24/02/2016 8:16 AM AEDT | Updated 15/07/2016 12:51 PM AEST

New Crowdfunding Laws, Yay For Small Business Or Nay?

FIONA GOODALL via Getty Images
Australian Prime Minister Malcolm Turnbull speaks during a press conference with New Zealand Prime Minister John Key at Government House in Auckland on 17 October 2015. Turnbull is in New Zealand to conduct bilateral talks with John Key on his first overseas trip as Australian prime minister. AFP Photo / Fiona Goodall (Photo credit should read Fiona GOODALL/AFP/Getty Images)

Business leaders are lukewarm over the Turnbull Government’s new crowdfunding Bill which has passed the House of Representatives, with some saying it’s a first step for small business and startups but others saying it falls dramatically short.

The Government’s crowd-sourced equity funding (CSEF) Bill is designed to help startups and small businesses have greater access to equity funding. It allows anyone to buy equity in a company -- so they own a piece of it and can share in its financial success -- so 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 $5 million 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.

Minister for Small Business and Assistant Treasurer, Kelly O’Dwyer said the Bill was a win-win for investors and small business.

“The intent of this Bill is to assist start-ups and other small businesses that may have difficulty accessing equity funding due to the costs of disclosure and other requirements, while protecting mum and dad investors,” she said.

Rob Nankivell, CEO of crowdfunding company VentureCrowd who helped HuffPost unravel the complexities of the issue in a previous story, said the new laws will actually make life harder for startups because they require them to become public companies.

The Bill must next be passed by the Senate and a Senate Committee is considering it. VentureCrowd is just one of many companies which has made a submission in the hope of an amendment.

His company’s submission claims that to become a public company a startup must gain 50 or more shareholders and go through a rigorous process that “imposes a significant (and unnecessary) regulatory, administrative and compliance burden on those start-ups”.

VentureCrowd CEO Rob Nankivell has made a Senate submission opposing some aspects of the Bill.

Nankivell said he wanted to see equity-backed crowdfunding opened to retail investors but called the laws “ineffectual” and may only benefit startups that have proven to be un-investable by all other sources.

“The government’s failure to consult with startups and those who will use this system is inexplicable given the rhetoric from the PM Malcolm Turnbull regarding the ‘Innovation Boom’,” he told The Huffington Post Australia.

"VentureCrowd has proved equity crowdfunding can work – we have completed 13 deals with hundreds of sophisticated investors, including Australia’s largest equity crowdfunding deal of $4.2 million for mobile payments startup ingogo.

“Extending that to a wider investor base will be extremely positive for startups and investors alike, but the regulations proposed in the bill are far too onerous and potentially destructive for startups looking to this investment method.”

Here’s how a few other Aussie small business leaders viewed the legislation.

Sarah Hamilton, Co-founder and CEO of Bellabox

“The new laws, in theory are a very exciting development for small businesses and startups as breaking into the venture capital world is still relatively hard,” she said.

“Unfortunately the legislation does fall down in terms of preventing funding through crowdfunding platforms as these protect investors through a careful process of collecting relevant information normally required by a VC for investment.

“Additionally they also reduce the reporting burden for businesses, as the business would need to register individual investor details through ASIC as opposed to investors being under the one trust or otherwise through the crowdfunding platform.”

Bellabox Co-founder Sarah Hamilton says the new laws ignore the benefits of crowdfunding.

John Winning, CEO of Winning Group

“It’s a positive that more Australians will be allowed to support local start-ups and that there will be more opportunity for our nation to retain these small businesses,” he said.

“From a small business’s perspective, it provides them with a better opportunity to raise capital in a more cost effective manner.

“Whilst some regulations are required to protect investors, we don’t want to stifle Australians’ interest in investing in innovation, which could be the key to stimulating our economy in the future. It's a balancing act.”

Winning Group CEO John Winning criticised the new laws.

Mike Rosenbaum, Co-founder and CEO of Spacer

"Whilst we strongly support the opening up of crowdfunding laws to boost liquidity and available capital for start-up enterprises, we see a number of issues with the proposed legislation,” he said.

“For one, the $10,000 cap will limit the number of ‘sophisticated’ investors interested in participating. For those investors, the exposure is not meaningful enough to warrant the administrative burden of investing. And for businesses, the proposal to ban the aggregation of investments into a single vehicle (such as a unit trust) via a crowdsourcing platform will mean their register could contain upward of 50 investors, a sub-optimal position for any SME.

“Similarly, the administrative red tape for SMEs to become an unlisted public company to gain access to ‘crowdsourcing’ creates undue burden and focus away from the real job at hand -- growing the business.

“I would encourage the government to adopt the more progressive NZ perspective on crowdfunding, and open up accessible funding to all Australians, regulated through the provision of the crowd-sourcing platforms.”

Spacer’s Mike Rosenbaum says there is too much red tape with Turnbull’s plan.

James Crawford, Co-founder and Managing Director of Beanhunter

“One thing that's really important, and arguably more important for early stage ventures, is to not just have money, but have the right people sitting around the table who can help the entrepreneur build the business,” he said.

“The advantages of having successful entrepreneurs or 'smart money', over 'mum and dad' investors is they naturally should understand early stage ventures and the expected ups and downs that comes with the ride. Hopefully this 'smart money' can open doors, bring quality people, partners, channels etc to the table that would otherwise not be accessible to an unknown business owner, even with decent bank balances.

“Crowdfunded equity as a concept has its merits, but entrepreneurs would really need to think through the pros and cons of raising capital from 'mum and dad' investors as opposed to other entrepreneurs who have been successful themselves.”

Beanhunter Co-founder James Crawford warns against mum and dad investors for startups.

Steve Shelley, Co-founder of Deputy

“I fully support any mechanism that allows anyone with a great business idea the opportunity to take the concept to market, so long as the appropriate regulations and legislation is in place to prevent unscrupulous types from deceiving and profiteering from crowdsourcing,” he said.

“It's often the case that entrepreneurs who have a sound business idea or concept, have no choice other than to enter into an arrangement that allows the investor to achieve far more the the inventor.

“Crowdsourcing allows the investor to seek out, research and invest in opportunities that are otherwise unlikely to be available to them. Crowdsourcing also allows small investors to partake in a low risk but potentially high return investment.”

Deputy CEO Steve Shelley supports all laws to open up crowdfunding for startups.