Wednesday, 10 February 2016
Corporations Amendment (Crowd-sourced Funding) Bill 2015; Second Reading
As I was saying before the debate was adjourned in relation to the Corporations Amendment (Crowd-sourced Funding) Bill 2015, it is very important that we have a very strong and thriving innovation ecosystem. Part of that is making sure that funding works. Funding is part of the ecosystem. Of its very nature as an ecosystem, all components have to work together. In the funding space that means that crowdfunded equity has to work together with venture capital, with angel investment and with traditional forms of finance with a view to ensuring that new start-ups can get the money that they need to start and then to grow. The purpose of ensuring that we have such a strong ecosystem is to help start-ups get going and have very high growth in their early years with a view to, hopefully, follow the example of some great Australian firms like Atlassian and scale up to become a global firm. But we would like them to be able to do it a lot more, and we would like them to be able to do a lot more of it here in Australia. That requires a more mature funding system for start-ups where they can get better access to the funds that they need to start.
It is important, in considering that, that we get one of the strands of the bow of funding for start-ups—that is, as I say, crowd sourced equity funding—absolutely right when we legislate a new framework for that funding option for people, because it is really important that the sector feels as though this will be a positive move forward when it comes to finding an additional source of funding. Of course it is very important that, as members of parliament, we can have confidence that these laws will be laws that will be acceptable to the sector and to the public at large.
As I was saying earlier, there have been some very strong concerns expressed by some very significant and respected people in relation to this bill. Angela Perry, who is a world renowned expert on employee share ownership and who is part of Employee Ownership Australia, has made a submission to the Senate Standing Committee on Economics in relation to this bill raising some concerns. I was talking before we adjourned about the issue of the corporate structure for firms to be able to access the crowd sourced equity funding arrangement.
This bill requires a firm to become an unlisted but public company before gaining access to the crowd sourced equity funding regime. The Employee Ownership Australia submission to the Senate inquiry into the bill has made the point that this actually puts a significant amount of compliance burden on the firm right at the time they are starting up and trying to be a high-growth firm. They are being asked to do something they would not otherwise do. As Employee Ownership Australia says, transitioning from a proprietary limited company to a public company is something that it might do when it is getting ready to list, when it is at a significant size already. It is not necessarily something that it is going to be doing at the very beginning when it is that very new high-growth starting-up firm.
As Employee Ownership Australia say in their submission, there is a lot of cost. It is not just the additional compliance burden in time but of course time is also money. They say, for example, one of the key costs is a requirement to have an auditor and audited accountants, which smaller companies may not need. This can be a significant cost for a small organisations for $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. This is a significant and serious concern. It is a concern that has been expressed to me in private discussions with people who have got an interest in start-ups and in growing Australia's start-up and innovation ecosystem. It is an important concern.
I think the people in this place will find that the sector wants this done. There is no doubt about it; the sector wants the crowd sourced equity funding regime in place but wants it done right. There has been a variety of issues like the definition of 'related entities', for example, and the way that might work in situations where a start-up is not just relying on crowd sourced equity funding but is relying on venture capital. There is a range of other issues as well.
What Labor is saying is: go back to the sector, work out these issues, continue to consult and discuss. We will not criticise the coalition for taking that additional time to deal with the crowd sourced equity funding regime because we want to see this done right, because it is a matter of bipartisan position in this place that Australia needs a good strong crowd sourced equity funding regime as part of our innovation ecosystem, so we want to see it done right.
But as the shadow parliamentary secretary also said when he spoke to the bill, in the event that the coalition fails to go and engage with a view to ironing out those wrinkles, fails to get this bill into the form that it needs to be in for it to be something that would be not just acceptable but celebrated by the sector then we are going to have to consider how further reform might need to be taken when we are in government. We are going to have to revisit it. Of course the most efficient and best way to deal with this is to get it right from the very beginning, so further consultation would be appropriate.
It is not as though we do not have a range of experts willing to give us their expertise, give us the benefit of their views about the regime as it has been proposed. I mentioned Employee Ownership Australia because I think that they have made a great submission to the Senate inquiry. It is very concise and it draws the attention of the inquiry to a number of issues with the bill. They are also a stakeholder that engages with our bipartisan parliamentary friendship group on innovation and enterprise—and I note that the member for Banks, my co-convener of that parliamentary friendship group, is here in the chamber as we speak. It is a bipartisan group that engages very well with stakeholders to discuss what is needed for growing the innovation and start-up ecosystem in this country.
Another one of the stakeholders that has been very constructive and forthright in engaging with parliamentarians including through that friendship group is the Australian Private Equity and Venture Capital Association Ltd, known by its acronym AVCAL. They have also given us a great submission to the Senate inquiry to tell us what they think can be done to better implement the crowd sourced equity funding regime. Like all stakeholders and like Labor, they really welcome the implementation of the regime. They are very keen to see this crowd sourced equity funding regime put into place but, again, have raised several issues.
I mentioned earlier the related parties restriction. This is really something that needs to be dealt with because you do not want to inadvertently have a situation where coinvestors get caught up in the definition of 'related parties' and, as a consequence, you are actually reducing the pool of funding that a start-up is able to obtain by operation of these laws. That would be an unintended consequence and a shame, particularly given the funding that is available in the sector at the moment still needs to grow.
