BILLS: Corporations Amendment (Crowd-sourced Funding) Bill 2015

Mr HUSIC (Chifley) (12:45): I rise to outline federal Labor's position on the government's Corporations Amendment (Crowd-sourced Funding) Bill 2015. Labor has long recognised the importance of early-stage innovation to drive economic growth in Australia and Australia's start-ups have already proven their potential here and abroad. From small beginnings, they have evolved into widely celebrated names from seek.com.au to carsales.com.au to freelancer and even the recent listing of software company Atlassian on the NASDAQ. We need to encourage the growth of successful start-ups, especially considering the majority of jobs to be created in the next decade and beyond will be with companies that do not exist today and that is why it is important to have policies in place to help grow as many more of these companies as possible, policies that help remove some of the barriers to growth, particularly a lack of capital. The challenge is to channel investor dollars into early-stage innovation and that challenge is real.

I note for instance that some have observed that of the eight million investors in the US, only an estimated three per cent have ever invested in a private start-up. Clearly more investors prefer to back established companies. So while traditional sources of funding for early-stage innovation and start-ups have come from venture capital and angel investors, equity crowdfunding has emerged as an alternative way of raising capital.

Crowdfunding is not new. It has been used as a way of raising funds for projects gained by securing small amounts of money from the public via the internet. In the case of equity crowdfunding, the internet forms a platform for start-ups and other small businesses to raise funds in return for an equity stake in those businesses. This bill amends the Corporations Act 2001 and the Australian Securities Investment Commission Act 2001 to facilitate equity crowdfunding and a series of proposed regulations to help enact the bill were also released on 22 December 2015.

The origins of this bill sit within a decision taken in 2013 by the former Labor government, where the Corporations and Markets Advisory Committee—otherwise known as CAMAC—was tasked to advise on the appropriate framework to allow equity crowdfunding to operate in Australia. In May 2014, CAMAC completed this review and found that this form of fundraising is costly and impractical for businesses largely due to regulatory impediments in the Corporations Act that impose an excessive compliance cost for start-ups and other small businesses. Since then, Labor has consulted with the start-up community and heard their views on what they believe will make for a productive regulatory framework. These consultations, along with the tremendous work of CAMAC, have shaped Labor's overall philosophy to equity crowdfunding—namely, we think that it is important that governments recognise and demonstrate support for equity crowdfunding, sending the signal that it is one of the legitimate and valuable ways to raise much needed capital. We also believe investing in start-ups is an important to way to drive early-stage innovation but there is also a greater risk degree of risk and failure. That is why it is important to have investor safeguards in place. While having these measures in place, we should ensure that the legal framework introduced is not heavy-handed and costly. We believe a lighter touch regulatory framework should deliver vital capital for start-ups. Since we are competing in a global market for funds, we should be mindful of the level of limits on access to capital.

Finally, once a reliable framework is in place, it should not be subject to constant change. Investors and companies should be confident that they can invest without concern the laws will change with the wind. Having said that, Labor will be setting down legislative tests for this new framework and will announce future changes were required. We know that within the start-up community equity crowdfunding is not everyone's cup of tea but the reality is it is going to be someone's cup of tea. Considering this, we need a robust secure legal framework in place to ensure that those who use this mechanism to seek investment or those who seek to invest have every confidence in the surety of the crowdfunding system.

For some time, we as an opposition have stated our preparedness to work constructively with the Abbott and then Turnbull government to advance the development of a viable equity crowdfunding framework, even if they have not demonstrated a similar desire of late to work cooperatively on this legislation. In stark contrast to current circumstances, I want to publicly acknowledge that we had solid and open discussions about reform pathways with the former small business minister, that irrepressible member for Dunkley, Bruce Billson. We recognise and pay tribute to his efforts. He invested much into this legislation previously and demonstrated a preparedness to be consultative and considered with the federal opposition on this reform. In the discussions we had with him, I would like to think we gave him every confidence that we never broke a confidence. From our point of view, it was important the opposition, in signalling its preparedness to work with the government, was giving the government room to move to explore a new approach to equity raising that is providing a direct challenge to longstanding, deeply held views about how this should work as evidenced in the Corporations Act. That is the dividend that is generated through genuine bipartisanship and collaboration.

