Australia is on the verge of getting a public “equity crowdfunding” regime after an exhausting, four-year journey.

Previously only available to sophisticated investors, equity crowdfunding will soon be open to retail investors and Australian small companies.

Equity crowdfunding is exactly what it sounds like: a funding route which involves listing on a crowdfunding platform and receiving capital from a group of individuals in exchange for equity in their company.

It’s like a Kickstarter campaign — but instead of getting early access to a product, backers get a chunk of the company.

It has not been easy introducing the concept in Australia.

In fact it has been a protracted, farcical political process that took four years despite broad bipartisan support.

The federal government initially wanted participating businesses to convert into an unlisted public company.

The Bill that passed Parliament earlier this year — due to come into effect in September — locked out private companies from this process, in turn preventing 99 per cent of local companies from the funding route.

In this year’s federal Budget, the government extended the scheme to include proprietary companies. Draft legislation is currently up for submissions.

Will equity crowdfunding work?

After a long journey that has left Australia lagging behind much of the world, equity crowdfunding will be here by the end of the year.

Will it catch on like wildfire and rival the ASX for the attention of budding young startups? Or is it a fad that will prove too difficult for cash-strapped tech companies?

There are a number of existing platforms in Australia — including Equitise and VentureCrowd — that offer the service for sophisticated investors only. They will benefit from the impending law changes.

But there will be a range of regulations and restrictions that are likely to stunt the growth of the funding avenue here.

Companies with annual turnover and gross assets of up to $25 million will be able to raise up to $5 million each year, while retail investors will be capped at $10,000 per company.

Any company wishing to undertake an equity crowdfunding round will have a range of reporting and disclosure obligations placed on them.

They’re not as onerous as those required for ASX-listed firms, but they’re still likely to deter many young companies with little time and expendable capital.

New Zealand offers the best comparison to Australia’s incoming laws.

Introduced in 2014, the laws across the ditch allow companies to raise up to $NZ2 million, but with far fewer regulatory and disclosure hurdles.

Anne Guenther, the founder of New Zealand crowdfunding platform PledgeMe, says Australia has a long way to catch up.

“We’ve been lucky in New Zealand, in that our regulators have pragmatically balanced the risks to investors with the needs of growing companies,” Guenther says.

“In an ideal world, Australia would try to find the same balance and make equity crowdfunding a complementary way of raising funding to the ASX.”

Will equity crowd-funding catch on?

Under the current plan, it’s unlikely there will be many companies rushing to an equity crowdfunding campaign in Australia.

“The regulation and guidance as it currently stands will make it hard for equity crowdfunding to become a competitor for the ASX, or for anyone else, because it looks set to be over-regulated,” Guenther says.

But if some of the issues are ironed out and the platform gains mainstream attention, it could provide a valid alternative to seed and Series A venture capital rounds.

“The current regime would see companies able to raise relatively small amounts, currently capped at $5 million,” Fintech Australia chief Danielle Szetho says.

“For an early-stage Australian startup, this would typically be around a VC Series A, where a company’s valuation would typically be around $10 to $20 million.”

This is much smaller than the so-called ‘sweet spot’ that the ASX currently has for small caps, which is around $50 to $500 million.

“The incoming crowdfunding legislation — both public and private — will sit very nicely alongside the ASX, and other forms of raising capital such as venture capital.”

It might take another frustrating wait for politicians to get it right and fix some of the issues, but eventually equity crowdfunding could work nicely for early-stage tech startups, and act as a step on the journey towards a possible listing on the ASX, not an alternative to it.