THE concept of crowdfunding

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1 Crowdf unding offers equity stake Small and mid-sized businesses will soon have a new option for raising capital when crowd-sourced funding legislation takes effect. Mark Beyer mark.beyer@businessnews.com.au 6-PAGE FEATURE THE concept of crowdfunding is nothing new to many micro and small businesses, and those operating in the startup sector, but the way it applies will change from September 29. From that date, unlisted public companies with annual turnover and gross assets up to $25 million will be able to issue shares to the general public. The process will be similar to companies issuing a prospectus to raise capital ahead of a listing on the ASX, but in a way designed to make life easier for smaller businesses. This is a big change from the crowdfunding campaigns run through organisations such as Kickstarter, Pozible and Gofundme. Many of these campaigns are donation based, while others are rewards based, such as offering cheap prices on the goods being produced. HLB Mann Judd business services partner Kirstin Stewart said the crowd-sourced funding (CSF) legislation marked an exciting new opportunity for investors and businesses. "Mum and dad investors will be able to buy a stake in a company and get equity in return, instead of goodwill or the occasional free cold-brew coffee served in an avocado," Ms Stewart told Business News. She said many people assumed equity crowdfunding would be used mainly by tech startups, but she had already found interest from a broad range of businesses, which would be able to raise up to $5 million in a year. While positive about the opportunities, Ms Stewart cautioned that businesses wanting to pursue equity crowdfunding needed to meet detailed criteria and must prepare for having potentially hundreds of fellow shareholders. "You don't get something for nothing," she said. "It's not your business any more. "You need extra directors and you need to meet all the compliance requirements." Jeff Broun is a big advocate for equity crowdfunding but also cautions business owners, saying they need to think carefully about the pros and cons of equity crowdfunding compared with other options. "Do you really want to reach out to a crowd of people, or would you rather reach out to an angel investor or a private equity firm?" he asked. Page 1 of 5

2 Find a partner Business owners wanting to pursue equity crowdfunding will need to partner with a licensed intermediary, or CSF platform operator. Mr Broun's business, Australian Equity Crowdfunding, is one group aspiring to secure a licence from the Australian Securities and Investments Commission. "We're already under way working with a few companies looking to raise capital this way," Mr Broun told Business News. Other licensed intermediaries are likely to include Sydney-based startup accelerator Blue Chilli, Equitise, and the Australian Small Scale Offerings Board. These organisations are all members of the Crowd Funding Institute of Australia, which also counts Subiaco company CrowdfundUP as a member. CrowdfundUP operates a real estate crowd investing service, illustrating the wide range of businesses that sit under the crowdfunding banner. Former investment banker Ashley Zimpel heads ASSOB, and was part of a group that has re-engineered the business since buying it two years ago. Operating under special provisions of corporations law, ASSOB has helped 175 unlisted public companies raise $6 million over the past decade. companies, at an average raising of about $740,000. Sydney-based Cracka Wines has already signed up with Equitise, and confidently predicted last month it would complete Australia's first and largest crowd-sourced funding raise after the CSF bill was enacted. Cracka said it was aiming to raise $5 million from its 250,000 customers and saw this as a first step toward listing on the ASX. Its customer base is a key attribute, as it means Cracka has access to a large pool of potential investors. Mr Broun emphasised that CSF platform operators will not be in the business of finding investors; that job rests primarily with the existing business owners. To be successful, they will need a large number of backers, as retail investors will be limited to $10,000 per company in a 12-month period. And they will need to be well prepared, as a CSF offer document will only be 'live' for 90 days. "I think the secret to success of crowd-source funding is to have a lead or a cornerstone investor who takes the time to check it out and commits to, say, half the capital," Mr Broun said. "That makes it easier and gives peace of mind to other investors." Mr Broun hopes another of his businesses, crowd-backed venture capital investor Fat Hen, will fill that role. Preparation Mr Broun said a lot of preparatory work was needed before a business could begin equity crowdfunding. "Companies that have never been through this will need to make lots of changes," he said. Page 2 of 5 Mr Zimpel has welcomed the CSF legislation, saying it presents a big opportunity, particularly for high-growth businesses in traditional industries that need capital but are not ready for an ASX listing. Equitise is a major player in New Zealand's crowd-source funding market, where it has raised $20 million for 27 different days. By comparison, a prospectus remains open for 12 months and retail investors can put in whatever amount they choose. In addition, the average raising by companies issuing a prospectus for an initial public offering is substantially larger. The BNiQ Search Engine shows that 17 companies based in Western Australia have completed an IPO this year, with an average raising of $6.5 million. They range from as little as $3.5 million by Marquee Resources up to $25 million by Zenith Energy. Mr Broun is hoping to see the emergence of professional funds that will complete due diligence on companies hoping to pursue equity crowdfunding.

3 "They need to convert to a public company, appoint three directors, think about corporate governance. "Do they have financial reporting systems, and can they manage a large number of shareholders?" The recent federal budget announced plans to extend crowd-sourced funding to proprietary companies, but Mr Broun does not believe this would be a sensible move. "If you are serious about raising capital you should be in the right structure, which I believe is a public unlisted company," he said. "It's not just round one, you might want to do more capital raisings and then you might want to list on the ASX." Mr Broun said equity crowdfunding would only be cost-effective for companies raising at least $300,000 or $400,000. One area of uncertainty surrounding crowd-source funding is the amount of detail that will need to be in the CSF offer document. Ms Stewart said ASIC had prepared a template, which indicated the offer document could be more concise than a prospectus. "It's got a very similar flavour to a prospectus but they're targeting this to a smaller scale entity," she said. "The intention is that this isn't meant to be as big and complicated as a prospectus." However, she acknowledged the amount of disclosure would depend on the circumstances of each company and its directors. Companies that raise capital through a CSF platform will benefit from several reporting and governance concessions. They will not be required to hold an annual shareholder meeting, and they will not need to be audited if their raising is less than $1 million. Ms Stewart said these concessions would only apply to unlisted public companies established after the legislation takes effect, on September 29. Mr Broun believes the government has struck the right regulatory balance, particularly compared to the UK. "I think the government has got it right," he said. "Australia has pretty robust legislation, it's much more prescriptive in terms of outlining what should be in the offer document." STEPS TO EQUITY CROWDFUNDING Partner with an intermediary (none licensed yet) Complete legal/financial due diligence Convert to public company (after Sep 29) Appoint at least three directors Prepare a capital management strategy Identify potential investors Prepare a CSF offer document WHAT ARE THE LIMITS? Your business has revenue and gross assets less than $25m Only ordinary shares can be issued Offer document live for only 90 days Each investor limited to $10,000 pa Maximum raising of $5m pa July 17,2017 I Page 3 of 5

4 Mum and dad investors will be able to buy a stake in a company and get equity in return, instead of goodwill or the occasional free cold-brew coffee S e r v e d i n a n avocado - Kirstin Stewart I I think the secret to success of crowd-source funding is to have a lead or a cornerstone investor who takes the time to check it out and commits to, say, half the capital - Jeff Broun 1 FEATURE GET READY: Jeff Broun says companies planning to crowdfund need lots of preparation. Photos: Attila Csaszar Page 4 of 5

5 INTEREST UP: Kirstin Stewart has been surprised by the interest in equity crowdfunding. Page 5 of 5