Crowd Fundingsurvey findings

December 2011

www.pennampartners.com

Context

• The United States has recently introducedproposed legislature – ‘The EntrepreneurAccess to Capital Act’ (“the Bill”) to allowstartups to use crowd funding to raisecapital in exchange for securities. Whilstthe Bill has been passed by the US Houseof Representatives, it is yet to beapproved by the US Senate at the timethis survey was initiated.

• In a nutshell, the Bill will allow startups toraise:

– Annual maximum capital of USD 1,000,000or USD 2,000,000 (if audited annualfinancials are provided);

– Annual investment by an investor islimited to the lower of USD 10,000 or 10%of their annual income; and

– General solicitation will be permitted witha consequential amendment being made.

• In an Australian context, crowd funding inexchange for securities is not permitteddue to legislature restrictions.

• Startups in Australia have a concession,commonly referred to as the 20/12/2 rule,where they are allowed to raise amaximum of AUD 2,000,000 from amaximum of 20 ‘retail’ investors in arolling 12 month period without the needto meet the arguably burdensomedisclosure regime. However, a strict nogeneral solicitation rule still applies.

• This survey has been carried out todetermine whether it is beneficial forAustralia to replicate the US and have acrowd funding regime (in addition to the20/12/2 rule).

Findings

1. Would it be beneficial to allow securities crowd funding in Australia as analternative avenue to seek seed/early stage capital (i.e. should Australia follow in thefootsteps of the US and bring in reforms to allow securities crowd funding)?

80%

10%10%

Response

Yes

No

Maybe

Note: Comments were made by some respondents that the appropriate regulatory measuresshould be put in place to protect investors and prevent promoters from abusing this concession.

Findings

2. What would be the ideal maximum amount that can be raised through a crowdfunding platform to ensure the process is still effective, compliance costs are kept ata minimum whilst maintaining integrity in the process?

10%10%

20%

30%0%

30%

Response

$100,000

$200,000

$500,000

$1,000,000

$2,000,000

Other

Note: No survey respondent chose the $2,000,000 option. Some respondents prefer the idealmaximum amount to be between $4,000,000 - $5,000,000 whilst others believe it is subjective anddepends on the underlying venture.

Findings

3. Profile of survey participant

40%

10%

50%

0%

Response

Entrepreneur/business owner

Financial backer

Advisor/serviceprovider

Other

Conclusion

Summary of findings• 80% of respondents are receptive to the idea

of having a securities crowd funding regimein Australia, this conclusion has to be viewedin the light of:

– The sampling pool was made of 40respondents; and

– Only 10% of the respondents wereinvestors.

• The majority of the respondents believe thatat least $1,000,000 in capital can be raisedfrom a capital raising platform whilst stillmaintaining the integrity and effectiveness ofthe process and keeping compliance costsdown.

Points to ponder• Should crowd funding be undertaken

through an ASIC regulated intermediary, byany third party or by the investee company(say via their twitter or facebook a/c)?

• What would be an ideal annual investmentceiling cap for a crowd funder to limit lossexposure and protect the crowd funder?

• What would be the minimum (financial andnon-financial) information required to bedisclosed to allow the crowd funder to makean informed decision?

• What can be done to minimise companysecretarial costs given the comparativelylarger shareholder base if the crowd fundingavenue is being used?