Early movers in the fast-growing crowdfunding sector want to ensure the legitimacy of their business model is maintained.
THE issue of regulation has emerged as a major hurdle for the fledgling crowdfunding sector as two Perth-based platforms prepare to launch.
Both CrowdfundUP and Fat Hen are putting the final touches to their online platforms before they unveil their first investment opportunities.
In the background of all this activity, both businesses harbour concerns that rogue operators could tarnish the future of this fundraising sector.
Crowdfunding is not new, it’s simply using the reach of the internet to raise funds from a large pool of people.
The individual amounts are often small, but the model is still in its infancy – and CrowdfundUP and Fat Hen have big plans.
Crowdfunding is best known as a reward model, where investors essentially pre-buy a product.
This structure has been successfully used to fund ventures from Hollywood films to virtual reality gaming device, the Oculus Rift.
However it’s the equity model that is gaining the most traction as an emerging and cost-effective alternative to traditional venture capital.
Days out from his company launch, CrowdfundUP founder Jack Quigley fears opportunistic operators could trash the reputation of crowdfunding and stymie the growth of innovative financial technology (fintech) in Australia.
Both CrowdfundUP and Fat Hen are pursuing an equity model, where investors will be able to buy into a business to assist in funding its expansion or development.
However the growth and success of these online investment platforms can only be predicated on robust regulation, according to CrowdfundUP.
Mr Quigley said the Corporations Act 2001 did not take potential developments in IT into account when it was drafted, and failed to foresee its ability to connect businesses with a broad spectrum of potential investors.
The interim report from the Abbott government’s Financial System Inquiry this month warned that the emergence of a new class of financial services came with risks.
It’s a delicate balancing act for the government.
On the one hand, operators such as CrowdfundUP want regulation to ensure the sector is transparent and less vulnerable to the type of scams that permanently damaged the online coupon market.
On the other, the reg
“This is still a very new industry and … people, if they find a loophole, they will abuse it and that will bring down the whole industry,” Mr Quigley told Business News.ulation needs to encourage innovation; otherwise, Mr Quigley said, this new breed of financial services would ultimately shift offshore to take advantage of more friendly domiciles.
“I’ve heard people say we should be self regulated but we’re dealing with investing in companies, that’s not something you can do with self regulation.”
Fat Hen investment partner Jeff Broun is equally concerned about the impact of unscrupulous operators in the online venture capital market.
But he’s not convinced legislation, on its own, is the answer.
“It’s a very big negative, in the Australian corporations law environment that our laws are a long way behind where the US is at,” Mr Broun said.
But he warned against any measures that lowered the regulatory hurdles, because that inevitably opened the door to unscrupulous operators.
However sitting on the sidelines is not an option.
CrowdfundUP’s four directors – Mr Quigley, Derek Barlow, Andrew Quigley and Marc Sputore – have spent the past 18 months and close to $500,000 of their own money refining the CrowdfundUP platform to ensure it works for businesses and investors.
BDO has worked closely with Crowdfun
dUP through this development phase and last week it formalised the relationship.
BDO has agreed to provide compliance reviews for businesses under consideration for CrowdfundUP’s fundraising platform.
It will also support a national investor roadshow planned to support the launch of CrowdfundUP.
A lawyer by training, Mr Quigley knows the mooted changes to the corporations act will impact CrowdfundUP but this is a fast-moving sector and he’s not going to wait around for the federal government to catch up.
“We could sit around and wait but then we wouldn’t be innovative,” Mr Quigley said.
Crowdfunding is part of a broader peer-to-peer investment movement that is gaining momentum all over the world. It has been enabled by the internet and its capacity to connect people and automate financial transactions.
In many cases these online financial platforms are sidelining traditional financial institutions such as the banks.
“Technology is able to disrupt traditional industries because it reduces the friction and the amount of bumps between point A and point B and basically that’s what crowdfunding in its essence has done,” Mr Quigley said.
“It’s taken out brokers, it’s taken out banks and it’s connected the peers.”
CrowdfundUP claims to be the first Australian crowdfunder targeting property transactions and the launch of its platform will feature two investment opportunities – one in the commercial property space and another in the technology sector.
Ultimately, Mr Quigley said, CrowdfundUP was an introduction service that connected investors with potentially lucrative investment opportunities.
The business has already attracted its own investor interest but the directors turned down the offer of an $850,000 cash injection at this early stage of the operation’s development.
CAUTION: Fat Hen CMO Rajab Karume (left) and investment partner Jeff Broun are concerned about unscrupulous operators in the online venture capital market.
The CrowdfundUP business model is predicated on taking a 4 per cent fee on any successful fund raising.
CrowdfundUP plans eventually to roll-out its platform into international markets and rapidly expand the business through acquisition.
Fat Hen has also set its sights on the international market, but is utilising quite a different business model.
The operation will derive revenue from a management or advisory fee levied on companies using the Fat Hen platform to raise funds.
“Up until now crowdfunding hasn’t been structured very well ... with two or three thousand dollars it’s hard for you to check the project out,” Mr Broun said.
“That’s where we saw the weakness in the crowdfunding space ... how do you give people the security of knowing someone has looked at the investment and it has ticked all the boxes.”
The business is a public-unlisted company, so initially capital will be raised through a prospectus or an approved offering document.
But the end plan is to list the business once it has shored up investor support.
“Once we get 1,000 or 2,000 members we would ultimately be a listed crowdfunding organisation,” Mr Broun told Business News.
“Which would give us greater profile and greater access to projects … and more eligible to some of the wealth groups that are looking to deploy the capital into what we are doing, which they can’t do at the moment because we are not listed.”
Fat Hen plans to release a prospectus next month and start to build its membership base.
Members will be required to pay a joining fee, which will give them first priority to any investment opportunities on the electronic platform.
Fat Hen plans to replicate the model in other countries.
“At this stage it’s a bit of a chicken and egg thing, we have got to get the members on board and then we can go after the projects,” Mr Broun said.
“You have just got to make sure that, if the project is in South America, say, that there is rigour around the project, we don’t want to run before we can walk.”
The success of crowdfunding has already caught the attention of the mainstream banking sector, which is moving quickly to strike deals with successful operators in this fast-changing space.
This month, Spanish-owned Santander UK struck a deal with peer-to-peer online lender Funding Circle.
This agreement will direct some of Santander’s small business customers to Funding Circle for their borrowing needs.
And in March, Reinventure, Westpac Banking Corp’s venture capital fund, spent $5 million on an equity stake in Sydney-based peer-to-peer lender SocietyOne.
Ultimately the long-term goals of both CrowdfundUP and Fat Hen will be shaped by, at least in part, by the creation of a regulative regime for crowdfunding, as well as the emergence of new fintech concepts across the banking and investment spectrum.
