11/12/2015 6:44 AM AEDT | Updated 15/07/2016 12:51 PM AEST

Crowdfunding 101: What New Legislation Means For Small Business And Investors

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The Turnbull Government has just introduced legislation that affects crowdfunding for startups and small business as part of its National Innovation and Science Agenda.

It’s designed to allow so-called mums and dads to be able to more easily help small, innovative companies get off the ground, but there are lots of ifs and buts.

Crowdfunding is a convoluted topic so we’ve asked Rob Nankivell, CEO of crowdfunding company VentureCrowd to give us the low-down on the current state of affairs and outline how the new laws will affect investments.

What is crowdfunding and do I always get a T-shirt?

No, you don’t always get a freebie. Sad face.

There are two types of crowdfunding, says Nankivell. The first is on platforms like Kickstarter, Pozible and Indigogo where you support a small business, a charity or not-for-profit in return for a keepsake or product.

“This is the model where you prepare a YouTube video and you make the pitch about why you’re such a good business and you just throw it out there and people can support you for a T-shirt or a discount off the first product if it ever gets off the ground,” Nankivell told The Huffington Post Australia.

This is what is called retail investment -- anyone can do it.

The second type is where investors buy equity in a company -- essentially they own a part of that business. But equity has only ever been available to so-called wholesale investors.

These are people who, individually or via their own wholly-owned company, have earned more than $250,000 in the last two years or have net investible assets of $2.5 million. In other words, the rich people of Australia.

How do companies like VentureCrowd come into it?

VentureCrowd is a curator. It raises money from a crowd but from a small one: it represents wholesale investors who give VentureCrowd their money to fund startups.

VentureCrowd doesn’t go out and find the startups that need cash -- they are introduced via their 20 or more partners, including universities and groups of investors such as the Sydney Angels.

Rob Nankivell from VentureCrowd says the new legislation could go further.

“They will bring us a deal occasionally and say ‘this is something we’re interested in and we’re putting in the first $3m’,” Nankivell said.

“If the founder would like more investment, say an extra another $500,000 and he’s quite interested in crowdfunding, then we say ‘yeah that’s interesting we’ll help’ and then we help market it through our platform. We are selling equity in companies. The net result is that if you invest with us you’ll be owning part of a company.”

What is the new legislation?

The proposed new laws for crowd-sourced equity funding (CSEF) allows anyone to buy equity in a company. If passed, mum and dad investors would be able to spend $10,000 within a 12-month period in a startup that has less than $5 million in assets and has less than $5million in annual turnover.

But there’s a catch: the startups must be unlisted public companies -- a structure that allows them to sell shares but not list them on the stock exchange -- as opposed to private firms, which most startups are.

“The changes will enable a small percentage of smaller businesses to access retail investors via crowdfunding, however those businesses will need to be public companies as opposed to most smaller operators and start-ups who are proprietary companies,” Nankivell said.

“If the goal is to enable start-ups who are innovators access to a larger potential pool of capital, then it is limited.”

Will it be better for small business?

Yes and no. Nankivell says more investment from “regular” people is more likely to happen, but not for all startups because of their structure. But he says it’s a good first step.

“If you’re looking for a philosophy behind crowdfunding it’s about access,” he says. “It’s about enabling non-high-income earners to get access to deals that have typically been the domain of wealthy people.

“Venture capital is a great example. Silicon Valley and all that is basically a whole lot of rich dudes investing in startups and making themselves extremely rich.

“Why can’t a normal Australian invest $1000 each in 10 different startups to get a little portfolio of deals that might go very well? That’s the whole philosophy that we are pursuing but we see this as a first step and hope for more broad reaching, effective change.”