Home' Forge : Vol 1 No 2 Contents FAST LANE // 7
One of the mysteries of the post-GFC
economy is the relatively low level of
business investment. Why are extremely
low interest rates in the developed
world not translating into more
investment from big business?
In America in particular,
many of the non-finance
corporations are cashed
up, but are doing little
According to a report by
the Bank for International
Settlements (BIS), one
theory is that, although it has
become easier to raise equity
capital, it is not the same for the
cost and availability of bank credit.
The report says that in most economies,
the cost of bank credit has declined by less
than the cost of capital market funding.
A better explanation, however, is a lack of
profitable investment opportunities. ‘Given
the strong growth of debt and equity issuance,
it is hard to see that a shortage of funding
has significantly constrained aggregate
investment,’ the BIS report says. ‘Many
companies, especially in the United States,
can issue debt on such favourable terms that
they have used new debt to finance share
buybacks. In addition, while business credit
growth is low globally, it is not clear that this
is because of a restricted supply of credit
rather than weak demand.’
The report concludes that businesses are
uncertain about the profitability of making
investments, and so are reluctant to take
risks – even when capital is easy to obtain.
This casts doubt on the strategies that were
employed by governments and regulators
in the wake of the GFC. The focus has
been on bailing out stressed financial
institutions, and creating conditions that
make it easy for them to lend. But, as Japan
has demonstrated since 1990, easy monetary
and financial conditions will not necessarily
kickstart an economy. For businesses to raise
capital and invest, they must be confident
that consumers will spend enough for the
investment to be profitable. With a widening
income gap in many developed economies,
that is becoming harder. The solution?
Simply hang on to the capital.
Raising equity for start-ups or for business development
is one of the most challenging tasks for Australian
businesses. For most smaller enterprises, the stock market
is neither practical nor within reach, which leaves friends
and family as the main potential source of capital. An
alternative approach, which seems to offer more hope,
is crowdfunding, whereby the business lists itself on an
intermediary’s website and seeks to raise the necessary
funds from third parties.
The prospects for crowdfunding in Australia appeared to
get a boost when taxi-booking company ingogo completed
a $12 million fundraising round, which included
$4.2 million from crowdfunding. That $4.2 million was
more than twice the previous biggest raising in Australia,
and was the second largest in the world.
Whether this is a positive sign for would-be start-ups is
debatable. In total, ingogo has raised $28 million over
four years, and the company is valued at $100 million. It
has used crowdfunding as a means of diversifying the
offering, rather than as the sole source of capital.
Crowdfunding is legal in Australia, but many of the
potential problems remain unresolved. The level of
financial disclosure is largely unmonitored, and there
is often no secondary market for the shares. At least
two new approaches are being considered; one is
the Corporations and Markets Advisory Committee
(CAMAC) model. Under this regime, a start-up would
automatically become a public company after early-stage
exemptions. Fundraising would be limited to no more
than $2 million per year, and individual investors would
not be able to commit more than $2500 annually.
The other approach is being used in New Zealand. The
crowdfunding platform is responsible for ensuring that
the businesses looking to raise funds have not engaged
in false and misleading conduct. Those enterprises
must submit a business plan, but there is no requirement
for audited financial accounts.
Communications Minister Malcolm Turnbull has
suggested that the new Australian legislation,
which should be introduced by the end
of the year, is likely to be similar to the
New Zealand approach.
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