We still have immature funding in this country for start-ups. It is something that needs to be dealt with. It is something that both sides of this parliament are working very strongly on. Deputy Speaker Broadbent, You would have read Labor's very detailed and extensive innovation policy that we put out early in 2015. One of issues that needs to be dealt with is the available sources of funding in Australia need to grow. While that is happening, the last thing we would want to do as a parliament is inadvertently cut off funding options for start-ups through not having an appropriate definition of 'related entities' and therefore inadvertently catching co-investors.
A range of other submissions and issues have been raised by the Australian Private Equity & Venture Capital Association, AVCAL, as I have said. They are also concerned about the requirement under the bill as it currently stands that firms be unlisted public companies, for the reasons that were expressed in the submission to which I have previously referred. So there are a number of issues. There is an opportunity right now to deal with them, to continue the bipartisan spirit we have in trying to make a better start-up ecosystem in the interests of this country's economy. Now is the time, before the bill is passed, to iron out those wrinkles.
Crowdsourced equity funding is actually important for real businesses, for firms that are trying to start up, trying to grow, trying to scale and trying to become global firms. I do not say by any means that this is the be-all and end-all of funding for start-ups, but it is an important component. It will help some of our newer start-ups to try to emulate success stories like SEEK.com and Atlassian. Everyone in this place wants to see more success stories like those firms. High-growth start-ups are firms in which there are a lot of opportunities not just for the entrepreneurs themselves but also for the creation of jobs, which is something that our economy sorely needs.
The importance of funding obviously cannot be overstated when it comes to those starting up firms. That is why it is a genuine pleasure—I know I have talked about some of the concerns we have with the bill—to be here to speak in support of the concept of having crowdsourced equity funding as a framework in Australia. I think it is also timely—given that the Corporations and Markets Advisory Committee, also known as CAMAC, has given such good and strong advice on this framework—to acknowledge the real value of CAMAC and the advice it provides in this nation. I have spoken in this parliament before against coalition moves to abolish CAMAC. This is another example of CAMAC showing its value as an adviser.
The bill itself has a lot of really good features. I do not want to seem like I am being unnecessarily negative. But it is important that, in creating these frameworks, we work together—not just with the people here across the aisle, but with the sector; with funders; with start-ups themselves; with peak bodies like StartupAus, which is a really great organisation; with the accelerators; with the incubators; with the universities; with the research bodies; and of course with the stakeholders like AVCAL and Employee Ownership Australia and New Zealand, which I have mentioned, who are so willing and ready to assist.
The Corporations Amendment (Crowd-sourced Funding) Bill 2015 is extremely important, representing as it does a part of the government's approach to this most important area of facilitating funding for early-stage and start-up businesses. Why does funding matter? It matters because if, as a start-up business, you cannot raise funds to support your operations, you are not going to get very far. You are not going to get off the ground, you are not going to employ people and you are not going to be able to make that broad contribution to our economy which so many start-up businesses do. So anything that the government can sensibly do to facilitate the raising of capital on commercial terms for start-up businesses, we should do. We should not leave any stone unturned in that effort. One of those areas is crowdsourced funding, but there are a number of other areas that fit within this broad theme of helping our start-up businesses to raise the capital they need to get off the ground.
Mr Deputy Speaker, back in December you would no doubt have seen the National Innovation and Science Agenda, which was released by the Prime Minister and the Minister for Industry, Innovation and Science. In that important document the government covered off on a number of important areas to help start-up businesses to be able to raise more capital. One of the most important areas was in reforms to the operation of capital gains tax in Australia. At present, for the vast majority of investors, if you invest in a risky start-up business or if you invest in something more conservative—say, an investment property or listed shares or whatever the case may be—the capital gains tax treatment of those investments is exactly the same. Understandably, when most Australians decide where they would like to invest, they will tend to invest in those safer areas, such as property, listed securities and so on. Of course, there is nothing wrong with those investment classes, and they are huge parts of our economy, but it is particularly important that our policy levers encourage investment in early-stage businesses, because early-stage businesses are so often the place where innovation takes place. Our big incumbent businesses do innovate, but often when you are inside a very large business that is very successful today, it can be hard to pivot towards something that might be an opportunity in five or 10 years time. If you are a start-up, that is often your primary focus.
The capital gains tax regime as it exists now does not differentiate between a start-up investment and an investment in a much more conservative class of investment. What we said back in December is that we would make changes to our laws to give a capital gains tax benefit to investors to invest in start-up businesses. Basically the way it will work is that, when an investor takes that risk and puts some capital into a start-up business, as long as they hold that investment for a period of three years or more, on exit, when they sell, if they make a profit they will not pay capital gains tax. That is really important because it means that entrepreneurs, as they go out and try and raise money, can say 'Here is the proposition of our company.' A lot of start-ups do not work out, so the proposition will be, 'Here is our business concept—it might work, it might not work. But if it works and if your investment is successful you will not pay capital gains tax on that profit.' That is a really powerful lever for entrepreneurs to have, and from 1 July this year they will have that lever. For businesses that have modest expenditure and modest income in the last 12 months there will be that opportunity to have a capital gains tax benefit for investors. It is a very strong selling point.