I never thought I would say this but there were ministers in the Abbott government that were better at consultation than ministers in the Turnbull government. Although it is early days and while they took up their commitment to bipartisanship, it appears the Turnbull government's approach to bipartisanship in this space reflected its broader mindset—say one thing, do another. Worse still, it appears this mindset is underpinned by a view that the opposition is merely here to rubber-stamp government proposals. I would like to respectfully inform the Assistant Treasurer that that is not how bipartisanship in the innovation space is going to work. We certainly will not be rubber-stamping a bill that has attracted the level of industry and legal concern this bill has, especially when we see that literally none of the recommendations we made in discussions with the Abbott government have survived the transition to the new regime. Not surprisingly, that has been the experience industry stakeholders have complained about—that there has been a complete and utter failure to address serious concerns and grievances that have been raised with the government about this bill.

I suspect what has happened is that we have a new minister and he has had little time to get across a complex policy area, combined with public pressure to release the draft bill by the end of last year, and they simply bow to the kind of internal resistance that has seen Treasury delay the speedy formation of an equity crowdfunding framework. It is important to remember this: it has taken over 18 months to get to the point of debating the legislation here, it has been 18 months since an independent CAMAC report on equity crowdfunding was released in May 2014 and it will be nearly two years from that point before this bill even becomes law. So much talk about being agile and nimble, yet so little evidence of this happening in real life. I will outline federal Labor's position and intent with this bill later in my contribution, but for now let me outline key elements of the bill.

Start-ups and small businesses will be required to convert themselves into unlisted public companies if they seek to access equity crowdfunding. Eligible companies will be able to fundraise up to $5 million a year from retail investors, an amount higher than allowed under both the New Zealand framework and the model recommended by CAMAC. Retail investors can invest up to $10,000 per issuer per 12-month period, allowing investors the opportunity to make substantial investments in a product while also seeking to mitigate the size of their exposure. Retail investors will not be limited in the total amount of investment they can undertake, allowing them to diversify. Investors will have cooling-off rights for a period of five days. Equity crowdfunding will not be limited to start-ups; small businesses will also be able to access this funding regime. Companies will be required to meet turnover and assets tests before they are eligible to fundraise, with a threshold of $5 million.

Provided a company undertakes crowdsourced equity fundraising within 12 months of registering as a public company, they will be eligible for exemptions of up to five years from requirements to hold AGMs, have annual reports audited if they have raised less than $1 million from equity crowdfunding and provide annual reports to investors other than by publishing them on the website. Companies fundraising under this framework will be able to offer equity securities to retail investors with lower disclosure than currently required. However, the government proposes to set out disclosure requirements in the regulations, which it has, that will ensure investors have access to the key facts about the company, its structure and fundraising.

Investors will also be able to interact directly with the company to ask questions relating to an offer and the company will be able to respond to those information requests. Intermediaries who maintain an internet based platform to bring start-ups and investors together will be required to be licensed, and they will have to meet certain obligations, including the conduct of checks on issuers.

It is worth noting at this point that the government's proposals have drawn a mixed reaction. While industry stakeholders have most definitely welcomed progress in bringing equity crowdfunding laws to reality, many have expressed disappointment publicly and to the opposition that the government has completely ignored concerns about aspects of the framework that will potentially add regulatory and financial imposts on start-ups and crowdfunding platforms. Taking this into account, Labor moved to have the bill examined by the Senate Economics Legislation Committee, which I understand is set to report later in February.

It is safe to say the response from the sector to this inquiry has been frank and fearless. They certainly have not held back their views on what needs to be reformed. Overall, while Labor agrees with the need to introduce equity crowdfunding legislation, there are some key areas of the bill that may require amendment, pending the outcome of the Senate inquiry into the legislation, and we reserve our right to put forward any amendments to this bill after the Senate brings down its report. But let us detail some of those concerns, and they are pretty significant.

For example, the Australian Private Equity & Venture Capital Association Limited states that, in their view:

… the rules should be simple and cost-efficient, and principally targeted at successfully aligning the interests of startups and CSF investors.

