Crowd Funding – Road Paved with Gold or a Disaster Waiting to Happen?
The Uber or AirBNB of Investor Funding is here. Crowd funding is upon us. What would have been almost impossible to achieve without spending tens of thousands of dollars and many months to produce a prospectus is now a real option in Australia. Retail investors are within easy reach.
As someone working in the industry for around 20 years now and seeing countless Australian SME’s struggle to raise capital within the traditional regulations, the thought of crowd funding seemed like utopia. Mum and dad, retail investors, are those that ASIC guard dearly – and rightly so. So to ease all the restrictions and provide a relatively easy pathway to take their money is a really big deal.
The question I want to pose is, are Australian SME’s set up to manage what could be 100s or even 1000s of investors joining their share registry? Campaign over, money in the bank and off we go.
However, what ASIC hasn’t done is eased any of the countless laws and regulations around the director’s responsibilities to shareholders. Traditionally where a company has a small group of people known to them who invested based on a personal offer, any issues that arise are generally managed internally often with the help of the company accountant. What these SME’s often look like is they have family members chipping in, sometimes paid, sometimes not, and a small group of known investor. In good financial years, more is shared, in not so good financial years, some do without. Where a change in course is required, the company can call a quick meeting where decisions are often made as a group and the business moves on.
The biggest issue I see with prospective crowd funding clients is they believe this ‘family-run’ mentality will cut it.
Even directors with their hearts squarely in the right place are required to understand their director’s legal responsibilities to shareholders – in the very same way directors of large public companies need to understand their responsibilities to their shareholders.
The $50 a retail investor spends buying shares in a crowd funding campaign also buys them the complete backing and weight of the Australian Federal Government (ASIC) who will not muck around when it comes to retail investors. Where the Australian government has relaxed the laws around taking money from retail investors, the countless other laws relating to their treatment and rights remain solid, in place and enforceable.
The good news is that it’s not that hard or expensive to adopt a sound governance and compliance framework and strategy. This approach will ensure that every communication that goes to shareholder including the information memorandum is compliant, how a client benefits personally by way of a salary or other rewards is compliant, how shares are issued to founders, others and new shareholders is compliant, managing potential conflicts of interest and ensuring key agreements are sound. Moving forward, how and when to communicate changing business conditions to shareholders, determining when you need shareholder approvals, and so on.
For assistance with managing a Crowd Funding campaign please contact The Financial Writing Company 1300 477210.