In addition to that, those same investors who take the risk and invest in a start-up business will receive 20 per cent of the amount they invested back as a reduction of their tax bill. Take the example of someone who puts $100,000 into a small business. They will receive a $20,000 reduction on their tax bill at the end of the year as a result of that $100,000 investment. That is a very big deal, and that is going to be a very powerful incentive for investors to get behind the Australian start-up community.
Also important in the National Innovation and Science Agenda were changes to things called early stage venture capital limited partnerships, or ESVCLPs—a bit of an acronym. These ESVCLPs have been around for some time. When they were created, more than a decade ago, the rationale was that they would create some advantages for investors who were going to invest in start-up companies and hopefully seek to seed that start-up environment in Australia. The reality is that ESVCLPs have not worked particularly well in a stimulating start-up investment in Australia. As of late last year, there were only 24 ESVCLPs in Australia—24 in the whole country. Those 24 ESVCLPs did get certain benefits in relation to capital gains tax and other taxes, but they are quite a complex structure and effectively they are only available to people who are willing to place their investment into a third-party fund which then invests on their behalf. So they have some limitations.
We want to encourage ESVCLPs because, just as with those very small investors who will have a tax advantage after these changes are made, ESVCLPs allow larger investors to gain some benefit from investing in Australian start-ups. We have seen in recent months some more activity in the ESVCLP area. We are seeing the beginnings of a more mature funding ecosystem, so-called, but we can do more—and we are going to do more. Investors in ESVCLPs in the future will receive a 10 per cent reduction on their tax bill relative to the amount they put into an ESVCLP, and we are also going to enable ESVCLPs to hold up to $200 million instead of the old limit of $100 million. On both the small scale, with smaller investors putting money into start-ups, and the larger scale, with ESVCLPs putting money into start-ups, there are very significant material changes taking place here under the National Innovation and Science Agenda that will mean more money flows into start-ups, more investment in start-ups, more jobs in start-ups and more innovation in Australia. This government is absolutely determined to grow our innovation and start-up sphere. So these were very important initiatives back in December.
Today we are debating the crowdsourced funding bill, brought to the House by the Assistant Treasurer and Minister for Small Business. Just as those other initiatives were important for start-ups, this is a very important initiative too. 'Crowdfunding' has some of the characteristics of a bit of a buzzword, and sometimes it is used flippantly without it clearly describing what the situation is, so it might be worth explaining it. Effectively in Australia at the moment there are broadly two types of companies—there are public companies, which can make broad offers to raise capital from a very large group of people, businesses or whoever, under certain rules, and then there are private companies under which there is a series of other rules and those privately held companies can only raise capital in much more limited circumstances and effectively cannot make a general offer to raise capital. That means that if you want to raise a significant amount of money from lots of people in small amounts it is extremely difficult. You can do it through becoming a traditional public company and offering shares on the stock exchange and in other places, but there is a very substantial compliance cost, a compliance burden—as indeed there should be, because when such broad offers are made it is appropriate that there be a tight legal regime. You can do that now—you can through the public market seek to raise capital from large numbers of people but it is a very expensive process and, frankly, hardly any small business will ever attempt it because of its complexity. If you are a privately held company you can obviously seek to raise capital but there are significant limits on how you can do that and the number of entities you can approach. There are very substantial restrictions; you cannot just put out a general offer to the market.
Crowdsourced equity funding seeks to take the best of both worlds and basically say if you set yourself up to make use of this new structure you can raise money as a small company from hundreds of individuals providing small amounts of money and you can do so without all of the complexity that is normally associated with doing that. By 'complexity', we mean things like requirements for onerous meeting processes, for prospectuses to be issued, for complex audits of accounts and for various other things which render the current system not particularly useful to small businesses.
Through this important bill we will create a new structure of entity in Australia: a company which is set up for the purpose of raising funds in a crowdsourced fashion. Just to give you some perspective on what that means, in any given year, a company could raise as much as $5 million, with up to $10,000 from any one individual or entity, under these rules. So this is not about huge investors or highly sophisticated investors putting in millions of dollars; this is about small investors putting in a couple of thousand dollars, $5,000 or whatever it may be. As you can imagine, Mr Deputy Speaker Broadbent, there are a wide range of applications for this new company structure.
There will not be the obligation to hold things like annual general meetings. Audit requirements will be reduced. There will be reduced financial reporting requirements, compared to what is required today of public companies. Generally, the focus of the government is on making it as simple as possible for small businesses to put out an offer, say what their proposition is, put it online and then encourage the public to invest in it.
Under this bill, we limit individual investments to $10,000, and the reason for that is that we acknowledge that this is not a form of investment for which there is a very high standard of disclosure, with prospectuses et cetera, as you would normally expect of a publicly listed company. As a consequence, the amount that any one investor can put into that structure is limited to $10,000, which means that people cannot put in a very large proportion of their assets. Intermediaries will be required to put the offer to the market on behalf of the company, and as financial intermediaries they will be required to be appropriately registered and to ensure that the company that is seeking to raise capital complies with all the rules of the new system.
