The Australian market for crowd-sourced funds is expected to be opened up in the New Year. The Federal government has signaled its interest in grass-roots finance that leverages the Internet and other online channels.
A just-released discussion paper is canvassing feedback from the industry and consumer groups. This paper is available at the Crowd sourced Equity Funding web site. The closing date for submissions is 6th February 2015.
Mathias Cormann, the federal minister for finance, notes that any new crowd-sourced equity funding model needs to be balanced by supporting investment, reduced compliance costs and appropriate levels of investor protection.
Among the trends, the administration’s discussion paper acknowledges that crowd-sourced equity funding offers new sources for start-ups or small-to-medium enterprises.
These channels enable entrepreneurs to raise money from a larger pool of like-minded groups or individual investors.
Globally, crowd-sourcing is increasing small businesses and start-ups’ ability to access funds to develop and take ideas or products to market. This peer-to-peer lending base can complement angel investing or the more traditional venture capital.
Removing barriers to crowd-sourced funds
But officials note that Australia’s current regulatory environment places a barrier to the widespread use of crowd-sourced funding. Other international jurisdictions are far ahead including New Zealand, the US, UK and Canada (Ontario).
These countries have already, or are in the process of, implementing regulatory regimes for crowd-sourced funding.
A similar and appropriate Australian regulatory framework will ensure that policy planners or the industry can respond more readily to the funding needs of innovative but cash-strapped businesses.
Among the domestic barriers, small-to-medium-enterprises face difficulties in accessing debt finance. This often stems from gaps in information between lenders or borrowers. Moreover, debt finance involves being able to service the debt.
Small businesses or start-ups may not have sufficient evidence of past performance or be able to forecast their prospects for long-term success.
“They can face particular challenges accessing credit,” the Crowd sourced Equity Funding report says. “Similarly, lenders may not be willing to bear the cost of obtaining detailed credit-related information to assess the level of risk involved in lending to a smaller business.”
Opening up online options
Moreover, some local banks confirm that they decline approximately twice as many loan applications for start ups as those involving established companies. The start-ups often struggle to obtain finance from lenders because of insufficient security around a possible loan default.
In an online environment, more innovative financing options are emerging. These draw on a “crowd” to expand the base of funding options. These funds are available based on a collective need, business goals, or grass-roots support around an idea or concept. Individual contributions can quickly add to a bigger pool of funds.
The online channels include peer-to-peer lending, rewards-based crowd-funding or equity and debt crowd-funding. These channels may complement the more established financing options such as angel investing or venture capital.
In Australia, a small number of crowd-sourcing operators offer finance for some start-ups. However, existing laws do not support a widespread access to crowd-sourced funds. Instead, services may be available through wholesale investors that leverage a managed investment scheme.
Limited pool of Australian operators
Other services tap into a “small-scale personal offer exemption” or an Australian Securities and Investment Commission “class-order” that may offer relief from certain regulatory requirements.
Australia’s restricted crowd-sourcing channels may suit certain types of companies or investors. These do not open up the broader crowd-sourcing options.
A new regulatory framework, canvassed by the Australian government, seeks to address existing barriers to sourcing a wider pool of Internet-enabled funds.
The planned reforms are contingent on feedback from industry bodies, business advocates, community groups and consumers.
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