Even before crowdfunding became a global phenomenon on the rise, investors in Australia had already been funding startups through equity investments that work a lot like crowdfunding.
And they’ve been doing it for almost eight years: long enough to learn quite a lot about what works.
ASSOB (Australia Small Scale Offering Board) has been funding startups through equity investments, limited to only 20 unaccredited investors. This may not be entirely the same as the equity crowdfunding that is now shaking the 80-year-old securities law in the U.S., but needless to say, ASSOB has made great and impressive strides in the last eight years since taking its approach to crowdfunding online.
I was down there early last year to speak in several conferences, and I have met with ASSOB to discuss developments in Australia. I was fortunate to catch up again this time with Paul Niederer, CEO of ASSOB. From years of offline equity funding to the digital leap made in 2005, we can learn lessons from the ASSOB experience that will be useful as the rest of the world maps out its road to equity crowdfunding success.
While you may dispute that Kylie Minogue is the best thing that ever happened to the Australian music industry, you will have to agree that the pioneering ASSOB is the best lesson that ever happened to equity-based crowdfunding.
The following interview with Paul provides rich insights on the keys to a successful equity crowdfunding platform. Experience is still the best teacher, and ASSOB has loads of it.
David Drake: You are the longest running crowdfunding for equity platform there is. What can you tell us about the history of ASSOB?
Paul Niederer: In 2005 we decided to take an offline unaccredited and accredited capital raising business online. Eight years later over 300 raises have been handled with over 2,500 investors having invested. Only equity transactions are handled, and nearly $140 million has been raised to date. The smallest raise is $55,000 and the largest $3.5 million.
David: What are three of the strengths of ASSOB?
Paul: 1) Internal legal monitors [for] people, entity and offering compliance. 2) Handholding through the process by ASSOB Partners and ASSOB. 3) Templated process to make it easier for capital raisers.
David: What were three of the weaknesses in the past?
Paul: 1) Not having oversight of the issuers share registry. 2) Thinking it could be all done online. 3) Expecting issuers could manage large parts of the process themselves.
David: How is ASSOB going to operate in the US now with your new investors, and what are the synergies you see?
Paul: ASSOB has licensed the platform to Offerboard.com. They will be using the ASSOB capital raising engine, but their implementation will be different than ASSOB’s — understandably so, as Title III (unaccredited investors) will not have access to the platform until part way through 2014
David: ASSOB platform exemption only allows 20 investors, so how do you engage the crowd and the crowdfunding in this limitation?
Paul: Every raising builds its own crowd. Some raises have hundreds in their crowd, others have thousands. In this respect it does not differ from the majority of reward crowdfunding platforms. Unlimited accredited and overseas investors can exist, but only 20 unaccredited investors per annum. This is strictly monitored. Issuers need to ensure that when they accept investment from unaccredited investors, they choose the 20 largest suitable applications and return the funds for the others.
David: What do the Aussies have that the U.S. doesn’t? You have been on this longer than we have.
Paul: There is more emphasis in the Australian legislation on putting the onus of responsibility on the investor. If they have acknowledged the warnings that they may very well lose all their money, then provided the offer has been marketed compliantly, the onus is on the investor.
David: Tell us about a success story — in your eyes — in one of the investments.
Paul: We have had mining companies go from an ASSOB raise to international stock exchanges. Other companies have exited through trade sales.
David: What are three things you advise investors to take away?
Paul: The relationship is always between the issuer and the investor. We purposely do not give advice. However, we do suggest they take independent advice. If they have doubts, they have 10 days to seek a refund, and they should thoroughly do their own research as there is a chance they could lose all their money.
David: What are three things you advise issuers to take away?
Paul: Teamwork is required to raise the capital you need. You need a good story, team, followers, and an aggregating platform that keeps your raise compliant and is proven to raise capital. Only make promises you can deliver on.
David: Where is the scale of this industry? We see LendingClub hitting $2.1 billion and Kickstarter potentially doubling its $275 million last year. Crowdcube has done $30 million, and you have done 6 times more than them. So where do you see the scale for yourself in Australia?
Paul: At present the average investment per investor on our platform is around $30,000. With regulation change, we hope that the number of unaccredited investors per raise will move from around 20 to 100 or 200. This will allow platforms to scale. However, there is a difference between pledge crowdfunding and equity crowdfunding from an operational point of view. With “pledge crowdfunding,” the contributor is expecting a reward. A gratification. Probably instant gratification. Meaning if they contribute $100 for a watch, they are pretty sure they will get the watch within a few months.
However with “equity or investor crowdfunding,” there is uncertainty and hope. The investor hopes that when they invest they will get their money back or better, but it is uncertain as to when this will happen. Meaning if they contribute $20,000, they trust that the founders of the company will be good custodians of the money and will deliver on the promises they have made or the picture they have painted. Hope also must endure. From the time of the crowdfunding investment until its return, or not, communications need to be maintained with investors because they are still living on hope.
They hope that they will at least get their money back, and it should not be a surprise after three years if they don’t.
Ongoing communication is essential.
David: Where do you see the scale in the U.S. with your new investors?
Paul: Scale in the U.S. will come through lowering the cost structure of running raises. It is prudent to have some upfront costs to discourage the non-serious, but the majority of fee income should come from actually raising the funds.
David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City private equity advisory firm, and The Soho Loft — The Voice of Capital Formation, a global financial media company with divisions in Corporate Communications, Publishing and Expos & Events. You can reach him at David@LDJCapital.com.