A better model for crowd equity funding

In its current form Australia’s proposed Crowdfunding Legislation, with its limits of $10,000 per non sophisticated investor per year and maximum of $2500 per company per investor, looks pretty bloody useless.

My guess is the feds are working hard to protect small investors from losing their money on an investment that they can’t do a proper risk assessment on.

The fear? That the same small investors, after they lose their money, will cry foul and blame the government for not protecting them from their own ignorance.

I have a solution!

Put all the relevant companies into a pool (say a specific exchange) and when an investor puts their money in they are assigned a randomly picked stock.

Given that the pool will without doubt lose money and that there will only be a small fraction of companies that make money, this then creates a ‘lottery’ situation. Most importantly the mean return for all the money going into the exchange will be negative, just like any good tote scheme.

Since this is without doubt just a pure gamble, investors gains would not be taxable as income.

And their losses? Well, bad luck – it would be like losing your money on a horse or a lottery ticket.

I would also create a PIPE scheme, where these same companies could sell stock directly to private investors (at the same price and terms) which would be treated under capital gains tax rules.