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Slow down, guys: crowdfunding may not be the capital raising answer for start-ups

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There has been much hype about the Crowd-Sourced Funding (CSF) regime finally coming into effect in Australia late 2017. Equally plenty was written about its narrow application to unlisted public companies with gross assets and annual revenue of no more than A$25 million – which incidentally excluded a vast majority of SMEs from accessing the regime.

So now that the CSF regime is to be extended to private companies (from October 2018), how much does this really open the door for SME raisings?

Finding the right source of capital is difficult. You have to be ‘investible’, have a strong vision, know how (and effectively communicate about how) you will execute it, have the right people, and lastly, find the cash to make it happen.

Your investors have to be the right fit. If you are pre-revenue you need risk capital and investors willing to take on that risk profile (i.e. venture capitalists). If you have a proven concept and a working business, you may need expansion capital and investors whose risk/return expectations will leave you in control. VCs, Angels, private equity and high net worths’ will each have their own ideal investee profiles and due diligence requirements.

So how do private companies find these people when they can’t access public markets?

Many hoped the answer would be through a CSF platform – but it seems only if you are willing to play dress up as a public company. The good news is that private companies will be able to raise up to A$5 million per year through the CSF regime (currently capped at A$2 million if relying on the ‘small scale offer’ provisions); and by using a licensed CSF intermediary will have access to a broader audience of potential investors with a range of risk appetites.

Here’s the knotty part about crowdfunding

1. Individual investors will be capped at $10,000 per year – To raise decent funds your share register may get unwieldy. You’ll likely need a crash course in investor relations (and should expect to dedicate a good deal of time to this going forward).

(But on the plus-side CSF investors will be excluded from the count in determining the 50 non-employee shareholder limit for private companies and you’ll get a diversified register).

2. After raising CSF funds, you’ll need to prepare annual financial reports and directors’ reports in accordance with accounting standards (irrespective of your size). – Internal management accounts won’t do. This means more dollars on accounting, and potentially getting your internal control systems up to par to provide the level of input needed. (How well do you currently capture your COGS data)?3. If you want to raise over A$3 million, your accounts must be audited.

3. Your offer will be broadcast to the same audience pool – because high and low risk investors are all thrown in together, the CSF regulatory environment is still aimed at the lowest common denominator. When Government consultation on CSF began in late 2014 the key aim was to assist private businesses to raise capital without drastically increasing costs and compliance burdens. Whilst we may be one step closer I’m not sure this objective has been effectively achieved. Our regulators are very adept at investor protection (and should be heralded for this), but not all investors are equal and there still doesn’t appear to be a way to neatly match experienced or high risk investors with the capital hungry business engines of Australia.

At best, it seems that the CSF door has been left ajar for little brother public companies to join the fray. So if you’re a capital starved private company, don’t get too excited – CSF is not for everyone, and unless you’re ready to start behaving like a public company, pounding the pavement with your private networks and selling your story to ‘sophisticated investors’ may still be your best bet.

Olivia Christensen is a Special Counsel at national commercial law firm Macpherson Kelley. She is an equity capital markets specialist and experienced in both public and private company capital (equity and hybrid) raising.

 

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