On the way to receiving its banking licence in September last year, neobank Xinja used the equity crowdfunding platform Equitise to raise capital three times. It’s a story of an innovative business using and equally innovative funding model to establish its presence in the market.
Unfortunately for the retail equity crowdfunding market, it is a story that doesn’t get told very often. The latest Australian Securities and Investments Commission review of the market found only about two-thirds of the offers that were launched in 2018/19 were completed and half the intermediaries in the market did not offer any deals.
ASIC is also concerned about a growing trend to seek funds on a “subscribe now pay later basis”, which has increased the risk that investors will renege on their commitments.
ASIC says: “It is too early to form a view as to whether crowd-sourced funding is a meaningful source of capital for smaller or start-up companies.”
The regulator surveyed the activities of crowd-sourced funding intermediaries between July 2018 and June 2019, when 56 offers were launched and 39 were completed – a 69.6 per cent completion rate.
A total of $26.3 million was raised, at an average of $488,000 per completed offer. Proprietary companies raised $14 million through 22 completed offers and public companies raised $12.3 million through 17 completed offers.
Intermediaries received total compensation (including shares) of $1.62 million from completed offers, equal to 6 per cent of the capital raised or $41,500 for each completed offer.
In addition, a total of $103,000 was charged on 12 of the 17 uncompleted offers.
ASIC says the fees make crowd-sourced funding a relatively expensive way for companies to raise capital.
The crowd-sourced funding regime, which opened up equity crowdfunding to retail investors, was established in September 2017. A year later it was extended from public companies to proprietary companies.
There are 16 licensed CSF intermediaries, with fund raising arranged on websites hosted by the intermediaries. Only eight of the 16 intermediaries hosted CSF offers in 2018/19.
The highest number of offers hosted on a single platform, Equitise, was 22. Other active platforms include OnMarket and Birchal.
ASIC said: “The number of CSF intermediaries is large compared with the number of offers and the actual amount of capital raised. We are unsure whether the CSF industry can continue to support this number of intermediaries, as well as any new entrants.
ASIC has not licensed any CSF intermediaries since April 2019.
The majority of companies seeking funding through CSF platforms are start-up and small companies. Eligible companies are allowed to make offers of ordinary shares to raise up to $5 million in a 12-month period. Investors are limited to investing $10,000 a year in any individual company.
A total of 14,799 investors subscribed to CSF offers, with an average of 264 per offer. Retail investors made up 98.5 per cent of the investor base and provided 66.5 per cent of funds. The balance came from wholesale investors.
Close to half (27) of the offering companies were in the consumer staples sector, 12 were in the consumer discretionary sector.
Financial sector companies and information technology companies each made nine offers.
Intermediaries made extensive use of “subscribe now pay later” arrangements, which allow investors to pay subscription amounts at a later date. About $1.3 million committed (6.5 per cent of the total subscribed) under such arrangements remained unpaid at the end of the survey period.
“This is a substantial shortfall,” ASIC said. It raised the prospect of requiring intermediaries to warn offering companies that some investors may default on their obligations.