The Australian government has finally made up its mind and decided equity crowdfunding could be a good idea. ASIC has been given some resources as it requested to study and establish the framework under equity crowdfunding can be established. We expect this process to go on for another few months and the regulations to be similar or slightly more conservative than what New Zealand is upto.
So instead of the current 20 12 rule which allows an issuer to make offers to 20 retail people to invest upto 2 million dollars we may see a far larger number of investors participate. This could be upto 200 or unlimited. It is also expected that crowdfunding platforms will be asked to self regulate to prevent a single retail investor from investing more than a certain amount which could be $5000 to $10000 a year. However the amount that can be raised would not exceed 2 Million.
ASIC will come back with the framework in a few months and then a new class of licenses called crowdfunding platform licenses would start getting issued. Expect this process and the first true retail equity crowdfunding offers to take about 6 to 12 months.
Equity crowdfunding for all its fancy connotations is essentially an investment. The only difference is the delivery and service vehicle is online. So the same factors which you keep in mind when making an investment such as duration, return, and risk would still be paramount. Just the fact that it is online wouldn’t make you pick an investment which offers significantly lower returns. In fact because the process is online you would probably want to see a higher return and a stronger level of security behind the deal presented.
While 2 Million is a significant amount for an early stage startup in terms of its funding, it is not a large amount for a real estate projects. The second issue is we are in an era of unprecedented liquidity. One prominent Melbourne area developer aptly told me, “We have money coming out of our bums!”. The only developers who are scrounging for small amounts are those who don’t have the credibility to secure these funds. The classic “Lemons” problem of Economics. You dont want non quality projects listed on the platform, if the first few projects go belly up it will destroy crowdfunding platforms for good in Australia.
So if we are going to make crowdfunding real estate happen the projects that are listed have to be from quality developers. These are in turn larger projects which have the advantage of securing quality project managers, auditors etc which give it a better chance of success. The size of the project also means that there is more return on offer which would make it more attractive to potential investors.
The equity portion of these investment offers is going to be significantly larger than 2 Million. Which is why even if crowdfunding deregulates and ends up including real estate investments we at estatebaron.com believe that doing a full retail public disclosure is still the way to go.