Why Deregulating Equity Crowdfunding in Real Estate Is a Bad Idea in Australia

Equity crowd funding usa is finally coming to Australia. Today the Joe Hockey led Treasury announced a slew of measures in the budget to help support startups. This is one of them being undertaking steps to bring Equity crowdfunding to Australia.

This is a welcome measure and must be lauded. Australian startup business finds difficulty to raise money locally and the best and brightest tend to sail across the pacific in search of greener pastures. Early stage startups in particular will find this avenue of accessing funds from the crowd especially useful.

Equity crowdfunding

ASIC in its submission had asked for more resources to setup and monitor the new Equity crowdfunding framework. The government has agreed to provide it with those. Although 7.4M over next few years can seem pretty paltry when compared to the potential genie that could get uncorked from the bottle.

If we look at ASIC’s submission closely, the expected framework will allow for 200 instead of the current 20 retail investors. Also ASIC will ask crowdfunding platforms to self regulate and monitor an individuals investment on a specific platform below a certain level, which could be fixed to $5000.

Even within these constraints, the expected deregulation can be a boon to early stage startups and provide a fillip to Australian innovation.

Hidden dangers lie

But beyond the rosy talk, hidden dangers lie. One of the major beneficiaries of equity crowdfunding deregulation in the US is crowdfunding real estate platform. While the broken American housing market needed this boost of liquidity, unleashing deregulated Real Estate Crowdfunding in Australia would be like spraying Petrol on fire.

Australians love property and are three times more likely to invest in property than an American. Negative gearing, low-interest rates, and Chinese money have all created a bubble that is pricing out most middle class Australians out of the property market. Property Spruikers run seminars, which border on evangelism, imagine unleashing these guys online on unsuspecting mom and pops.

Equity crowdfunding for real estate developers for startups is a great idea and will help startups acquire the minimum oxygen they need to survive and grow in their early stages. But for investment purposes the current ASIC regime based on AFSL and Public Disclosure Statements and proper due diligence should stay.

ASIC has already indicated that it intends to preserve this for pure investment purposes. Financial innovation can be a good thing, but we should all carefully remember what Subprime Mortgage Backed Securities got us.