So this is a really important change. We are going to go from a system where a small business basically cannot make an offer to the broader public to one where they can. That is a really big deal, because there are often situations where small businesses have great ideas and concepts but perhaps do not have the contacts or the sophistication to go and raise millions of dollars from investors. To be able to put out an offer to the broader community like this will enable them to raise more capital—and that leads to more innovation, and that is extremely important. If you couple that with the changes to capital gains tax, income tax relief and EVCLPs, you can see there is a very broad and structured approach from this government to stimulate investment in start-ups, to drive innovation and to create more jobs and growth in our economy.
I am really pleased to speak on this bill, the Corporations Amendment (Crowd-sourced Funding) Bill 2015. I know that the alternative finance sector, the many organisations that are finding new ways to work and the start-up community have been waiting sometime for this, so I am very pleased to be able to talk about it in the parliament today. There is of course much criticism of this bill, too. I am going to touch on some of that, but my colleagues have covered much of the sector criticism that we have seen in the submissions to the Senate Economics Legislation Committee inquiry and in the media, so I am not going to go into much detail on that. I want to talk more generally about the alternative finance sector and its needs, and why I believe the government really needs to rethink some of the elements of this bill.
We all know that something needs to be done. Even in the submissions that were highly critical of this bill, the need to do something fast was clear. We need to catch up with what is already happening among our competitors and we need to find ways to support the extraordinary creativity that we find within our business community to enable them to pursue some of the wonderful solutions that they have found—particularly start-ups but also small businesses. We need it not just for individual companies to flourish but because the economic system in Australia needs more capital: if there is no funding here, then our best minds and our best businesses will quickly go elsewhere. Entrepreneurs are welcome all over the world, and there are several countries now that are well and truly ahead of us in the area of access to funding through equity crowdfunding.
Nearly all of the submissions to the Senate committee inquiry were highly critical of what they see as overregulation, complexity, high costs and, sometimes, barriers that prevent certain types of businesses or organisations from accessing the scheme. Many believe that the bill itself risks the very growth in the sector that the bill is supposed to stimulate. So there is very real criticism but very real need.
The alternative finance industry, of which equity crowdfunding is a part, is still in its infancy. There is a lot of talk about it. We hear of peer to peer and of fintech, but it is very much in its infancy. The best report I have found recently is one from Nesta in the UK, from the University of Cambridge. They put out a substantial report in 2014 that looked at the UK alternative finance industry, which mirrors but is slightly ahead of ours. Even in 2014, they identified nine different elements of alternative finance: peer-to-peer business lending, invoice trading, community shares, reward based crowdfunding, debt based securities, pension led funding, peer-to-peer consumer lending, donation based crowdfunding and equity based crowdfunding. In 2014, there were nine, so there are probably 11 now, and I suspect that in the years to come we will see many, many more ways of disrupting what has been quite a conventional finance sector, through new products and systems.
As I said, the alternative finance industry is in its infancy, and, at a time when it is in its infancy, perhaps tying it down in such a prescriptive way limits its possibilities. The Prime Minister talks of agility; he says we must be 'agile'. I hope he is not talking just about the government, because the role of government at a time like this, a time of rapid change, is to allow flexibility into the economy to allow businesses and entrepreneurs to be agile, and you do not do that by overregulating or narrowing the definitions of the things they are doing at such an early stage. Being agile does not mean imposing a set of restrictive rules on a growing area. In fact, regulating a growing area is incredibly difficult. There are few times, probably no time, when it has been more difficult to do that than it is now because the speed of change means that our regulation needs to be very light to allow for things to change, almost on a weekly basis.
I think the problem that the government has here is that it has tried to regulate an answer to crowdfunding as we know it in quite a narrow sense. It has tried to solve the problem of crowdfunding. I believe that is the wrong way to go.
I find regulating for answers to be quite a common thing. It seems quite obvious. I come from a sector of the arts industry, which was never industrialised. We have never been in that world where you build large, monolithic structures and you have to stay within them. We dealt with a constantly changing environment all the time. Many times in my frustration I sit down and consider what we do, even in government. Quite often we have ministers for answers. We have a minister for superannuation. That is a very good answer, but we do not have a minister who considers how we build financial security through life in retirement. We do not have someone who considers how we create a sustainable way of life or how we ensure the health and wellbeing of our population or how we build the capacity of our people. It is a way of looking at government that looks at the major questions that we all ask ourselves—How do we improve the quality of life? How do we rebuild community cohesion and capacity? How do we strengthen community and decision making? How do we build resilience?—all those questions which we all ask ourselves, which in government we quite often break down into answers we already know, and then concentrate on.
I think that is, again, a method of looking at the world which is increasingly less relevant, and it is exactly what we have the government doing now. We have a bill that deals with something the government thinks it understands—that is, equity crowdfunding. It legislates rules to make the government feel comfortable about something that is already there. It is very much catch-up legislation. The problem here, though, is that crowdfunding as we know it now is nowhere near finished. It is still a possibility. It is still nascent and it is still very much questioned.
