SMSFs and crowdfunding: a match made in heaven or hell?

From

Peter Townsend

Self-managed superannuation funds (SMSF) will shortly be able to invest in potentially high-growth unlisted companies, as a new era of crowd-sourced equity funding begins.

The Federal Government’s Corporations Amendment (Crowd-sourced Funding) Act 2017 takes effect on September 29, 2017. The Act, passed by Parliament in March, provides a legislative framework for crowd-sourced equity funding in Australia.

SMSFs will have access to investment opportunities in emerging companies that have typically been the preserve of professional investment funds and high-net-worth investors.

Crowd-sourced funding platforms help organisations raise funds from large groups of people who typically provide small amounts. Crowdfunding sites, such as Kickstarter in the United States, have raised billions of dollars for commercial and not-for-profit projects.

Equity crowdfunding broadens the concept by allowing earlier-stage companies to raise funds from investors in exchange for equity in the business. ASSOB is Australia’s largest crowd-sourced equity funding site, having raised $150 million for 176 companies since 2008.

Equity crowdfunding is booming overseas. The US allowed this form of funding through the Jobs Act 2012 and the United Kingdom followed suit in 2014. Both markets are experiencing strong growth in capital raised through equity crowdfunding.

The Australian Crowd-sourced Funding Act, in its final consultation phase, proposes several reforms. Retail investors (those with less than $250,000 of income or less than $2.5 million in assets for each of the last two financial years, certified by an accountant) can invest up to $10,000 per company each year through an equity crowdfunding campaign. Wholesale investors have no investment-size restrictions.

Companies will benefit from reduced disclosure requirements in offer documents, making it cheaper and easier to raise capital. Temporary concessions for newly registered or converted public companies, for up to five years, from certain reporting, audit and corporate governance obligations, will lower compliance and administrative hurdles. The Government has also released draft legislation to extend crowd-sourced equity funding (CSEF) to proprietary companies.

Intermediaries, such as ASSOB, must hold an Australian Financial Services Licence (AFSL) and perform checks on companies making offers and their directors, and the offer document.
Should an SMSF use a crowdfunding site or an intermediary like ASSOB?

The need for SMSF trustees to do due diligence is substantial. Crowdfunding sites may have limited operating records, may not have robust compliance or governance systems, or do inadequate checks on companies on their platform. Investing in emerging companies, through speculative equity crowdfunding platforms, unnecessarily adds to risk. That is not a place for SMSF capital.

Under the current Act, ASSOB is not able to advertise offers to anyone outside of the ASSOB database who have not signed up to the relevant terms and conditions. The reforms will allow ASSOB to market offers on its platform to the general investing public, so long as the advertisement is not misleading or deceptive and complies with the legal requirements.

The ASSOB platform is apparently attracting more interest from SMSFs with a sharp increase in trustees wanting information about investments in early-stage companies this year. SMSFs appear keen on an exposure to this type of asset but should act from a prudent investment approach rather than a ‘get-rich-quick’ mentality.

By Peter Townsend, Principal

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