By virtue of the fact that governments exist to protect their own, investment in high risk start ups often comes from foreign shores, where investors are not protected by the laws of the land from which the innovation originates. Whilst the government protects the retail investor, the entrepreneur and the local economy in general dies a little with each foreign investment made, with future profits moving off shore and little likelihood of reinvestment in the local economy. But as broad scale equity crowd funding becomes permissible, we will see retained knowledge, profit and investment in the country where innovation originates.
Put simply, for every percent of ownership that is currently sold off overseas, one dollar of every hundred of profit made seeps out of the economy, rather than being retained on shore to reinvest to fund jobs, further innovation, and to improve the greater economic health of the local financial system. If enough equity is sold off to foreign ownership, control can pass from the innovators and founders to overseas parties with little regard for or knowledge of local trade and industry.
The challenge facing many governments is how to open up local investment to the retail sector, broadening the pool of funds available to fund innovation and entrepreneurial ventures, but maintain a cap on the risk exposure to these same unsophisticated investors. At the same time as the governments ponder a solution to their dilemma, little stops investment in start-ups coming from overseas. Whilst it can be rightly argued that foreign investment does get businesses moving, the view is relatively short-term and narrow sighted, as the immediate benefits are quickly outweighed by medium to long term losses.
However, many governments have an option available to them that will see a sizable pool of local investment funding made available for innovation and start ups. Through the change in laws to allow equity crowd funding to be available to a far broader section of the community, governments will release potentially billions of dollars to get the economy moving and thriving from the grass roots levels and upward. The US government recognised two years ago that by making it permissible for equity crowd funding to be come into being, an estimated $300bil would be made available to small business in the first year alone. Whilst most other economies are nowhere as large as that of the USA, across the world governments have recognised relatively similar large pools of funding available to their own economies.
In a post GFC world, governments are increasingly under fiscal pressure to provide to the communities they serve, but in many cases they are required to do so with lesser revenues. With equity crowd funding, governments have a mechanism that takes the onus off them to provide funding for small business and start-ups, and provides them some relief to their balance of payments dilemmas. President Obama has often stated that the JOBS Act will provide funding into sectors to levels that the government could never commit to with any certainty or sustainability, and provide far reaching economic benefits that would have a profound impact on the broader fabric of the US community.
Governments around the world are realising that the best thing for their economic well being is to allow broad based equity crowd funding to become a practice allowed for under a change of laws. The USA is on the verge of giving the green light, with a rolling start well underway. In Australia, the Corporations and Markets Advisory Committee have called for input from industry to get buy in from the sector as to the best framework for equity crowd funding. Many other countries have either just initiated equity crowd funding or are doing the same as Australia and the US, and are preparing the legislation around how to best protect the market whilst not stifling innovation with compliance laws that are too onerous for many start-up ventures.
Broad based equity crowd funding will allow for the core of funding to come from local sources, to then be supplemented by foreign investment. This will see a turn-around in the current situation, and ensure the benefits of innovation remain firmly in the lands that put so much into the development of idea, product and ingenuity.