There are two ways of looking at crowdfunding even as we know it. On the one hand there is the government approach, and it is quite clear in the explanatory memorandum what that approach is. The first couple of sentences say:
Crowd-sourced funding (CSF) is an emerging form of funding that allows entrepreneurs to raise funds from a large number of investors. It has the potential to provide finance for innovative business ideas and additional investment opportunities for retail investors, while ensuring investors continue to have sufficient information to make informed investment decisions …
For the government, crowdsourced funding is a way for entrepreneurs to raise funds from a large number of people—a crowd in this case.
There is another view of crowdfunding which turns it around the other way. It is that crowdfunding is actually about the crowd. I will talk about that for a small amount of time, because I was involved in crowdfunding back in the eighties. It was not equity crowdfunding, because it was not legal then as it is not now, but crowdfunding generally. I first participated in a crowdfunding project—I think the choir was called Cafe at the Gate of Salvation. They sent out a letter to a range of people, because the internet did not exist then, asking us to buy a CD that they would press some time in the next year, and when it was finally pressed I would get one. I was not a particularly great fan—it is actually a great choir, by the way.
Gospel. I do not run around and seek out gospel, but I thought it was such a good idea that I thought, 'Yep, I'm gonna to do that.' So I did. So I participated in that one and that made me part of the buy-in on then. Every time I saw an ad for that choir I was part of their world. I was part of making it actually happen. In a way I was kind of Adam Smith on steroids—you know the old Adam Smith quote that says 'if each person acts in their own enlightened self-interest the resources of the world are best allocated.' This was not just me doing that by spending my money. This was actually me involving my time, my attention and my money in the production of the product which other people then bought. It was an incredible thing.
In the arts industry, theatre was crowdfunding in the seventies. In fact, in Australia the mechanism where people buy their entire year's subscription a year early, and arts companies start the year with 90 per cent of their revenue in their bank, and the crowd actually cash flows the production of their work, was developed in the seventies in Australia. Only Australia and South Africa do it. It is one of the great innovations in the theatre world. Even now, if you look at the proportion of where crowdfunding is, you will see that the arts sector matches start-ups in crowdfunding, because it has been in it for decades.
Crowdfunding for me, perhaps because I come from that background, is not just about business, and start-ups seeking investment. It is actually about the power of people to determine where a society spends its resources. It is actually about the crowd itself as much as it is about the investment. I can imagine the time when someone comes up with a way for crowds not just to fund something that exists but to cause it to happen, to cause it to come into being, to cause the idea to form. We can already see all around the world communities trying to take back that power, the power of determining their own direction. Even in Australia you see organisations, like GetUp!, that do it through the political process quite well, but you also see a whole range of other social enterprises and not-for-profits that are using the power of the crowd to make things happen.
The problem with the government's approach is that it excludes the kinds of organisations that are already in the crowdfunding space. It is very difficult for small business, which is not actually in the crowdfunding space, to get in, because most of them are now proprietary companies. They would have to become unlisted public companies—something that is quite expensive for a business to do. There is a lot of red tape and hurdles for small business, and most small businesses do not currently meet the requirements of crowdfunding. Then you have social enterprises, which also do not fit. You have not-for-profits, which do not fit. You have some intermediaries that are already using mechanisms that will no longer be legal under this platform.
What we have in a sense is a whole range of things that are happening—start-ups that are ready to do this—and then we have the government coming in with a structure and a process which do not match what is already happening and the vision that the sector itself has for how it might use crowdfunding. I hear from social enterprises, for example, that believe that crowdfunding could be a pathway between where they are now and the impact investing world, which requires them to be of a much larger scale than they currently are. That is one pathway that we would hope this question of equity crowdfunding would solve, but not under this legislation.
This legislation is very narrow in its definitions and in many ways serves the larger end of equity crowdfunding quite well. Businesses that are well established, businesses that have some administrative capacity and the larger investors are served quite well by this legislation, but the many, many people who would be interested in making small contributions to quite young and emerging organisations of a whole range of types are actually excluded in this legislation.
It is good that it opens the door to some. We on this side will be watching very carefully. We are looking forward to the results of the outcome of the Senate inquiry and we will be watching very carefully. We are listening very carefully to the criticism that is coming from the field and we are urging the government to reconsider some of the more difficult elements of this bill.
But I do want to say that it is very good that the government is acting and that at least some elements of the start-up and small business communities will find a way to use this bill to grow their activity. But, again, it is a belief I have that the time for governments to prescribe the way people do things is coming to an end. If we really want our community to be agile, if we really want innovation, the way of regulating now is not to describe what the narrow framework is; it is to describe the outcome and the rules and allow people and businesses to find pathways that best work for them; to allow business to define their structure by what works for them as a business not because of this single piece of legislation. We want people who wish to do social good to determine the pathway to do that—whether it is a social enterprise or whether they have to do it through some other structure—in the way that best satisfies the work that they are doing, not in a way which the government prescribes in order to allow a very narrow definition of equity crowdfunding to take place.
