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Crowdfunding: the threat for bankers

James Eyers (AFR) | March 27, 2013

 

 

While Australia's regulator has warned of the potential pitfalls of equity crowdfunding, the US is set to open its doors. As here, US crowdfunding, including through Kickstarter, has been the pledge and reward type, as equity raising is governed by strict securities laws. This is about to change.

US President Barack Obama's Jumpstart Our Business Startups Act (JOBS Act) establishes a tailor-made legislative regime which seeks to protect investors providing equity to companies over the internet while relieving issuers from strenuous disclosure requirements. The act was passed last April with overwhelming bipartisan support. The Securities and Exchange Commission is still finalising its rules, a necessary step before the law comes into force.

Under the new law, small US businesses will be able to raise up to $US1 million in equity capital in any year by selling shares online without needing to register with the SEC and produce a prospectus, with its attendant costs. Before they can take advantage of this exception, crowdfunding sites will have to register with the US government. A range of investor protections have been included, such as a yearly aggregate limit on the amount each person may invest in projects, linked to net worth or annual income. Project sponsors will have to lodge financial statements for offers greater than $100,000 and audits of financial statements for offerings greater than $500,000.

 

Equity crowdfunding is also gaining momentum in other jurisdictions. In the Netherlands, Symbid offers equity crowdfunding, alongside a pledge model, via a co-operative structure. In Britain, new regulations will allow investors to provide equity directly to small businesses through Crowdcube.

Each jurisdiction that is moving on equity crowdfunding has studied Australia's corporate law, given the Corporations Act has a specific provision - section 708 - that exempts small-scale offerings from strict prospectus requirements. Offerings of $5 million in a 12-month period can be made without a prospectus, as long as 20 investors or fewer participate. Such offerings are made via the Australian Small Scale Offerings Board, facilitated by an ASIC class order made in 2002. In the past seven years, ASSOB has assisted about 176 companies to raise $132 million. For most businesses it is an option of last resort when attempts to borrow from the banks or other sources have failed.

Issuers on ASSOB pay a fee of just less than $5000 for ASSOB legal and accounting staff to prepare streamlined offer documents and put them on the platform. Its regulations require regular reporting by directors on insolvency and lodging of company announcements. Only investors registered with ASSOB can participate in the capital raisings, to ensure rules against solicitation are not breached.

Paul Niederer, ASSOB's chief executive, says nearly 6 per cent of companies that have raised money through ASSOB have gone on to list on a stock exchange, while about 40 per cent have been sold to other companies and 86 per cent are still registered as an entity with ASIC. There have been no incidents of investors being defrauded, he says, and ASSOB passes on any issues with possible director misrepresentations to ASIC to deal with under the existing corporations law.

 

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