The Australian fintech industry is growing at a rapid pace as evidenced by both the investment into the sector, US$675 million last year, and the number of Australian fintech companies standing at 579, growing from less than 100 in 2014, according to KPMG.
With the new equity crowdfunding laws recently approved, there is now a massive opportunity for innovative and growth companies to raise much needed capital.
The new crowdfunding laws have been warmly welcomed by the Australian start-up and fintech sector.
Yes, we are late to the party, but if we look forward and ignore the reasons why it has taken the Australian government so long to get this legislation drafted and approved, there’s a lot Australian companies and investors can look forward to, based upon what has transpired in other markets like New Zealand, the UK and the US.
So what is equity crowdfunding, and how does it work?
Equity crowdfunding enables a group of individuals (the crowd) to invest in start-ups or early-stage growth businesses.
In return, investors receive part-ownership (equity) in the business. In contrast, other types of crowdfunding models such as Kickstarter give you non-financial rewards for crowdfunding, such as the company’s products.
Previously, the regulatory overlay meant early stage investing was limited to people that could prove $2.5 million of assets or $250,000 of income. Now everyone has the opportunity to handpick and invest in start-ups, early-stage and growth-stage businesses.
This innovative type of funding has recently been enabled in Australia by the Crowd-sourced Funding Act 2017. It means that any unlisted public companies with annual turnover or gross assets of up to $25 million will be able advertise their business plans on licensed crowdfunding portals, and raise up to $5 million a year to carry them out.
The government has indicated it will be soon extended to proprietary limited companies.
Overseas success: from alternative to the mainstream
As seen from the successful operation of equity crowdfunding overseas, this disruption to the way firms can raise finance is an exciting one. Globally, equity crowdfunding was used to raise US$2.5 billion in 2015.
In the UK alone, the equity crowdfunding market grew by an astonishing 295 per cent in 2015, according to the University Cambridge Centre for Alternative Financing and Nesta.
Then, in 2016, 31 campaigns raised more than £1 million each. Over in the US, the enactment of the Jumpstart Our Business Startups (JOBS) Act 2012 has seen the equity crowdfunding market flourish, with US$1.2 billion raised in 2015.
It is fair to say that in these major overseas markets, equity crowdfunding is transitioning from an alternative form of finance to a mainstream one. According to a report by Massolution, equity crowdfunding models may surpass venture capital models by 2020.
A report published last year by Goldman Sachs labelled equity crowdfunding as “potentially the most disruptive of all the new models of finance”.
Equity crowdfunding won’t be for everyone, but it will definitely appeal to savvy investors who understand that much of the value has already been extracted from companies by the time of their initial public offering.
Equity crowdfunding will provide those investors with a genuine opportunity to get in earlier in the life of the company, potentially magnifying any return several years later upon exit.
That said, investing in equity crowdfunding isn’t for the faint-hearted. By design, the intention of these changes is to enable higher risk ventures to raise equity with less onerous disclosure and on-going reporting.
So, with increased risk, there is a higher chance of failure. Invest for fun. But don’t invest more than you can afford to lose. The beauty is that retail investors can invest as little as $50, and up to $10,000 in each company.
Ben Bucknell is the chief executive of OnMarket.