Once again, I thank the government for its work in getting to this point. I thank all the many stakeholders who have spoken to me and who have written submissions to the Senate. They have been very clear in their criticism. I strongly urge the government to pay a little bit of attention and rethink some of the elements of this bill.
Under the heading 'Innovation' in chapter 3 of David Murray's financial system inquiry report, he paints a cautiously optimistic picture of the role of new technologies and business practices in Australia's economy of the future. To provide a context for the legislation we are debating today, I will place on record a precis to the important chapter in David Murray's overall volume of work:
Chapter 3: Innovation
Technology-driven innovation is transforming the financial system, as evidenced by the emergence of new business models and products, and substantial investment in areas such as mobile banking, cloud computing and payment services.
Although innovation has the potential to deliver significant efficiency benefits and improve system outcomes, it also brings risks. Consumers, businesses and government can be adversely affected by new developments, which may also challenge regulatory frameworks and regulators’ ability to respond.
The Inquiry believes the innovative potential of Australia’s financial system and broader economy can be supported by taking action to ensure policy settings facilitate future innovation that benefits consumers, businesses and government.
The Inquiry’s recommendations to facilitate innovation aim to:
These recommendations will contribute to developing a dynamic, competitive, growth-oriented and forward-looking financial system for Australia.
The past couple of sittings have seen the federal government begin to shape its legislative response to the Murray inquiry, and the Corporations Amendment (Crowd-Sourced Funding) Bill is part of that overall picture. But its origins are more closely linked with the government's national innovation and science agenda, which will shape economic development in this country in the years and decades to come.
Crowdsourced equity funding—or crowdfunding, as it is sometimes called—is an emerging way for start-ups and early-stage businesses to access the funding and investment they need to move the size and scope of their businesses up to the next level. At the same time, it maintains adequate protections for retail investors who share in the risks and the successes of these businesses.
The legislation will allow unlisted public companies with less than $5 million in assets and less than $5 million in annual turnover to raise up to $5 million in funds in any 12-month period. Companies that become an unlisted company in order to access crowdsourced equity funding will receive a holiday of up to five years from some reporting and governance requirements. In order to allow investors to make informed decisions, companies raising funds through crowdfunding will be required to release an offer document. To ensure that mum and dad investors are not exposed to excessive risks, a cap of $10,000 per issuer over a 12-month period will be introduced.
The Australian Securities and Investments Commission will have oversight of the new arrangements, and this legislation represents a fundamental change in our business investment landscape, blending key aspects of the Corporations Act as it relates to public and proprietary companies. In Australia, there is a historical distinction between public and proprietary companies which underpins the Corporations Act. A proprietary company is a company registered under the Corporations Act that is limited to having no more than 50 non-employee shareholders and, generally speaking, must not offer shares to the general public or undertake other fundraising activities that would require the use of a disclosure document. Proprietary companies are generally relatively small and closely held, and have lower corporate governance and reporting obligations than public companies. A public company is a company registered under the Corporations Act that is not a proprietary company. It is important to note that public companies are not required to be listed on the Australian Stock Exchange. In fact, only one per cent of public companies actually list on the Australian Stock Exchange.
The government's CSEF, or crowdsourced equity funding, framework will not apply to listed public companies. The distinction between the rights and obligations of proprietary and public companies is an underlying rationale of the Corporations Act 2001 and applies to all companies. If crowdsourced equity funding were to be facilitated through the proprietary rather than the public company structure, there would need to be an exemption from the 50-shareholder limit and a prohibition on making offers to the public. The proprietary company obligations would also need to be increased to require an offer document for crowdsourced equity funding offers to the public. If such exemptions were to be a part of the crowdsourced equity funding framework, once no longer eligible for the disclosure and reporting exemptions the proprietary companies would be required to undertake one of the following two actions to bring them back into line with the Corporations Act 2001. Option 1: if the company wished to continue with more than 50 shareholders, it would need to convert to a public company and then comply with the increased disclosure and reporting rules. Option 2: if the company wished to continue as a proprietary company, it would need to undertake a selective share buyback until it had fewer than 50 shareholders. This is a time-consuming and costly process and would see companies lose significant amounts of capital in paying out shareholders.
In contrast, the government's crowdsourced equity funding public company model requires no further action at the end of the crowdsourced equity funding exemption process beyond complying with the standard public company disclosure and reporting rules. The government's crowdsourced equity funding framework anticipates that crowdsourced funding accessing companies are seeking to grow through capital sourced from a crowd or, to use the more conventional corporate language, shareholders.
As I described earlier, to facilitate this growth the framework provides exemptions for up to five years for compliant crowdsourced funding companies from the most regulatory burdensome aspects of administering a public company. After that holiday period or upon no longer being eligible for the crowdsourced funding framework—for example, due to company growth beyond the turnover and asset caps—crowdsourced equity funded companies with more than 50 shareholders will need to comply with the reporting and governance arrangements like all other Australian public companies.
