In April last year, President Obama lit the blue touch paper to start the process of getting investment crowd funding into law. With his signature came the first steps of what would bring about massive changes in the world’s largest economy. In fact, it was not only the $300bil that was estimated to jump start the business start-ups in the USA that caught people’s attention, but all over the world economies started to consider how this form of e-commerce could make a change to their economic landscape, all without any impost on the local government.
For most of 2012, the US economy galloped along towards the introduction of investment crowd funding, until the end of the year when, just before the “go live” date, the focus shifted to avoiding the fiscal cliff, and the introduction of investment crowd funding stalled. Seemingly little more happened for much of the first half of 2013, until July 10 when the ban on general solicitation was lifted, allowing companies, hedge funds, and other asset managers to advertise private security offerings to pre-qualified accredited investors – something that had (until then) not been lawful in the USA.
At the time of the lifting of the ban, the rule still needed to pass through the Federal Register to become law, and this was to take 60 days, with many saying this was just a formality involving the adaption of the wording of the law to fit the Federal Register. With this in mind, general solicitation should be allowed any day now, and then we are underway in the US. With this immanent change, the rest of the world is starting to make moves for the implementation of investment crowd funding in their economy.
In the last week, the Australian Corporations and Markets Advisory Committee (CAMAC) released its discussion paper on crowd sourced equity funding (CSEF). They recognise that (internationally) CSEF is receiving increasing attention as an alternative form of corporate fundraising for start‑up or other small to medium companies. To date, some jurisdictions, notably the United States, Italy and New Zealand, have enacted legislation dealing with CSEF (though the US and New Zealand legislation on general CSEF is not yet in force), while some other jurisdictions, such as Canada, France and the United Kingdom, are giving consideration to this form of fundraising.
The CAMAC discussion paper notes that CSEF is already theoretically available in Australia, but subject to compliance by the issuer and the online intermediary with fundraising, licensing and other requirements under the Corporations Act. This paper examines the nature of those requirements and raises for consideration, taking into account approaches in other jurisdictions, whether the Australian provisions should be adjusted in some manner for CSEF.
In considering possible approaches to CSEF in Australia, CAMAC notes that this form of fundraising carries a series of risks for persons providing funds through this medium. While risks may be present in any capital raising process, the central role of the Internet means that the number of persons potentially affected can be significantly greater than for more traditional means of fundraising. There is also the question of the degree of scrutiny of these offerings, and the information to be provided to investors, compared with traditional prospectus or other disclosure requirements.
Another issue concerns the obligations that should rest on the online intermediaries.
The CAMAC discussion paper seeks views on these matters, including:
- Whether CSEF should be regulated in any different manner than any other form of corporate fundraising
- Whether any form of regulatory accommodation for CSEF should be limited to specific situations, such as offers to sophisticated investors, falling well short of general public offers open to all investors, or
- Whether the Australian legislation should ‘cherry pick’ CSEF approaches in some other jurisdictions but within the context of otherwise maintaining the existing regulatory structure, or
- Whether the Australian legislation should regulate the process of CSEF in the same self-contained manner as, say, under the JOBS Act in the USA, which is intended to exhaustively regulate this form of fundraising in that jurisdiction.
The lights have definitely changed from red to amber, and with the green light imminent in the USA, this may just be the catalyst for a global shift in the way small business and start-ups are funded.