What you need to know about equity crowdfunding and ICOs
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Crowd-sourced funding was recently expanded in Australia as an alternative to ASX initial public offerings and backdoor listings. How have we got to this point?
Crowd-sourcing funding is a financial service where start-ups and small businesses raise funds, generally from a large number of investors that invest small amounts of money. It’s an alternate source of capital without the regulatory burden of traditional fundraising. — ASIC
Equity crowdfunding has been around for some time. There were early players back in 2012 but ASIC was slow to provide the frameworks to let them.
There was a five-year gap between two initial guidance notes and in that time we haven’t seen any action in the market — but we have seen initial public offering issuance increase.
Government and regulators were trying to create a perfect world but five years is too long and I think we’ve lost any competitive advantage we had.
What is an Initial Coin Offering (ICO) and how is it different to equity crowdfunding?
An Initial Coin Offering is a form of crowd funding. It is like an initial public offering — but instead of offering shares in a company, an issuer offers digital tokens that can be traded on cryptocurrency platforms or for digital services.
ICOs aren’t dissimilar to equity crowd funding (ECF). Both involve the pooling of capital from a large amount of people.
Cryptocurrencies and blockchain [the technology that allows cryptocurrencies such as Bitcoin to work] have gained more widespread market acceptance. As more investors come into that space its opens up the number of capital raisings that people can participate in.
I see ICOs as the way that equity crowdfunding was supposed to be.
In Australia, Equity crowd funding (ECF) had to be written into the Corporations Act. I think it was mostly just for each successive government to put innovation points on the board.
ASIC did have the power to exempt it, but it was too difficult for them to because of the political situation.
How has the lag in regulation affected equity crowd funding in Australia?
The problem is what effect it had on the rollout of equity. In the same time it has taken to get regulation passed, international companies have created strong businesses which are now poised to cash in as soon as the laws are changed.
We saw equity crowd funding become a political hot potato and now it is ripe for the picking for foreign fintechs to take advantage with their established balance sheets.
To some extent the horse has already bolted. Everything ECF promised, ICO can deliver now and we haven’t seen the ECF industry even start.
Looking overseas and what others have raised in foreign jurisdictions like the UK or Nasdaq, the potential is well in excess of $100 million.
It was an inhibitor that didn’t need to happen and it has built up for investor demand for alternative markets.
Public companies can now raise funds through equity crowd funding and it is expected that private companies aren’t far off. How successful will it be?
Equity crowd funding will be a successful industry because Australians are resilient entrepreneurs and there certainly is a demand there.
Power Ledger recently raised $17 million in Australia’s first ICO and they would not have been able to do that under ECF because they were too large – so there is certainly is demand for both.
Where ECF has its place is attacking bottom rung of the ASX – pre-IPO raises or those below $5 million. It will help to support the bottom of the market to build a balance sheet, often with a view to eventually list on the ASX.
I think they don’t disrupt each other, while there is a similar nature in pooling capital online the fundamental reason of whether one company uses one or the other is different.
What should investors look out for in ICOs or equity crowd funding?
From an investor point of view the biggest difference between them is their liquidity.
If an ICO hits, their tokens are instantly tradable and if there is a large enough demand there can be a second market for it – something that ECF doesn’t have.
IPOs are by no means always liquid but if there are usually enough people wanting to buy them on the exchange – whereas under ECF if you buy shares you don’t have a secondary market.
With the rise of bitcoin and cryptocurrencies people are starting to see the potential returns from a token or digital company backed by blockchain tech.
ICOs will be the next wave in the same way that we saw it with IPOs. People want to buy into speculative investments where they can see a potential return.
It’s gone through a major proof of concept now and is now more widely accepted.
Jack Quigley is the Founder and Managing Director of CrowdfundUP, Australia’s leading real estate crowdfunding platform, and Founding Director of FinTech Australia, Australia’s industry FinTech body. Jack is also a member of ASIC’s Digital Finance Advisory Committee.
Jack has played an influential role in shaping the Australian crowdfunding and alternative finance industry over the past few years and is at the forefront of discussions with the Australian Government championing the benefits of innovation on the Australian economy. With extensive experience in both Australian and China, Jack has become a leader in the crowdfunding space globally, regularly speaking at events and conferences around the world.