They have outlined a number of concerns about the restrictions that exist within the bill. The Faculty of Law at the University of New South Wales has argued:

Currently the Bill excludes over 99.7% of companies from accessing CSF.

They are even more blunt in saying, for instance:

… the current proposed model in front of the parliament is too restrictive and excludes the majority of Australian companies from relying on CSF.

They are backed up by the Law Council, which states:

The Committee is concerned that the CSEF Bill is too complicated to be easily understood by start-ups and early stage companies seeking to take advantage of CSEF and may give rise to too high a regulatory burden for intermediaries to readily embrace the establishment of CSEF platforms.

BDO say:

The requirement to become a public company—

as embedded in this bill—

is likely to be daunting and costly to start-ups and small businesses.

Again, they have provided some very detailed concerns about what is being proposed. They say, for example:

It is not clear from the draft legislation, or the explanatory memorandum, what the Government perceives to be the risks to investors in CSF Companies compared with public companies and proprietary companies, and therefore it cannot be logically followed how the draft legislation is seeking to address these risks.

…   …   …

The focus of the draft legislation appears to be on trying to amend the current legislation to allow a limited level of CSF, but the law as it stands is too restrictive for this to be effective.

BDO would prefer to see a focus on identifying the risks to investors …

Employee Ownership Australia & New Zealand, in reflecting on this requirement to become a public company, state that there can be:

… significant costs for a smaller organisation, from $15,000 per annum. The financial statement and content requirements also may cause some concerns for entities that do not wish to give full disclosure for competitive advantage.

That is a serious concern. Pitcher Partners state:

The significant restrictions proposed for eligible participants (customers) and eligible securities (products) under the regime will ultimately result in very limited demand for the regime.

Accordingly, we believe that it will be difficult for CSF platform operators to create platforms that will (from a business perspective) be economically viable.

This is from the sector itself, questioning whether or not this will be a viable platform. Further, they state:

… we believe that the number of companies that seek finance from a CSF platform is likely to be less than expected unless compliance costs associated with becoming a public company can be reduced.

These are fairly damning comments. The Business Council of Co-operatives and Mutuals say that they do not support the current draft amendments because they:

A. do not serve the capital needs of small or start up enterprises, particularly co-operative or social enterprise models and

B. impose unwarranted regulatory imposts on the disclosure regime for the offer of securities by co-operatives governed by state and territory laws.

They go on to say:

As drafted, the proposed CSF amendments establish a regime

With potentially high costs for raising small amounts of capital

that is aimed at capital raising amounts in excess of the needs of small businesses and social enterprises

that does not recognise retail investor motivations or intelligence and

that excludes common entity types established for small business or social enterprise purposes.

VentureCrowd, one of the few that has been maintaining a regime in this country providing equity crowdfunding, believe that the reforms are made to allow equity where crowdfunding must reduce the friction currently associated with start-ups raising capital while ensuring that investors are both educated in the risks and protected. They say:

The Bill's requirement that an ECF start-up first becomes a public company imposes a significant (and unnecessary) regulatory, administrative and compliance burden on those start-ups.

That is, they have to spend thousands of dollars on lawyers and accountants to convert to being a public company. Although the bill provides relief from some of the burdensome consequences of being a public company, they claim this is token at best and the damage will have already been done, as outlined. This is a fairly damning quote, and it has been repeated by a number of companies to the opposition:

If there had been proper consultation with the Australian start-up community before the Bill was drafted, it would have been apparent that these fledgling businesses are unlikely to be able to adequately deal with 20 new shareholders, let alone more.

There is also within this bill a threat to their own business model. They rely on unit trusts as a way to crowdfund and they put forward the reasonable recommendation that under what they would prefer to see in this bill there would be no obligation to aggregate the investment but, they say, it at least would not be permitted. They want to see an ability for their business model to continue, and that has been repeated by others. These are all criticisms that have been levelled at this bill. CrowdfundUP say:

In its present form, the … Bill would not be attractive to start up companies due to the onerous requirement for a company to become a public company. Additionally, CrowdfundUP strongly suggest that after 12-24 months of the legislation being enacted, that it is revisited and revised.