Intermediaries play an important role in crowdsourced funding and will vet companies seeking to raise funds, run offers including suspending or closing offers where there are disclosure concerns, and handle investors' money. ASIC will develop a separate Australian financial services licence authorisation for crowdsourced funding intermediaries. Australia is not alone in regulating the role of intermediaries in crowdsourced funding ventures. The New Zealand and United States models also require them to be licensed. Crowdsourced funding intermediaries must comply with certain obligations, including conducting prescribed checks around the identity of issuing companies and their officers, confirming the issuing company is eligible to use crowdsourced equity funding and checking that offer documents contain the required content and are not misleading or deceptive. Intermediaries must ensure that a risk warning appears prominently on their platforms at all times, provide an application facility for investors, ensure cooling-off rights are available to retail investors, disclose fees paid to the intermediary by the issuer, stop an offer if the intermediary knows the offer document is defective and enforce the per-issuer investor cap. In answer to the question: how will an intermediary determine if it has conducted the prescribed checks to a 'reasonable' standard, the government proposes to include direction on what could be considered reasonable in the regulations, along with details of the checks themselves, to increase certainty for intermediaries.
The intent of this bill is to assist start-ups and other small businesses that may have difficulty accessing equity funding due to the costs of disclosure and other requirements, which is why the gross assets and turnover caps are set at a $5 million limit. We have set a $5 million assets and turnover test as it ensures the framework is appropriately focused on start-ups and genuine small businesses. The $5 million fundraising cap is consistent with the maximum limit under ASIC's business introduction and matching services class order. The $5 million limit is higher than equivalent limits in the United States and New Zealand.
Concessions from corporate governance and reporting requirements only apply to newly incorporated or converted public companies because these obligations can be costly for small companies. Newly incorporated or converted public companies that make a crowdsourced funding offer within 12 months of registration will benefit from interim exemptions from holding annual general meetings, having financial statements audited and sending annual reports to shareholders.
These concessions are intended to facilitate access to crowdsourced funding for companies that cannot yet meet the public company obligations. They are not intended as a means by which existing public companies should reduce their reporting or interactions with their existing shareholder base.
The $5 million cap acknowledges that investing in early-stage companies can be risky. While crowdsourced equity is an exciting new asset class for retail investors, lower disclosure requirements may also make it more difficult for retail investors to assess the relative risks of offers. For crowdsourced funding to be a viable long-term option, investors must have confidence in the sector and the investments they make.
A retail investor cap will mitigate investor risk by limiting exposures to individual offerings and issuers. The coalition government intends to keep the cap under review and the regulations will allow for amendment over time if the government feels this is appropriate. The legislation provides the minister with additional exemption powers in relation to Australian market licences. The Australian market licence regime was designed with large public exchanges in mind and imposes obligations that may not be appropriate for other market types.
The minister currently has the power to exempt a market from the need to hold an Australian market licence or clearing and settlement licence but does not have the power to exempt a market from individual obligations. There is no scope to tailor a licence to suit the circumstances of an individual market. This means markets may be required to comply with obligations that are clearly excessive in their particular case or exempted from obligations that would be appropriate. Extending the exemption powers will provide for more effective and flexible licensing regimes that could appropriately respond to and facilitate innovation.
In conclusion, I should point out that the government will also consult on options to facilitate crowdsourced debt funding during 2016. I commend the bill to the House.
I rise to speak on the Corporations Amendment (Crowd-Sourced Funding) Bill 2015. The social media has really turbocharged crowdsourced funding. It is now possible to go to a variety of platforms, some of which many people know and use regularly—Kickstarter, Pozible and many others—and put up a project or an idea online and put the call out for people who want to be part of it and who want to put a bit of money into that project. That is a remarkable thing and it has given rise to whole new ways of people relating to each other and supporting each other in their communities. On the whole it is to be encouraged, and it is something that is to be applauded because it is allowing people to connect with each other and form common bonds in a way that even 10 years ago, let alone 20 or 30 years ago, would not have been possible. I have helped a book come to fruition by being a small player in crowdsourcing it, and I have participated in other crowdsourced projects as well. Knowing that it is something that I could not have done 10 or 15 years ago is a good thing, and it is one of the more welcome aspects of the development of technology—the ability for people to connect to each other.
Many of the projects that use existing crowdsourced funding platforms reach an almost natural limit. These platforms are great for things like putting out a book, and some people have even used them for getting a new piece of machinery for their farm, for example. But there are certain projects where you want a bit more than someone offering to put in a bit of money on a website. You want something where the person who is putting in money might have a legal claim, and it is questionable at the moment as to what your legal status is if all you have done is to put in $20 via Kickstarter. So you might want to have a legal claim or you might want to have some say in what happens inside the enterprise. All these are questions we have to answer, as this new sharing economy develops, as to how best to deal with them.
In Australia at the moment, if you are someone with a good idea and you needed funding to make it happen, and you want to get that funding from multiple sources—as opposed to, say, going to a bank or getting into debt some other way—you have really only got the option, once you reach a certain size, of forming what is called a public company: a company that the law allows to go out and publicly advertise for people to put money into. The other form of company that most small businesses use, a proprietary company, does not allow you to do that. So start-ups find themselves at that point where they might have to make a choice: do they become a private company, as many small businesses would, but know that you cannot then go out to the public and ask for money—or do you become a public company? The problem with becoming a public company, for many of these innovative ideas, is that there are a lot of requirements that you have to comply with to become a public company. There is a lot of disclosure that you have to go through and it is an expensive exercise, and for those reasons not many small companies choose to take it up—public offerings and the like—and it gets even more complicated if you decide that you want to list on the stock exchange. You do not have to, of course, but many public companies do. So these new ideas are finding themselves at a point where they are facing an impasse. So, to that extent, it is good that the government has recognised that. It is good the Financial System Inquiry recognised that. And it is good that the government is bringing a proposal before this chamber to deal with it, because it is something that we should deal with, as members of parliament.
