proven

 

Part II: Cyantifically proven

Welcome back to Part II in our series profiling some of the most interesting crowdfunding (CF) campaigns we’ve come across to date. Last time we brought you the unbridled runaway success of the hinterland honey hippies behind the biggest revolution in the honey game since some old geyser left a crock of the sticky stuff out in the sun too long and had a rip roaring time on the fruits of the ferment. This week we have a horse of a different colour from three erstwhile electronic engineering students from Melbourne Uni with an idea so good they got real good grades. And backing from the prestigious Melbourne Accelerator program. Enter the Cube…

 

Campaign name: SwatchMate Color Capturing Cube (AUS)

PlatformKickstarter (US)

Campaign type: Rewards

Capital raised: USD$100k (182% funded)

 

What is it?

Thankfully not some strangely unaerodynamic intergalactic spaceship carrying high-grade sociopathic androgynous humanoids intent on taking over Dandenong. 

Although sounding like a curiously co-branded product from a joint venture with a Swiss watch company, the Cube is an award-winning pocket-sized colour-matching dynamo. 

Clearly marketed towards creatives with the very schmick design and layout of the campaign, the Cube is a real-life Microsoft Paint eyedropper you can actually hold up to stuff. 

Quite simply, find a colour you like, snug the ol’ Cube over the top, press a button and the Cube will sample the colour, match it with a mind-bendingly large reference library and output the colour match to your smart phone or even straight in to Photoshop. Sweet! 

Saves you having to jackhammer a piece of wall off a Melbourne alleyway and lug it in to the 16 year old behind the Bunnings paint desk. We only wished we come across it several weeks ago before spending several hundred man hours trying to get all our logos and banners to look the same.

 

What did donors get for their money?

Anything from a shout out on the SwatchMate website to an…..ahem…..‘Ninja’ Cube (don’t mention Ninja!!!) which is like a regular Cube but in suave black and not at all some sham device that has never existed. For a full list of the rewards offered see the Kickstarter campaign page here.

 

Why was it successful?

No single feature of the SwatchMate Cube campaign stands out as being responsible for its success. 

In fact, responsible is probably the standout feature of the whole enterprise. One look at the background, credentials, and photos of the creators and one can’t help but be flooded with cockle-warming instant reassurance that the project will not only get off the ground, but that your faith and support will be handsomely rewarded with a beautiful, perfectly functioning piece of art.

And who wouldn’t want to jump up off their bar stool and prance around the local streets taking colour samples of every neighbourhood moggie after watching the campaign video? 

The whole layout of the campaign is very user friendly with eyecatching design, useful explanations and, based on a present RRP of $179.95, amazing value rewards to sweeten the deal. As we talk about in subsequent articles and other info-pieces on our website, many of the standout features of a good startup are already evident in this project from the team, through market testing, prototypes, traction and a swag of awards to prove it, the SwatchMate founders are on to a good thing and know how to present as such. Now to get our hands on one and do up those brochures we’ve been putting off……

 

The wrap

The steady success of the SwatchMate team proves that it doesn’t have to be all guns blazing bajillion % overfunding all singing all dancing hands in the air with crowdfunding. They asked for a modest amount to do what they needed to do, received ~180% of this, tinkered some more and added a few features and turned out a beautifully sculpted and functional piece. It all goes to illustrate that a little tempering of enthusiasm, the setting of realistic goals and delivering on your promises can build the potential for sustainable long-term business propositions.

 

 

Well that’s all for the second second installment in our series unpicking the workings of CF winners. Thanks again for reading and email us if you’re feeling bullish about tapping into the power of the crowd to turn your dreams into reality. See you next time when we bring you more of the incisive insight that has CrowdReady leading the pack in independent comment and analysis on all things crowdfunding in Australia.

 

Understanding crowdfunding

Crowd goes boom!

No we’re not talking about that amazing tune from Jazzy Jeff and the Fresh Prince - we’re talking Crowdfunding. Crowdfunding has been touted as the biggest game changer in venture financing ideas since Acme Corporation backed Wile-E-Coyote in his dogged quest for a roadrunner roast dinner.

