Partway through its Series D capital raise, Australian neobank Xinja is inviting customers to back the new bank if they meet the definition of sophisticated or wholesale investors.

The company is currently conducting a $50 million Series D raise with the first tranche of $20 million already secured.

Previously Xinja has tapped its customers to participate in equity crowdfunding campaigns which raised more than $5 million. This money is accompanied by the $45 million raised from private and institutional investors around the globe.

However Australia’s laws prevent the bank from embarking on a third equity crowdfunding campaign, so the company is inviting ‘sophisticated’ or ‘wholesale’ investors to participate in the capital raise. The minimum investment parcel is $20,400 for 5,000 shares at $4.08 per share.

“I’m delighted to let you know that we’ve decided to once again open up our capital raising to a wider range of investors,” Eric Wilson, founder and CEO of Xinja, wrote in an email to customers today.

“We would have liked to do this via another equity crowdfunding round, however, regulation prevents us from doing so (having more than $25 million in assets means we are no longer eligible). This means the offer is only open to ‘sophisticated’ or ‘wholesale’ investors and this email is to let you, as a Xinja customer, know first.”

In September 2019 Xinja launched a savings account to the public and 47 days after a hard launch to market, the bank held over $300 million in deposits and had 25,000 customers.

The new cash injection will be used to help the business capitalise on this early growth and expand its offerings. The business plans to launch home loans, business banking and other subscription-based products this year. Xinja has flagged a potential IPO in the 12-24 month timeframe is being considered but is not guaranteed. And it expects to break even in FY22.

Funding reforms 

Xinja used its submission to Senate Select Committee on Financial Technology and Regulatory Technology, to ask that the asset restriction on companies offering equity crowdfunding be lifted. If the changes are made, Wilson said Xinja would conduct another equity crowdfunding raise.

The submission noted ADIs are particularly disadvantaged because of the amount of capital they need to hold for regulatory purposes that might otherwise not be included in asset calculations.

Lifting the cap on how much a company can raise via crowdfunding, or the net assets for the company to continue fundraising is one of a number of financial assistance measures the company asks for in its submission. Government grants, incentives for startup founders and tax subsidies are also offered up as suggestions to help overcome obstacles to capital raising.

The submission notes, “Xinja has found the appetite and funds available for startup investment in Australia to be particularly limited, and investors difficult or costly to reach. Xinja’s initial funding came from direct founder networks rather than from the investor community at large.”

The neobank has deliberately not sought nor accepted equity funding from the major banks, to remain independent.

The submission also highlights the high cost of operating a neobank, which face a high level of regulatory scrutiny and testing before the banking products go to market.

“At one point throughout 2019, 60 per cent of Xinja’s staff were working on licensing materials to put before regulators in one form or another. We estimate that this process has cost us well in excess of $6m in salaries and consultancy fees,” the submission states.

“The process caused delays to launch and a crunch on the money we had available to build the bank. Investors, not unreasonably, wanted to wait until we had our licence before investing more, meaning we had to ration our expenditure further, slowing the development of the bank.”

Xinja’s submission also recommends establishing more pathways to better connect investors and investment communities to fundraising opportunities. For example, by providing consular assistance for raising funds from overseas.

The submission also raises the possibility of reallocating industry fines to fintech startups for example fines levied by AUSTRAC against banks to be put towards the establishment of an Australian equivalent of the UK Capability & Innovation Fund (CIF), which is is designed to promote competition in the market for banking services to SMEs in the UK through expansion of each successful applicant’s business capacity, product offering and/or target markets.

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