Crowd-Sourced Equity Funding Could Help Grow the Social Enterprise Sector

Crowd-sourced equity funding could “unlock a whole bunch of opportunities” for the community sector in Australia and would remove barriers to growth in the social enterprise scene, according to industry experts.

CSEF allows start-ups and small to medium-sized businesses to raise funds from the public, in return for equity in their company.

Currently in Australia, only unlisted public companies are eligible to access CSEF, but legislation is currently before Parliament looking to expand CSEF to private companies.

Andrew Ward is a director of the Crowdfunding Institute of Australia and the managing director of the Incubator.coop.

He told Pro Bono News that Australia lagged behind legislatively with CSEF compared to overseas developed countries.

“Comparatively, the legislation for the equivalent in the UK, the US, New Zealand and Canada were all passed years ago. So Australia is significantly behind in the equity crowdfunding space,” Ward said.

“That’s a disadvantage, but it’s coming, just slower than it is in other parts of the world.”

He said the proposed legislation provided was well served to benefit community-owned enterprises, especially since it offered flexibility for organisations to write their own constitution.

“So if private company equity crowdfunding comes into place and people can write the constitution to make it more reflective of being one member, one vote, there is an opportunity for communities to democratically participate in building businesses that are run for the benefit of that community,” he said.

“And by nature of equity crowdfunding they will be funded by the community, used by the community and they’re not seeking to grow so big that they take over the town next door.

“So each community will own its piece of infrastructure, the way the legislation is aimed. So I think there is good news on the horizon.”

Ward added that it would “unlock a whole bunch of opportunities” for the community sector.

“I can see 1,000 people in the community putting $1000 a piece in and they can buy a $1 million battery storage solution which connects to the pre-existing solar on their roof and means that the community can go off-the-grid,” he said.

“I can see that business model in 10,000 communities or more across Australia and then if you think about it, it’s not just energy, it’s waste, it’s water and education and social services and food and tourism and 3D manufacturing. If you take that kind of business model, you can create some amazing community-owned enterprises.

“If you could have a company that provides mass participation, democratic involvement and enshrines that member-benefit thinking, then I think instead of replacing an AGL or Origin with an AGL or Origin that’s not run on coal but on renewables, you replace it with 10,000 tiny AGLs that are all community owned. And you do the same for Coles and Woolworths with community owned agriculture projects…. and any other piece of infrastructure that’s necessary.”

Employee Ownership Australia board member Alan Greig told Pro Bono News that he welcomed the legislation, but warned that it still restricted CSEF to “the few” rather than opening it up to “the many”.

“I am still not a big fan of the yet to be smaller company ‘Pty Ltd’ legislation. It has potential for social enterprises, but to me it seems to be still far too focused on the ‘the few’ amongst the investor community (especially self-managed Super Funds) rather than ‘the many’ – the mass of small retail investors in the community who would be keen to invest often very small amounts into local – often ‘cause based’ – social businesses,” Greig said.

“In the UK, this approach is focused on saving community facilities through community ownership – like community buyouts of pubs, stores, servos, leisure facilities, community farms etc. – some 500 in the past few years.

“It will be interesting to see whether we can make that work, and it be enabled under our CSEF regime, given our penchant to make such approaches so complex and costly though law/regulation as to rule out entirely people giving it a go.”

Tom Dawkins, the CEO and co-founder of cause-driven crowdfunding platform StartSomeGood, said that CSEF was not currently having much of an impact since less than 1 per cent of companies in Australia currently met the definition.

He added that the proposed legislation was unlikely to pass until September.

“We have the worst equity crowdfunding laws in the world, because while it opens it up to non-sophisticated investors, it radically throttles which companies can actually access this opportunity,” Dawkins told Pro Bono News.

“When less than 1 per cent of companies in Australia can use equity crowdfunding, how significant could it possibly be?

“A fix is on the way, but it’s unlikely to be until September. So while this is a useful stepping stone, we’ll be more excited once September rolls around if they have successfully expanded it out to [proprietary companies], because they constitute almost all the social enterprises that we work with.”                 

Greig said CSEF would allow the community to become more involved in social enterprise and would also remove some key barriers to the sector’s growth.

“Opening up social enterprise to ‘the crowd’ will bypass the narrow ‘monied interests’ and create a form of equalisation where all people in any community with any assets – no matter how limited – can participate in community business. Giving all a chance to participate in social enterprise – even those with limited means – is what the ‘wisdom of the crowd’ is all about. This will be good for regenerating ‘community self-help’ and social capital building as well,” he said.

“CSEF will also go far in overcoming one of the key barriers to growth in the social enterprise sector here  – the lack of sophistication in approach to their financial needs, combined with the ‘charitable mindset’ which inhibits risk-taking.

“It will also drive increased interest in social accounting to demonstrate financial as well social and ethical performance, while addressing further the skills gap we have within social enterprise and the lack of business expertise.”

Greig said if the proposed legislation for companies could not make CSEF work for the community, then Australians would have to look back to co-operative legislation alone for community investment.

But Ward said he did not think co-operative legislation would be enough to support the community sector.

“I’m a big fan of the co-operative sector, but the sector faces significant challenges going mainstream as it stands. So I think our best bet is getting companies through equity crowdfunding and then replacing the company’s constitution with that of a co-operative,” Ward said.

“This is [more promising] than hoping we can get co-operatives to be well enough understood by financial advisors to have the instruments of co-operatives.

“We’re decades away from that being mainstream, whereas we’re months to a year away before equity crowdfunding with an adjusted constitution could achieve the same end.”