Year-on-year since 2012, crowdfunding in all its guises has grown a remarkable 100+% per annum with forecasts of similarly strong growth heading towards the back half of the decade and beyond.

Taking a step back, crowdfunding comes in a number of different guises nominally differentiated along two lines: non-financial return and financial return.

The first two are generally not for financial benefit to the pledger. The latter two – equity and lending (peer-to-peer, and increasingly, peer-to-business) – have an expectation of financial reward. Read on for a brief recap of each type of crowdfunding style and their main points of difference.

The arrows below step it out in pleasing aesthetics, I'm sure you'll agree:

 
 

Donation-based crowdfunding:

Aren’t you a nice person? This form of crowdfunding provides donations to charities and personal causes via crowdfunding platforms, and are often tax deductible. These could be direct to the charity to be used as they see fit or more commonly donations to support individual projects run by a charity (like act.), or for purely personal causes such as our favourite campaign, Midlife Crisis Squirrel Tattoo (link). Although we’re left feeling a little daft as we can’t differentiate between a squirrel with or without a midlife crisis. They both look like squirrels. Then again, what is the colour of wind?

Rewards-based crowdfunding:

By now you’ve probably had enough of this guff from us vis-à-vis our website profiles and features of shockingly successful campaigns. Just to whet that little whistle again, these campaigns generally offer a tiered set of rewards commensurate with dollar value to sweeten the stumping up of cash by the donor. Most commonly used as a pre-sales vehicle for new and funky products which is of enormous potential value to the entrepreneur in demonstrating traction and market interest.

Lending-based crowdfunding:

Often called peer-to-peer (P2P) and peer-to-business (P2B) lending, these are loans provided to either people or businesses for interest and repayment over a period of time. This has developed exponentially in the past few years but some providers are missing the “peer” part (namely, raising from financial institutions) and then onlending. Some are predicting this to be the biggest growth area in crowdfunding - the cash is easier to get a hold of if you need something urgent, like a new Sony, and the interest rates are competitive. And everyone wants a new Sony.

Equity-based crowdfunding:

Equity crowdfunding (ECF) is the new(ish) frontier.

Have an idea? Put a lot of hard work and effort into bashing it into shape? Need money to get over that hurdle and into a functioning startup?

You no longer need to shoehorn yourself into that suit you save for cousins’ weddings and present uptown at an investment bank only to be shot down by a gang of marauding millionaires high on the trappings of success. Sure you’ll need a business plan, pitch deck, constituent documents and all the things an investor (and business) needs, but now raising capital is pitched at your friends. And your friends’ friends. And their friends’ friends.

So, slap on the Dunlop Volleys, slick down that small-batch mo’ that’s trying to escape from your face, get your other fixie-riding mates in and shoot a cool and informative video plying your wares and put it up on the interweb to share and let the crowd power you. Then give ‘em a bit of your company in return. All in it together. Sweet as bro’.

Or is it?

Turns out there’s equity crowdfunding and then there’s equity crowdfunding.

There’s a bunch of legalese associated with just what types of ECF are allowed in each respective jurisdiction. The most liberal category of ECF (such as in NZ and the UK) is the all-in model whereby ordinary mum and dad (the so-called ‘retail’) investors can purchase equity directly in the private company.  At the other end of the scale (which is Australia), ECF is available, but generally only to high net worth ‘accredited’ investors or, as in our case, a mix of ‘sophisticated’ investors and a maximum of 20 ‘retail’ (mum and dad) investors for each private company. Then there are many shades and permutations of this including managed funds, unit trusts, syndicates etc.

We’re ultimately headed towards market liberalisation and the opening up of private company financing to retail-level investors so we consider that the “Holy Grail” of ECF for the time being so for our purposes we define ‘true’ ECF as available to all investors, not just accredited individuals.

Real estate crowdfunding:

Yeah this is a thing too – we think it’s lending, but it may be equity, or something else altogether. Really though, we’ve got no idea where it fits in so forget we mentioned it.

