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What is crowd-funding? And why can’t we get the legislation to support it in Australia?


How cool (and efficient) would it be if you could tap Facebook not just to network with your friends but to also raise capital for your startup? Or perhaps LinkedIn? Or even Twitter.

Crowd funding, as it is dubbed, is the funding of a company through an online community, with small investments by individuals. Several crowd funding firms dot the Internet but they can’t really sell shares to raise capital. But it is an option that could soon turn real at least in the U.S.

The United States — that progressive land and global fount of innovation — has already moved on what is a paradigm change in the way companies can raise capital. Lawmakers there have responded quickly to entrepreneurs’ calls to tap modern technology to raise capital and give startups a big boost.

In November, the country’s House of Representatives passed the Entrepreneur Access to Capital Bill that will enable startups to raise capital in novel, and informal, ways. But the legislation has got stalled in the Senate. Also, several changes, or rather restrictions, are being contemplated. Still, the bill’s passing seems assured this year.

Aussie entrepreneurs excited

How cool would it be if Australian entrepreneurs could have similar access to funding?

To get a sense of excitement, and enthusiasm, for crowd funding, Pennam Partners — a diversified investment advisor — jumped the gun and surveyed entrepreneurs, advisors/service providers, investors and others. What emerged was far from surprising.

A high 80% wholeheartedly backed the new fund-raising model, agreeing that crowd funding is a worthwhile alternative avenue for Australian startups to seek seed capital or early stage capital.

The respondents also strongly urged strong regulatory and monitoring measures to protect “crowd funders” and prevent sham funding offers.

A majority of respondents agreed that at least $1 million in capital could be raised while without compromising the integrity and effectiveness of the process, and also keeping compliance costs down.

Crowd funding is in vogue in Australia but it cannot be used by companies to raise capital or sell securities.

Aussie startups are governed by the so-called 20/12/2 rule — entrepreneurs can raise a maximum of $2 million from a maximum of 20 “retail” investors in a rolling 12-month period without the need to meet the arguably burdensome disclosure regime. However, a strict “no general solicitation” rule still applies.

The proposed U.S. bills, broadly speaking, will allow entrepreneurs to raise up to $2 million via crowd funding subject to disclosure of audited annual financials. The law also will put curbs on the amount an individual investor can make in a given year in a give company, the tentative suggestion being the lower of USD10,000 or 10% of annual income.

The U.S. Senate is still working on a final form of the bill but a wider debate on procedures and necessary safeguards is ongoing among global entrepreneurs, investors and the financial community. Still, the new model will likely need to evolve over a period of time as the entire community of stakeholders assesses the many consequences. But one thing is clear — almost everybody wants it and wants it soon.

Will Australian authorities act soon?