i. i) The small scale offering exemption should be replaced with a more lightly regulated Chapter within the Corporations Act.
This is too onerous and an unfair cost imposition on the new industry of CSEF.
Issues with the current exemption include:
1. The exemption as it currently stands allows unlimted Accredited and overseas investors but allows only 20 Un-Accredited investors. As per Q1, CSEF would benefit local Australian communities if introduced.
2. The exemption basically doesn’t allow for public solicitation, as this is only available under certain circumstances within the portal of the offer-board and potentially people with a maximum 1 degree of separation. The crowd in crowdfunding is self enforcing that people beyond a degree of separation can be approached.
3. The exemption as it stands still practically funnels investment ultimately into a Limited (Ltd) company structure with Disclosure Documentation required by all public listed companies. Seed stage and low capital intensive businesses requiring between $20k and $500k – would find this untenable. In effect ruling out CSEF for Issuers unless they have a capital requirement in excess of $500k, which counter-intuitively would mean they would be of the size where conventional Angel investment networks are already operating. Making the CSEF legislation ineffective at freeing up the many small investors and their associated economic activity.
4. The limited success of Intermediaries operating under the exemption should guide future CSEF legislation. The small scale offer board has helped 300 companies in nearly a decade and facilitated $135m in investments through the exemption.
ASSOB being the only entity using this exemption declares an average of only 14 investors in most successful closes. This is correctly called a “small scale offer”. It is not CSEF whereby thousands (a crowd) may wish to participate in ownership of a business or venture.
Comparatively the pledge-based rewards platform Pozible has achieved much higher growth by tapping into the “crowd” in a similar way as CSEF proposes.
In conclusion, the exemption is not the priority because its for “small-scale offers”, where capital requirements would be in excess of $500k and would be accompanied by onerous ongoing governance requirements. That is assuming Sophisticated Investor and General Solicitation rules were also relaxed making it practical to implement.
Nor is it suggested is the current (Pty Ltd) company is a suitable vehicle with restrictions on 50 non-employee shareholders, 20/12 rules etc.
The priority must be to create specific CSEF Legislation
ii) As discussed above a set of new legislation would be preferred that allows crowdfunding instead of small scale offers.
In keeping with the idea of: many people investing small amounts – you would have to remove the Sophisticated Investor requirement. The legislation should include all unsophisticated investors. Otherwise you severely impair the spirit of “crowd” when talking about crowdfunding.
Perhaps investment classes such at the Sophisticated End should be restricted.
The nature of the accommodations should include:
– A lift on the general solicitation rule allowing entities to offer under clear terms to the public that their business idea is for sale under condition of meeting criteria set out by Intermediaries (the marketplace).
Most Australian private businesses would be under the impression they could not generally solicit for investment. It is only possible after all in specific circumstances, like the exemption that ASSOB exploits, like when specifying the type of investor in a portal environment.
In that context, removing the greys and specifics around general solicitation and allowing all Issuers operating under licensed Intermediaries operating under the legislation created for CSEF – to publicly solicit for funds once a Campaign is ‘live’.
– Removing the ban on general solicitation will make advertising in this space more creative – for better or for worse – and that will allow those that do it well to draw more attention and probably funds than someone that does it badly.
Moreover, it becomes a statement for the company soliciting funds about who and how they advertise. Their investor advertising and communication, which under CSEF conditions is much expanded, becomes the “brand” for that business/entity.
If we had “free for all” solicitation in Australia it would probably add more junk mail, but without it we aren’t creating a competitive market for ideas.
– A lift on the number of non-employee shareholders
– A regulatory, licensing and reporting structure for Intermediaries that facilitate CSEF, this structure should include:
o Clear disclosures to investors by Issuers
o Processes that Issuers are required to undertake so that the Intermediaries are minimising risks – specifically of fraud (harm done by others) and
o Processes Investors are required to undertake so that Intermediaries are enforcing limits to investment size (harm done to self) commensurate with that Investor
o Intermediaries should have the capacity to share data and deny service to an individual that is attempting to break an annual cap imposed on investments in CSEF funded ventures.
To conclude, fresh CSEF legislation is required in order to do the market dynamics in such a way that the legislation meaningfully unlocks economic activity from many people, in lots of small capital-requiring businesses.
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