Here’s what Australia needs to do next to support startup founders and equity crowdfunding investors

Australia was late to the game when it came to allowing startups to raise capital through crowd-sourced funding. But it grew quickly to become the second largest market per capita by 2021, according to the latest global research.

Five years in, it’s undoubtedly a huge success, with over $240 million invested across 320 successful offers and more than 140,000 individual investments.

Industry regulator ASIC agreed the sector was operating efficiently with an increasing reliance on what it described as a “robust alternative for smaller companies to raise up to $5 million in 12 months with appropriate investor protections.”

And yet, despite its recognition, a chasm remains between Australia and the top performing and longest running UK market.

In 2021 Australians invested the second highest amount through crowd-sourced funding platforms ($2.12 USD), behind the UK ($17.70 USD), according to the research by global thought leader on crowd-sourced funding, Professor of Law and Fulbright Scholar Andrew A. Schwartz.

With the data revealing the potential for Australian CSF to be at least seven times greater than it is today, we need to take seriously how to unlock this opportunity for Australian startups and their backers—beginning with improving incentives, expanding security types, and addressing current liquidity concerns.

 

Improving incentives for companies and investors

To date, wholesale investors have enjoyed lucrative tax incentives for investing in early-stage businesses through an Early Stage Venture Capital Limited Partnership (ESVCLP). Comparable incentives for retail investors are severely lacking. 

To foster a thriving ecosystem and encourage wider participation, it is time to level the playing field. 

Similar tax incentives for retail investors, incentivise greater participation and ensure all investors have equal opportunities to benefit from the potential growth of early-stage companies they invest in.

The existing incentives available under the Early Stage Innovation Company (ESIC) regime, though commendable, have not been widely utilised in conjunction with the CSF regime. 

Therefore, it is imperative to increase awareness and simplify access to these incentives to maximise their impact. 

By aligning the CSF regime with incentives that attract both retail and wholesale investors, we can unleash a wave of investment and support for dynamic founders.

 

Growing investment with more security types

Currently, the CSF regime only allows for the offering of fully-paid ordinary shares. 

It’s a solid foundation, but it’s time to enhance the regime, and cater to the diverse needs of businesses and investors. 

Overseas crowdfunding industries have successfully facilitated a broader range of security types, such as SAFE notes and debenture-like instruments. 

By following their example, we can expand the appeal of the CSF regime to companies that may prefer debt-based financing options over equity rounds.

Allowing the inclusion of additional security types within the CSF regime will not only provide businesses with more flexibility but also attract a wider pool of investors. 

It will enable companies to tailor fundraising strategies to match their unique circumstances, making the CSF regime more accessible and attractive to a diverse array of businesses and backers.

 

Allowing investors to trade CSF shares 

One persistent concern voiced by CSF investors is the limited ability to sell or transfer shares acquired through the regime. 

Unlike shares listed on established exchanges, CSF shares cannot be easily traded or sold. This issue inhibits the growth of the CSF market.

To address this concern, minor amendments to existing relief should be made to enhance liquidity for CSF securities. 

For example, by enabling proprietary limited CSF companies to utilise exemptions from the Australian markets’ licensing regime, so they can operate low volume markets, we can bridge the gap and provide investors with the ability to easily trade CSF shares. 

Such amendments would align the CSF regime more closely with traditional market practices, ensuring investors can readily exit their investments if needed.

 

Conclusion

The pace with which Australian founders and investors have moved to embrace crowd-sourced funding is undeniable. And its value has never been more evident, with the sector demonstrating resilience this past year while other funding sources dried up.

However, to unleash the full potential of this funding model and foster a vibrant ecosystem, the time has come to take bold steps, to further enhance the current regime.

By improving incentives for companies and investors, expanding the range of security types, and addressing liquidity concerns, we can close the gap on the opportunity–and solidify Australia’s position as a leader in investment crowdfunding.

Let’s seize this opportunity to create a more inclusive and dynamic investment environment that benefits businesses, investors, and the Australian economy as a whole.

 

• Matt Vitale is the cofounder & CEO of Birchal.