 

A growing industry

 

 
 

Figures from the latest Massolution 2015 Crowdfunding Industry Report published 31 March 2015 into the global crowdfunding industry are predicting big things for 2015 and beyond. Since 2012, the total industry has grown over 100% per annum and tipped to break the $30b mark this calendar year. Whilst rewards- and donation-based crowdfunding are showing steady growth through the 2015 forecasts, the real growth area in crowdfunding is in the financial reward sectors (lending and equity) which are tipped to continue the meteoric growth rates we’ve observed to date (167% for 2014 alone) to account for over 80% of the expected $34.4b global industry by year’s end.

No chump change, equity and loan crowdfunding are set to seriously disrupt traditional financing models and give the angels and VCs a run for their money – and in the best-case scenario, bring in these institutional and sophisticated investors alongside the mums and dads to fast-track startup and small business financing.

 

Well that’s it for now. We hope we’ve provided some grist for the ideas mill and stay tuned next time when we look beyond our borders and see what’s going on in the rest of the world – where equity crowdfunding is actually happening.

 

The Federal Budget - Equity Crowdfunding in Australia

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.

 

Valuing a Startup - Indicative Guide

Any entrepreneur needs to determine its startup business valuation at some point in time. A valuation is required to issue employee shares, raise money for your business or just for a sense of worth.

There are many different ways to value a company, whether as a mature, listed company or as a startup venture. The latter, is more subjective as there is generally no reliable financial history. It has traditionally come down to a negotiation between the investor and entrepreneur based on the funding needs and market potential of the business. 

In equity crowdfunding, this lengthy negotiation process is now a one-way street. It is the entrepreneur who will decide the valuation of the business, the funding requirements and the equity to be issued to new crowd investors. 

It is therefore important that entrepreneurs understand how to value a startup business and strike a balance on the fine line between providing good value to entice investors whilst preserving enough equity to ensure just rewards for their efforts.

The following diagram should provide some guidance in terms of valuation but each business is different and realistic financial forecasts will still be required:

Each stage of the business lifecycle from an entrepreneur’s initial vision to market acceptance entails different levels of risk to the potential investor and therefore different valuations.

But there are factors that an equity crowdfunding investor will look towards in placing a value on the entrepreneur's business. An investor is quite a simple creature with two facets: greed and fear. Maximise the reward and mitigate the fear. Here's how you should critically assess your business prior to determining a valuation:

 
CrowdReady Newsletter 2_increasing startup valuation.png
 

Entrepreneurs will note that the above attributes will be assessed and addressed within a business plan. All business plans will have financial forecasts, with reasonable and justified assumptions. These financial cashflow forecasts will be the basis of a startups business – using those future cashflows to justify a value today.

Equity crowdfunding has many advantages for entrepreneurs and investors alike, through the democratisation of capital. The value of any business is dictated by the agreement on price by a willing buyer and a willing seller. In equity crowdfunding, the seller is the entrepreneur and the willingness of the investor will become readily apparent when the campaign is launched. 

Equity crowdfunding puts the onus for valuation squarely on the entrepreneur, so getting it right first time is crucial not only to attracting initial funding, but to maximise successful outcomes for everyone involved.

 

The Big Honey Hunt

FLOWHIVE

Part I: The Big Honey Hunt

INDIEGOGO

CAPITAL RAISED: $12.2 million

      What is it?

Easily the highest grossing Australian crowdfunding campaign and comfortably in the top 10 all-time globally, the FlowHive is an exemplar of the power of the crowd to support inventive ideas. 

Designed by father and son team Stuart and Cedar Anderson from northern NSW, the FlowHive promises to revolutionise bee keeping with an ingenious self-tapping system to extract honey from hives without smoke, spacesuits and stings. 

The rest of the world seems to agree, pitching in a mere 174 times of the modest $70,000 goal bringing the total to $12.2 million.

What did donors get for their money?

Sticky. 

