Federal government encouraged to free up crowd funding
A quick glance at local crowd-sourced funding site Pozible will find hundreds of hopeful arts and media-related projects seeking benefaction. There’s Dan Ilic’s “A Rational Fear”, which this week attracted more than 700 supporters to pledge more than $50,000 (the project’s target) by Wednesday night for the creation of a “10-week season of digital comedy to fill the void of political satire in this country”. Of those initial sponsors, nearly two-thirds pledged less than $100.
Ilic’s success in raising funds is the latest in thousands of projects that have now raised some $20 million on the site. The largest included live-action game “Patient 0” ($244,000), New Matilda magazine relaunch ($175,838), movies Tango Underpants ($107,004) and Gayby Baby ($104,756), and charity event “The Ride: East Coast” ($105,380).
Crowd-sourced funding is an umbrella term to describe raising small amounts of money from a large number of people through a web-based platform, normally for endeavours that don’t fit banks’ strict lending requirements. Within this, there are four main categories: donation-based funding, reward-based funding (offered by platforms such as Pozible and Kickstarter), peer-to-peer lending (connecting borrowers and lenders online) and equity crowd funding.
The latter two are based on the idea of financial reward – investors put in their funds in return for equity, dividends and/or interest. It is this area that has attracted attention from policymakers worldwide as a means of fostering innovation and encouraging start-ups, in a traditional funding environment still suffering lingering after-effects of the global financial crisis. But it has also attracted attention for the risks it can pose to investors.
In Australia, crowd funding has revolved mainly around donation or reward-based funding, in which supporters receive free goods or services in return for giving money. Westpac’s recent $5 million investment in new peer-to-peer project SocietyOne has also brought attention to the P2P market, with speculation it could in future provide competition to traditional bank lending.
But now the attention is on local regulations that inhibit the development of local equity crowd-funding opportunities. Communications Minister and former entrepreneur Malcolm Turnbull recently wrote on his blog: “Crowd funding has become an increasingly popular way of promoting financing for innovative projects, allowing start-ups and rapidly growing companies to access diversified sources of capital … however, regulatory arrangements in Australia are not particularly tailored to this type of capital raising. The government is determined to see if we can match the regulatory environment that’s present in the US, here in Australia.”
The federal government is expecting a report from the Corporations and Markets Advisory Committee next month on what reforms might be needed to encourage equity crowd funding, but also to ensure sufficient protections for investors from the risk of default.
Pozible co-founder Rick Chen can testify to the rapidly expanding appetite for crowd funding. When his rewards-based site launched three years ago it took just over a year for it to raise $1 million. It now raises $1 million a month, and has this month opened a site in China, after a move into Singapore last year.
Unsurprisingly, Chen believes the federal government should seize the opportunity to free up equity capital-raising. At the moment, this is limited by rules designed decades ago, before crowd funding had been dreamt of, which limit the amount raised to less than $2 million in 12 months from no more than 20 investors. Any more and start-ups need to meet extensive regulatory hurdles, including the need for a detailed prospectus.
So keen is Pozible for this change that it has already set up the equity crowd-funding site epplio.com to gauge the interest of would-be start-ups and investors should the laws be changed.
In its submission to the federal government, national law firm Minter Ellison advocated a loosening of the rules around equity funding. “Any legislative reform that can help facilitate entrepreneurship and endeavour, especially in the arts and culture – which is where many projects seeking crowd funding are focused – is a positive development, but there does need to be an appropriate emphasis on managing investor risk,” Minter Ellison partner and governance specialist Alberto Colla says.
The government should also track capital flows to crowd-funding platforms in other jurisdictions to provide empirical data as to whether Australia’s more restrictive approach is encouraging entrepreneurs to seek crowd funding offshore, Colla suggests. He notes that the laws are designed to assist existing businesses with a track record to raise money, whereas crowd funding is often skewed towards unproven start-ups, and that a self-contained new statutory regime for crowd funding should be the goal.
David Jones and Myer under siege
Meanwhile, corporate news this week was dominated by the results of venerable retailing competitors and will-they-won’t-they potential partners Myer and David Jones. With the announcement of the results and recent confirmation that DJs chief executive Paul Zahra will stay on under new chairman Gordon Cairns, merger discussions will now be the focus after the company knocked back the first approach last year.
David Jones’s half-yearly profits fell 4.6 per cent to $70.1 million, compared with an 8.1 per cent drop for Myer to $80.8 million, as costs for both rise faster than sales (although this is tipped to moderate). Both recorded like- for-like sales growth – 1.1 per cent for DJs and 1.2 per cent for Myer. The results will be used to underscore Zahra and Cairns’s position that Myer’s “merger of equals” line undervalues DJs and that there are insufficient synergies to be gained from a merger.
But as the jousting continues, there is no greater visual reminder of the competitive pressures on both than in the Melbourne CBD. Not only has online shopping been cutting away at them for years, global competition in the bricks-and-mortar space is literally surrounding them.
By mid-April, their Melbourne flagships will be encircled by overseas fashion chains – Sweden’s H&M (Hennes & Mauritz) will open the doors of its Australian beachhead next door to Myer on April 5, ahead of store openings in central Sydney and elsewhere. Its entry follows the successful arrival of Spanish chain Zara in 2011.
And then, directly behind the Bourke Street stores, Topshop and Japanese fashion store Uniqlo are among dozens of international labels preparing to open mid-April.
Media reports this week suggested foreign retailers could attract up to $735 million in revenue in the next three years, and another $1.69 billion to offshore websites over that period. To put that in perspective, Myer and DJs had $2.8 billion in total sales between them in just the past six months.
This article was first published in the print edition of The Saturday Paper on Mar 22, 2014 as "Freeing up crowd funding". Subscribe here.