Next Investors logo grey

Are start-ups about to become the next small cap stocks? – OPINION

Published 08-DEC-2015 12:43 P.M.


4 minute read

Hey! Looks like you have stumbled on the section of our website where we have archived articles from our old business model.

In 2019 the original founding team returned to run Next Investors, we changed our business model to only write about stocks we carefully research and are invested in for the long term.

The below articles were written under our previous business model. We have kept these articles online here for your reference.

Our new mission is to build a high performing ASX micro cap investment portfolio and share our research, analysis and investment strategy with our readers.

Click Here to View Latest Articles

It’s a question worth mulling over as a result of the government’s much-vaunted ‘Innovation Statement’, which amongst its recommendations opened up start-ups to a much larger pool of equity.

In case you missed it, the Turnbull government yesterday outlined a $1.1 billion spend over four years to foster innovation.

One of the key planks was an ambitious plan to attract more small-scale capital for start-ups which may fly under the radar of existing venture capital of angel investors.

The government pointed to a report done by PricewaterhouseCoopers back in 2013 on the start-up sector, which found that 4500 Australian start-ups miss out on funding altogether.

It also found that access to funding is one of the main prohibitors in start-ups getting off the ground.

It may very well be that the next big thing is being brewed in a garage somewhere, but unless that start-up understands how to access capital investors, they’re not going to win any investment.

However, the government is aiming to turn mum and dad investors who may not be averse from having a punt on small cap equities into those who may not be averse from having a punt on start-ups.

Compared to other nations around the world, Australians in general are obsessed with investing in listed stocks. This comparison is especially true when measured against the US, where investing in private companies is easier.

So what’s the carrot?

The government is attempting to lure finance from everyday Australians in two ways:

Number one, it is offering a 20% tax offset for investors rather than a deduction.

For example, if somebody invests $100,000 in a start-up, their tax will be reduced by $20,000 straight off the bat.

If it were a deduction however, it would come off the investor’s taxable income and would not equate to the full $20,000.

Secondly, it is providing a 10 year exemption on capital gains tax on the initial investment if the investor holds onto their investment for three or more years.

So, if an investor invests $100,000 for shares in a start-up and sells them for $500,000 five years later, the initial $100,000 will be free from capital gains tax.

For investors looking for potential rapid upside in exchange for greater risk, these two things may help swing attention away from small-cap equities and toward start-ups.

Investors will also be eligible for a 10% tax offset for capital invested in ‘Early Stage Venture Capital Limited Partnerships’ under proposed legislation.

Eligible companies must have expenditure of less than $1 million and income less than $200,000 in the previous income year.


The government also announced that it would allow start-ups to access capital from crowd-sourced equity funding platforms.

Usually, to access CSEF platforms companies need to be public. There’s nothing in particular stopping a start-up from becoming a public company except the burden of having to do things like file annual reports and hold annual general meetings.

For many start-ups who are a one-man band, this can be rather onerous instead of being a simple proprietary company.

Under laws being drafted however, a start-up will be exempt from having to file audited annual reports and holding annual general meetings for five years.

This means start-ups will be able to access CSEF platforms, grab the capital, and then in five years when the company is more established get to filing annual reports and holding AGMs.

Access to CSEF platforms has been in vogue of late.

Crowdfunding advisor Oscar Jofre told the International Mining and Resources Conference in Melbourne recently that companies looking at raising cash via brokers were leaving of a lot of cash on the table.

“You think when you take a deal to a broker, that it’s actually being distributed to everybody. It is not,” Jofre said.

“In the last ten years the mining sector, the private placements that have been done, have only been distributed to the one per cent of those investors qualified to invest.

“The rest just aren’t getting a shot at it.”

A flood on the cards?

It’s way too early to call whether or not start-ups will eat into the retail investment pool available to small-cap equities.

It could very well be the case that the new funding arrangements will open up a new source of capital, as those who may not have thought about investing in small caps look at start-ups.

In any case, a lot of the changes need to go through parliament before they get off the ground, and there’s no guarantees there.

But it does open up another path to funding for early-stage investments.

The scope of what qualifies as a ‘start up’ under the scheme is yet to be fully defined, but it’s unlikely a driller looking for $1 million in capital to drill targets in West Africa is going to qualify.

From this point of view, it’s hard to see a direct competition breaking out between small cap equities and start-ups for retail finance.

But, it does open up another interesting paradigm in the smaller end of the market.

General Information Only

S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

Conflicts of Interest Notice

S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.

Publication Notice and Disclaimer

The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.

Any forward-looking statements contained in this article are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results or performance of companies featured to differ materially from those expressed in the statements contained in this article. S3 cannot and does not give any assurance that the results or performance expressed or implied by any forward-looking statements contained in this article will actually occur and readers are cautioned not to put undue reliance on forward-looking statements.

This article may include references to our past investing performance. Past performance is not a reliable indicator of our future investing performance.