We are finally seeing a shift in how small businesses can raise capital, and how we retail investors can become a part of it. For many years in Australia the constraints in privately raising capital for small business meant many simply did not, and the consequence is simple. Businesses were unable to grow, ideas withered and talented entrepreneurs went offshore.
Even at the bigger end of the market technology based companies have struggled to raise money in the Australian market, as the rules haven’t facilitated it like our overseas counterparts, and the typical Australian investor has not seen the full value of long term investments which don’t pay out the short term dividends.
Recently announced changes won’t necessarily fix all these problems, but mum and dad investors, punters like you and I will now have a chance to get involved in small businesses. These might be businesses that represent social change like renewable energy, regional services and education. Or high potential money making ventures in the tech space, or as we at Blue Lake Invest have spoken at length about, dairy.
The proposed changes will allow start-ups and small businesses to license/register with ASIC to be eligible to raise capital on a crowd funding platform. This will no doubt require similar documentations and audits as publicly listed companies. Each business registered will then be able to raise up to $5 million each year, should they have less than $5 million in assets and turnover.
The government has been quick to point out that these thresholds are more flexible than our USA counterparts and will allow Australian businesses to be more competitive with other global companies. There is of course protection to the retail investors reading, with a 5 day cooling off period.
But that won’t expel all the concerns of the market. The concept of digital crowd funding has been well explored here in Australia through platforms like Kickstarter, and while everyone involved has the best intentions, the process isn’t always completely smooth. I will be watching to see what other, if any safe guards are introduced to protect us investors. The trouble is of course allowing the market to function with minimal government interference, while maintain a fair system.
The opportunities for us investors is pretty good. Soon we will log into a site like Kickstarter, will search for projects and businesses that might be of interest. Then through presumably audited information will carry out our due diligence. The potential is that we could invest in the next tech giant, retail superstar or a leading service provider. These are opportunities that have not been available to the everyday Australians before.
It is likely that the required level of investment will exceed the amount that you might put into the ASX. Numbers touted are in excess of $10,000 which might price a few people out of the market. Meanwhile we are still seeking clarity around whether self-managed super funds (SMSFs) will be eligible to invest in these platforms. If this is allowed it will increase the appeal of SMSFs and facilitate more retail investors to move into the digital crowd funding model.
Regionally based businesses like Birdsnest, or the many microbreweries will for the first time get access to funding. Funding to grow, employ and innovate. The other side, as mentioned in the intro is tech companies which have traditionally been shunned by Australian Investors may gain access to early seed capital stage funding. The risk is high, but if you ask Mark Zuckerberg, Sean Rad (Tinder) and Travis Kalanick (Uber) so is the reward.