The Australian Government’s financial advisory committee, CAMAC, has proposed a new regulatory structure governing the crowd-sourced equity funding model used to kickstart many tech start-ups.
The Corporation and Markets Committee said it “sees the potential” for crowd-sourced funding to kick-start the Australian innovation sector “especially in the crucial early stages of project and product development”.
It partially blamed some start-up failures on a “capital gap” between the limitations of traditional funding sources like bank loans, and the onerous requirements small enterprises need to meet before they go public.
In a report made public yesterday (PDF) – likely to be CAMAC’s last before it falls victim to Coalition budget cuts – the committee has proposed a new category of business entity with subject to regulations that tailored to the early stages of product development.
It wants to see start-ups temporarily recognised as “exempt public companies” which will still be obliged to make a number of disclosures to shareholders, but will be relieved of some of the more onerous reporting requirements associated with larger scale capital raising.
For example, exempt companies may be able to retain voting rights “on the argument that they are the persons with the vision and the skills to make the enterprise successful” despite selling off equity to investors.
Start-ups would be allowed to retain their exempt status for a prescribed period, which CAMAC suggested should be three years or until they raise $5 million.
However, CAMAC also acknowledged that investor confidence will be critical to nurturing a healthy start-up sector.
“Sustainable growth, productivity and competitiveness through [crowd sourced equity funding] are only possible if investors have confidence in investing through that process.”
CAMAC has suggested a cap on entities issuing equity worth more than $2 million in any 12 month period, and on investors investing more that $2500 into any one company, or $10,000 overall, in any 12 month period.
The committee has prompted some urgency from the government in considering its draft regulatory scheme, warning that continuing the status quo is likely to push Australia’s innovators offshore.
“Lack of a supportive local regulatory environment may result in worthwhile Australian entrepreneurs incorporating in other countries, or moving their businesses offshore, to enable their ideas or projects to be funded by the crowd.”