The tiered rewards systems caters for novices to experienced apiarists (beekeepers, not monkeys as the name might suggest) with rewards ranging from a postcard and an e-cuddle for $30 to the full box and dice for $600 (minus bees of course which are apparently a bit of a liability for the posties). 

For full details on the crowdfunding campaign and rewards like postcards, a little bit of honey, or the whole sweet hog, Indiegogo’s campaign page is here.

Why was it successful?

Relatable. Practical. Tangible. 

We’ve all eaten honey. We’ve all been stung by bees or know someone who has. 

The idea is so good that the only people oblivious to its potential appear to be its inventors. The pitch was also pretty spot on. The traditional style of beekeeping is dangerous, labour intensive, time sapping, messy and undoubtedly unpleasant, and is the preserve of the patient or the certifiably insane. 

Enter Flow Hive – crack, tap, collect honey. No mess, no smoke, no anaphylactic shock. And the campaign video and infographics are all crackers. 

The concept is so simple and straightforward it’s a surprise to learn it took 10 years to develop and even more surprising that no-one else beat them to it.

 

CrowdReady Submission

CrowdReady made its submission on the proposed crowd sourced equity funding structure in Australia. Please click here for the CrowdReady CSEF Public Consultation Process submission.

There have been indications that legislation allowing equity crowdfunding in Australia is expected to be introduced in the second half of 2015.

 

Calling for Submissions

The Department of Treasury has called upon submissions (click here) by 6 February 2015 on the framework for crowd sourced equity funding in Australia. Namely, there are three approaches that are to be considered:

  1. The CAMAC CSEF Report with refinements
  2. The New Zealand equity crowdfunding regime
  3. Status quo

CrowdReady will be making a submission on its suggested framework to ensure a sustainable and trusted eco-system for crowd sourced equity funding in Australia.

Please contact us if you have any suggestions. 

 

Financial System Inquiry Report

CrowdReady is pleased to see today's (7 December 2014) Financial System Inquiry Final Report recommending the Government facilitate equity crowdfunding in Australia. In essence, it has recommended the key findings in the CAMAC's report to be implemented promptly, echoing concerns from industry stakeholders that Australia is lagging behind international jurisdictions. 

http://fsi.gov.au/publications/final-report/chapter-3/crowdfunding/

Please see below for further information on crowd sourced equity funding in Australia.

 

Crowd Sourced Equity Funding (CSEF) in Australia

Simply put, equity crowdfunding is currently not supported in Australia. The regulatory framework for raising capital for start ups from a large number of small investors is cost prohibitive. However, the Corporations and and Market Advisory Committee released their report on the recommended changes to facilitate this form of crowdfunding: CAMAC's CSEF report.

The CSEF Report has prompted the Federal Government to consider, through the Department of Treasury, the findings of the report and how it may be implemented in Australia. At this stage, it is currently looking towards further industry submissions prior to the likely inclusion of CSEF in Australia in 2015.

CrowdReady intends to keep investors, issuers (entrepreneurs) and intermediaries abreast of its development and provide updates that are appropriate and relevant. In addition, we are interested in hearing from you.

 

CSEF Report Quick Summary

CAMAC's Report provides the regulatory blueprint for Crowd Sourced Equity Funding in Australia.

It proposes the establishment of a new corporate entity: the exempt public company. As the name suggests, it is a public company but reduces the up front and ongoing disclosure requirements of public companies. CAMAC also proposes a template disclosure document for issuing shares. 

There are three parts to the facilitation of crowd sourced equity funding in Australia: the Investors; the Issuer (the entrepreneur's exempt public company) and the Intermediary (crowdfunding platform provider). The main recommendations are as follows:

Investors:

  • no more than $2,500 in any crowdfunded venture; and
  • no more than $10,000 in all crowdfunded ventures in any 12 month period

And then there are the risk disclosures, AML / CTF checks and general investment provisions.

