Time to cut crowdfunding red tape

The shipping of the Pebble Watch yesterday marked a coming of age for crowdfunding in the United States, while Australia, sadly, lags behind.

The creation of the watch was funded by raising $10 million through crowdfunding website Kickstarter and the watch, which wirelessly connects to smartphones, has been shipped to the “backers” – the ordinary people who paid the company money.

The Pebble Watch is significant as it was one of the first on Kickstarter to raise such a huge amount of money, and proved that bypassing financiers could be a viable route for small business.

However, the success of the Pebble Watch only highlights the problems with the rules and regulations surrounding crowdfunding in Australia.

Last year the Australian Securities and Investments Commission released a warning for users who participate in these types of events.

The warning related to financial investors who receive equity in a venture rather than just a product like a watch.

The regulatory burden imposed on equity crowdfunding means Australian law currently effectively prevents this type of entrepreneurial activity.

That’s a shame because crowdfunding is a great means for entrepreneurial activity and innovation and many projects that would struggle to raise bank debt or venture capital are viable thanks to crowdfunding.

While vulnerable and unsophisticated investors do need some level of protection, Daniel Goldberg and Ryan Doherty of law firm Addisons recently warned in an article in the Law Society Journal that requiring a crowdfunding project to register as a managed investment scheme, for example, “is tantamount to prohibiting the activity altogether given the Act’s exacting requirements.”

Goldberg and Doherty suggest that instead of ASIC involvement, the “crowd” can become its own regulator.

They argue that untoward behaviour on the part of platform operators or those seeking funding will be quickly weeded out through internet and social media channels, ensuring investors are not taken advantage of.

As the law stands in Australia, it is limiting the innovation and entrepreneurship which could be possible through more widespread use of crowdfunding.