They are clearly concerned about some of the things that are being put forward in this bill—in particular the abandonment of unit trusts being able to provide a mechanism for crowdfunding. CrowdReady says:

Our view is that the current Bill and Regulations are more facilitating in nature rather than encouraging crowd sourced equity funding in Australia.

Chartered Accountants say:

We are concerned that the CSF framework concessions for public companies may have a negative impact on investor rights and may also not achieve the desired aim of reducing regulatory burden.

They also say:

It is important that such reforms are implemented quickly—

good luck!—

as Australia is already significantly behind other similar nations, including New Zealand.

We consider alignment of the Australian and New Zealand CSF models is important as part of the single economic market and to ensure issuers do not see one country as preferential over the other.

They are valid concerns. The Australian Small Scale Offerings Board says:

The issues that are raised in this submission will make it very hard if not impossible for intermediaries to develop a business model that is sustainable and so this legislation will not have the effect that is desired.

Again, more criticism. The Solutions4Strategy group say:

A fear based approach that over focuses on possible risks for investors has created a bloated structure that is inflexible, too costly for the businesses it was designed for and at the end of the day does not reduce the risk to investors.

In discussion with Treasury, forefront in their thinking is how to avoid future newspaper headlines … The risk averse culture in Government is hijacking economic outcomes.

So why is there a fixation on the Public company structure as being an ideal model and why is CSEF restricted to this model? CSEF is a disruptor that is breaking the mould of how capital raising is being done. We need to stop applying what may have worked for other forms of capital raising in the past and rethink what will work for this new structure.

Finally, King&Wood Mallesons, a large legal entity in this nation, say:

The greatest risk of the CSS Bill is that few startups or platforms will use it, and it will not support the development of Australian start-up businesses.

In their submission, and it is there publicly, they say:

Send the legislation for further consultation to see if it can be simplified. It is surprisingly complex and there are some difficulties ascertaining how it connects with other parts of the Corporations Act, and the Criminal Code .

This is a range of fairly solid criticisms that have been levelled at the way in which this bill has been framed and concerns about what it would do if it were brought to life—or, I think it is safe to say, what it would not do for advancing equity crowdfunding in this country. I will spell out some areas that will form markers for possible future reform, but I stress this: it will not be our intent to block this bill but we do reserve our right to amend it. Again, we intend to await the outcome of the Senate inquiry and to determine what amendments might be required but in the interests of legitimate bipartisanship we also extend this genuine offer to the government: even though there is a pressing need to get this legislation through, I take on board and the opposition takes on board the comments of the sector that they would rather get the legislation right than rush it, and if the government decides to park this bill and engage in genuine consultation to address widespread concerns about these proposed laws then we as the opposition would not criticise the government for that. I repeat: we would not criticise the government if it suspends passage of the bill to help make sure it gets the bill in better shape. We would rather get this right than rush things.

If the government is determined to press ahead with the bill, we will not invest time in blocking it but we will hold them most definitely to account for the lived experience of the bill. Our genuine desire is for the bill to support the emergence of a strong equity crowdfunding community in Australia, but we have serious doubts about this happening under what is being proposed. There are some areas that we will closely monitor, and for the public record we state to the start-up and small business community that we will maintain a watching brief and will potentially mark these out as areas of reform in the future.

One area, for example, is the demand for conversion into an unlisted public company. As indicated earlier and as you have heard, there is a widespread view that this is onerous and heavy handed. We believe that there are alternative approaches that could have been employed to manage some of the limitations presented in the Corporations Act and we state for the record that we will continue to keep a watch on this into the future.

We will also maintain a watch on the overall fundraising amount and individual caps. You heard some from the sector express that, on the one hand, there is no clear identification of what risks this bill is trying to tackle and yet, on the other hand, the government has brought in an increased fundraising cap and increased individual caps of up to $5 million, well above what is happening in New Zealand and well above what was recommended in the CAMAC report. So we will watch that. I should state that there are diverging views about this in the sector. Some question why it is so high; others say that the individual cap should be lifted to $20,000. Either way, it is clear that there is not consensus on this, and we have to keep a watch on it.