Issuers:

  • become an exempt public company (reduced compliance requirements as opposed to public companies) or public company;
  • offer new shares in the company – recommended to be only one class of shares (namely, ordinary shares);
  • do not exceed the issuer cap of $2 million in any twelve month period;
  • comply with disclosure requirements. This is quite extensive and will be difficult for most Issuers to conduct independently;
  • adhere to controls on advertising (basically, ensuring no misleading or deceptive statements are made and referring potential investors to the intermediary platform); 
  • do not lend to crowd investors to acquire its shares; and 
  • notify any material adverse change concerning the issuer. 

Intermediaries

  • should be appropriately licensed (AFSL) and comply with the various obligations attached to that licence;
  • conduct limited due diligence checks on Issuers; 
  • provide a generic risk disclosure statement to crowd investors (recommendation that this be a standard template disclosure across intermediaries);
  • check compliance with investor caps in some instances; 
  • provide communication facilities between issuers and investors; 
  • have, and disclose information about, dispute resolution procedures and indemnity insurance; and
  • disclose the fees they charge.

For further background, please see the article below.

 

Crowd Sourced Equity Funding: Australia's Achilles Heel

Crowdfunding is not new or innovative.

 

The Illiad

In 1713, Alexander Pope’s English translation of Homer’s The Illiad was essentially crowdsourced from 575 subscribers, each receiving an acknowledgement in the book. Further, a plaque for the Statue of Liberty in 1885 raised $102,600 from over 120,000 people, most receiving a replica of the statue in return.

But it has been the advent and proliferation of internet platform providers, such as Kickstarter, Indiegogo and Australia’s Pozible, and perhaps a cultural change among contributors, that has seen a paradigm shift in crowdfunding into a $16.2 billion industry (and with 112% expected growth to $34.4 billion in 2015). 

Crowdfunding is essentially raising funds from a large number of people (“crowd”) to deliver on a project, product or a business.

It is not surprising that crowdfunding (including crowd sourced equity funding) is expected to develop into a $96b industry by 2025, or 1.8 times the current venture capital industry. And it is the raising of monies for a business via shareholding through crowdfunding platforms that has prompted a regulatory response.

The current legal framework in Australia 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, which allow 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.

The very nature of the “crowd” in crowdfunding would lend itself to more than 20 investors and to people the start-up knows and doesn’t know. In fact, it would be expected that the crowd would be greater than 50 non-employee shareholders, which 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 Odyssey

The journey of the regulation of crowd sourced equity funding (“CSEF”) in Australia started in August 2012, when ASIC released a general warning to intermediaries regarding rewards-based crowdfunding potentially coming under the provisions of the Corporations Act. It created a level of uncertainty that has yet to be resolved, but prompted an independent review as part of the Federal Government’s national digital economic strategy.

Whilst crowdfunding, in the form of rewards and donation-based contributions, has been growing at 524% compound annual growth rate from 2009-2012, only recently have countries initiated the framework for CSEF. The USA, Canada, the United Kingdom and Italy have all put forward their own regulatory overlay, but it was with New Zealand’s model that our Corporations and Markets Advisory Committee (“CAMAC”) became most enamoured.

Perhaps equity crowdfunding is Helen of Troy? The most beautiful option for start-ups in terms of filling their funding gap which has been taken to our across sea rivals – substitute New Zealand for Turkey and Australia for Greece?

Whilst not advocating a war with our trans-Tasman rivals, we should begrudgingly respect their ability to note CSEF’s potential, take the initiative and bring it to their shores. And quickly. Australia now lags behind New Zealand (and many other developed nations) in developing and implementing a workable legislative framework for CSEF.

As one of its last rites, the report by the now defunct CAMAC in May 2014 was a welcome response, but we ought look to the far eastern states of Australia, the North and South Islands, for inspiration about how we can effectively implement crowdfunding regulation.

CAMAC’s final report on CSEF provided a detailed regulatory blueprint for the operation of soliciting small financial contributions from a large number of people.

The basis of the report was to determine whether CSEF should be facilitated in Australia – yes – and if so, do the existing laws facilitate it – no – and then finally, “the preferred policy options to introduce a regulatory regime specifically designed for the CSEF”.

