Crowdsourcing equity financing has been bubbling around Canberra for a few years now. There have been several bills floated, deferred and then recrafted over this period. However, it finally looks like crowdsourced equity will finally see the light of day.
In a nutshell, crowdsourcing allows a lot of smaller investors to make an investment in return for a future product, or in this case, shares in a company. Companies like Pebble used crowdfunding effectively to pre-sell versions of its original smart watch.
For the new crowdsourced equity regime in Australia, legislation passed the Senate this week allowing it to commence later this year.
Under the rules, unlisted public companies (those ending in Limited rather than Pty Ltd) with a market capitalisation, assets and turnover of less than $25 million can raise up to $5 million via crowdsourced equity.
Mum and dad investors, otherwise known as retail investors, will be able to invest up to A$10,000 into any number of these ventures. This allows them to tap into a market that has historically been restricted to professional or sophisticated investors, otherwise known as wholesale investors.
While making it easier for investors and opportunities to connect is a good thing, there are always going to be unintended consequences. No doubt we will be hearing about the company that raises funds for a good idea only to skip off with the money and leave investors high and dry. Likewise, there are likely to be mum and dad investors (who are not suited to this type of investing) that pour their entire savings into one single speculative punt and end up doing their dough.
Probably the biggest positive that we can see is that new IPOs on the ASX are likely to be more mature companies that have spent a number of years pre-listing developing their technology, project or market using crowdsourced equity.
We just need to see whether Australian retail investors truly have an appetite for higher risk, illiquid investments that will take years to monetise, if they even get that far.