There is a serious concern that the prevention of access by unit trusts to the regime will kill off certain businesses that currently operate in this space. We want to know from the Assistant Treasurer what the motivation for this is, because some of the companies have said to the opposition that it has never been clearly explained to them why this is the case: why are they singled out in this way? We will also be keeping tabs on that.

Another area—something that intermediaries actually support, if I can put that on the public record, but that we have some reservations about and will watch very closely—is the ability of intermediaries to choose, before the close of a fundraising campaign, which start-ups on their platform they will invest in and which ones they will not invest in. Now, I can understand that for intermediaries that do not make a lot of money—and it should be added that not a lot of money has been made out of this process so far; it is something that in due course will evolve and we will see how profitable intermediaries will become. It is understandable, and I can certainly appreciate why the government has allowed this. But CAMAC was concerned about this and rightly so. The government will need to explain how it will manage a situation where the crowd is influenced by intermediaries choosing to invest in one company over another, because this is a platform that will attract both sophisticated and unsophisticated investors, and there will need to be an assurance that the choices of intermediaries, the actual crowdfunders themselves selecting which companies they invest in, do not influence the crowd.

In December 2014, Labor put forward principles to address this point and advanced the notion of last-mile investment—that, at the close of a campaign, if a campaign did not reach its target but a crowdfunder saw that there was promise in one of the start-ups or small businesses that put forward a proposition on their platform, an intermediary be given the ability to invest in that individual proposition. We argued that that might be a way to sidestep some of the concerns. Certainly, that has not been taken up in this bill, and we are disappointed that that has not been advanced further. But again, in the interests of getting the laws in place as quickly as possible, and to not be obstinate and block the bill's passage through the parliament, we will maintain a watching brief on it and see how it goes.

The other area is investor interaction. The bill allows for a multitude of investors to make contact with a start-up or small business to ask questions about the investment proposition being put forward. You can see why that might make sense. But just bear in mind that a lot of these start-ups, a lot of these early-stage businesses, do not have sophisticated investor relations platforms, mechanisms, policies or approaches. The preferable way to do this would be to go through the intermediaries and let them manage the bulk of the requests for information, channel through the start-up and provide the flow of information to investors to they can make informed decisions. I would be interested in finding out more about why this bill allows for the crowd to converge on an individual start-up with a plethora of questions. Again, Labor's view is that we will maintain a watching brief and we will see where we go from there.

We also want to get an explanation from the government about the $7.7 million that has been allocated to ASIC for overall oversight of the bill. There is $7.8 million over the forward estimates, which was spelled out in last year's budget, which is roughly $1.7 million a year beyond the current fiscal year, for supervision of the bill. We would be interested in knowing how many people have been assigned to maintain a watch on this emerging system and if that is the limit of the amount that has been assigned for supervision. The last thing you want in this area is lax supervision. We do not necessarily want ASIC to be looking over the shoulders of all the crowdfunders and all the issuers, and we would hope that there would be a productive relationship that builds up the knowledge base in the sector and ensures that there is a smooth pathway to the emergence of a crowdfunding community in this country.

Having said that, it does seem a lot, $1 million a year for the number of companies that may access it. But then again it may not necessarily reach that because, if you believe the predictions of the sector, hardly anyone is going to use this platform within the framework that has been advanced by this bill. It may be a moot point. I think the bottom line is that it would be beneficial if the Assistant Treasurer outlined to the parliament how the allocation of that money will be used for supervisory activities.

Again, I extend to the government this commitment: if they take on board—and they have seen already—the large number of reactions to what is proposed and they say, for instance, that they want to park the bill and consult further, we extend to them our continued desire to work with them on this bill in a collaborative way. If they park it, we will not criticise them for it. It is better to get this right. But, if they go ahead and decide to ram this through, we will see what the Senate says and we will see what amendments are put forward. If it does get through the parliament, we maintain the position that this bill will be the subject of future reform and we will follow that up.

Having said that, I hope that this outlines in detail Labor's position on this bill. We welcome the fact that we are debating these laws and we look forward to the prospect of this bill allowing for a positive and vibrant sector to emerge. We hope that the government will accept our offer of bipartisanship to work with them on this and ensure that a strong framework is put in place.

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Ed Husic MP
Federal Labor Member for Chifley


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