CSEF includes three key participants – the Issuers (start ups / companies seeking to raise equity); the Intermediaries (the internet platform providers); and the Investors (the crowd).

The regulatory framework-balancing act submitted by CAMAC was to provide a more efficient means to raise capital for (start-up) Issuers, the roles and responsibilities of the Intermediary and the protection of the Investors. All this, whilst trying to limit major Corporations Act changes. The report was substantially well considered but will inevitably require legislative changes to facilitate CSEF in Australia.

Whilst the current Managed Investments Act could facilitate CSEF in Australia, CAMAC dismissed this possibility as being unattractive to crowd investors and not commercially feasible. Whilst there is some doubt about this premise in the eyes of the writer, the disconnect of a fund overlay between crowd investors and the issuers may be an impediment for investors. And it is the investors that will make or break crowdfunding in any of its forms. It has not, however, stopped one Australian entity from structuring its platform through an intermediated trust, albeit for wholesale investors only.

To relieve start-ups seeking funding from a mass market of some of the compliance and reporting costs associated with public companies, CAMAC proposes the establishment of ‘exempt public companies’. Combined with a templated ‘crowdfunding disclosure statement' for investors to compare and contrast each Issuer’s offering, this overlay is aimed at striking the balance between Investor protection, Intermediary responsibilities and Issuer disclosure and compliance.

  

The Trojan Horse?

 So as not to speak ill of the dead, CAMAC’s submission was a well thought out and productive endeavor, outlining the requirements on Investors, Intermediaries and Issuers (with emphasis on changes to Issuers and Intermediaries). However, there is a substantial amount of cherry picking from other international jurisdiction regulatory requirements, with Investor protection and conservatism the underlying factors. CAMAC has certainly leaned towards greater disclosure and risk mitigation as a whole than most jurisdictions (UK aside), with Investor caps and Issuer disclosure being potentially the major impediments to an efficient crowd sourced equity funding model in Australia.

Issuer Disclosure

 The state of play for Issuers is more moderate upfront disclosure requirements than a public company issuing a prospectus. However, there are more ongoing disclosure requirements required than raising under the 20/12/2 rule. The main elements recommended by CAMAC include that Issuers:

  • become an exempt public company (reduced compliance requirements as opposed to public companies) or public company;
  • offer new shares in the company – recommended to be only one class of shares (namely, ordinary shares);
  • do not exceed the issuer cap of $2 million in any twelve month period;
  • comply with disclosure requirements. This is quite extensive and will be difficult for most Issuers to conduct independently;
  • adhere to controls on advertising (basically, ensuring no misleading or deceptive statements are made and referring potential investors to the intermediary platform);
  • do not lend to crowd investors to acquire its shares; and
  • notify any material adverse change concerning the issuer. 

In addition to the above, there are the normal public company disclosures to shareholders upon a successful crowdfunding campaign, subject to a few exemptions. Exempt public companies have certain obligations removed including: appointing auditor; half year financial reporting; continuous disclosure; and remuneration reporting; or significantly modified, such as shareholder reporting and the directors’ report.

Intermediary Responsibilities

Whilst intermediaries may be disappointed to come under the Australian Financial Services Licensing (“AFSL”) regime, it is an important element to ensure that intermediaries have the financial, compliance, IT and human resource capabilities to operate a crowd sourced equity funding platform. There are due diligence requirements, however these could be considered light as they relate to the Issuer and not the business or business plan.

  • should be appropriately licensed (AFSL) and comply with the various obligations attached to that licence;
  • conduct limited due diligence checks on Issuers;
  • provide a generic risk disclosure statement to crowd investors (recommendation that this be a standard template disclosure across intermediaries);
  • check compliance with investor caps in some instances;
  • provide communication facilities between issuers and investors;
  • have, and disclose information about, dispute resolution procedures and indemnity insurance; and
  • disclose the fees they charge.

Investor Protection

From an investor perspective, it is currently proposed that there be no major changes excepting the following:

1.     investor limits on CSEF platforms of $2,500 per Issuer and $10,000 total in any one year; and

2.     increased risk acknowledgement reflecting the lower Issuer disclosure requirements and the high risk nature of the investments

Unfortunately, the proposed investor limits do preclude friends of the Issuer investing greater amounts which, along with family, tend to be the major contributors to crowdfunding campaigns.

As with any regulatory overlay, there will be those that disagree with the onerous nature of the framework. Issuers may express concern that the initial and ongoing regulatory requirements of exempt public companies will be a financial and time consuming compliance burden. Intermediaries that were hoping to be a ‘facilitator’ will be somewhat taken aback by the AFSL, and additional financial, human resource and compliance requirements. Investors may feel aggrieved at the additional risk, investor caps (especially if the Issuer is well known to the Investor), disclosure and regulatory overlay to invest, or may feel there is not enough information about the Issuer to make an informed decision. But that’s the essence of any regulatory overlay – finding the right balance – rather than allowing a CSEF Trojan Horse.  We would prefer not to see this opportunity go the way of recent aborted start up assistance packages, such as Commercialisation Australia.

 

Give me a place to stand and I will move the earth

There are a number of issues that may be further investigated and changed by the Federal Government prior to bringing CSEF legislation through parliament.

Recent developments in the introduction of CSEF legislation in Australia have indicated a potential start date at July 2015 or perhaps even as late as July 2016. There appears to be bi-partisan support for CSEF in Australia, but the devil is in the detail.

Further consultations with industry have commenced, which is a positive (and roundtables were initially intended as part of the CAMAC review but were not progressed), but a start date extending out to 2016 would be detrimental especially given the cutbacks to a number of industry assistance programs to small business: the Entrepreneurs Industry Package not really assisting in this area despite its intended purpose.

One would suggest that with a 2016 start date, making it four years since the first real dialogue began in Australia about CSEF, and the fact that the CAMAC report recommends substantial parts of the New Zealand CSEF model be adopted, Australian Issuers may seek to raise money across the Tasman rather than in Australia until we get ourselves sorted.

Apart from timing concerns, other issues include revisiting the investor contribution cap issues, especially in relation to those that are “connected” with an Issuer, such as family and friends. Given that some industry statistics show that 50% of a start-ups capital is raised from friends and family, 25% from people one connection away and the other 25% from third parties/not connected), you will need either of both of a lot of friends or a large family. The limit of $10,000 may also need to be reviewed to allow for greater diversification by investors – the typical venture capital fund makes contributions to up to 20 portfolio companies (with a reasoned expectation that most will fail but that a couple will outperform significantly).

There may need to be further accommodations to Issuers as reasonable expectations of up to $5,000 for out-of-pocket expenses could ensue under the current CAMAC recommendations. These will include legal fees, crowd ready advisory fees and Issuer due diligence – not a small amount for a start up and with no guarantee of successfully raising money.

The CAMAC suggestion that Intermediaries look towards providing a secondary market appears flawed given the costs, ability to provide reasonable market information and that there are less than ten Australian Market Licences that have been issued by ASIC since its inception.

Overall though, the CAMAC report, with a few amendments, is an excellent initial blueprint for CSEF in Australia and a tremendous legacy.  May CAMAC rest in peace.

And while Australia has been discussing their response to Helen of Troy, New Zealand has already started enjoying the fruits of their labour. The Kiwis have already implemented their own CSEF legislation and, at the date this article was written, had issued two crowdfunding licences under their equivalent of the AFSL regime.

 

Each man delights in the work that suits him best

The online crowd sourced equity funding model is a relatively new industry for the raising of capital in Australia. As with any new market, investor protection, disclosure and intermediary capabilities have been the focus thus far. The $96 billion question is whether this new market, assuming we overcome the regulatory hurdles, will have the demand, trust, quality and returns to build a sustainable industry over the long term and assist in the start-up funding gap?

 

Jon Spensley, Founder of CrowdReady, jon@crowdready.com.au

Chris Mee, Principal at CNM Legal, www.cnmlegal.com.au