I am encouraged to hear from previous speakers and also from the minister that the government is going to have a look a bit later on at how to deal with debt funding for crowdsourced entities, because at the moment it would be fair to say that that characterises the majority of crowdsourced funding—people putting a bit of money into something that could be much more closely akin to debt rather than equity funding. But what we are dealing with here is: how do small enterprises encourage other people to take something akin to an ownership stake—an equity, or a share, as it would commonly be referred to?
It is good that there is potentially going to be a third way for these companies, so that they do not have to go through the rigmarole of becoming public companies and certainly not publicly-listed companies. And it is good that the government is considering allowing people in that position to opt out of a large number of the regulatory requirements. With that comes a potential downside, because the investors into those crowdsourced enterprises then might not have the same information that you would have if you were a normal, publicly-listed company in Australia. So if you jump on the internet and you see an idea or you hear an idea on the radio and you think, 'That looks like a good idea; I want to invest in that,' if they are going through a crowdsourced funding model as proposed by this bill, then you, as an investor, will probably have less information available to you than you would if you were to go off and buy a share in a public company. So, on the one hand, it makes it easier to get the idea off the ground; on the other, it potentially reduces the protections that are available for people who are prepared to invest in it.
Say I put $20 in to help someone publish a book. Many of us who do that are prepared to accept that we might not see that $20 again. Many platforms in fact only ask you for the $20 if you reach the full amount. We are talking about something different here. We are talking about potential investments of tens of thousands of dollars into a new idea—into a start-up. What kinds of protections should you offer those people?
I am pleased to see that this bill does place some weight on those protections for those people—that there is a version of the protections that are available to people who invest in public companies flowing through to this new crowdsourced equity funding model. That is a good thing. That has led some, though, in the sector to say: 'This bill won't do enough for start-ups. If we have to comply with those requirements, and if the protections that are available for the investors come in the form of limiting how much money we can raise or limiting how much money we can raise from an individual investor, then it is not going to do enough for start-ups.' We have had people approach our office from this sector saying exactly that—saying, 'If you really want to unleash innovation then you need a more laissez faire model than is currently being proposed,' and saying that this model is too restrictive.
I want to thank everyone in the sector who has come and approached us and raised those issues and said that there are ways that the bill could be improved. I also want to thank the minister responsible, for giving us an extensive briefing on it. I anticipate that this bill will be subject, probably, to an inquiry in the Senate, but it is certainly something that is being discussed and debated more broadly. We will continue to formulate our position based on those inputs that we get. We appreciate that this is about striking a balance, and the question is whether or not the government has got the balance right in this particular bill. That is in part going to be a question of judgement. But we need to have a bit more work done, from our perspective, before we can form a final position about the pros and cons of each.
There is one area that is of particular interest to us in the Greens, and that comes to the question of crowdsourced and community-owned renewable energy, because this is a booming sector. Increasingly, people want to own their own solar panels—their own way of producing electricity. They are going to start putting batteries in their houses soon so as to be able to store that electricity and generate it as they need. And it is expanding now beyond individual households to whole communities and whole towns.
In Victoria we have Hepburn Wind, for example, where the wind turbines that have been erected outside Hepburn are now helping power the whole community, but they are owned by the community as well. When the community decided to put this together, they had to jump over a number of hurdles to work out what the right legal form was to allow everyone in the community to own a bit of the wind turbine that exists in their area and how they—the people who wanted to make it happen—could put out an open offer to the community to get everyone to buy in and how to navigate their way through all these parts of corporations law that I have been talking about—private versus public company versus other kinds of organisations, associations and the like.
We have heard from a number of the community-owned renewable energy associations, of which there are many, many more around the country and whose number is growing, especially as they watch governments attack the renewable energy target and attack action being taken on climate change. People in this country are far, far ahead of this government. People know climate change is real, and people like renewable energy. They are now starting to build wind farms and large solar farms in their own backyards, especially if they are living in regional and rural areas, and they are starting to come together as communities to own them. One issue that we found is this. They get together, they navigate the system, and, after doing their crowdsourced funding, they have community ownership of renewable energy generation—and then they find it hard to plug into the market. They are told that there are a number of barriers to being able to do that and told, 'You are not the right kind of entity to do that.' We hope that perhaps this bill might give them a new way forward. Perhaps it might provide an opportunity for addressing some of those issues. But those issues are real, and they are ones that we will be considering in the context of this bill.
I can also say that, more generally, in Melbourne, which I think is the social enterprise capital of Australia and the social innovation capital of Australia, there will be many, many others who are looking at the prospects of doing their own crowdsourced funding who we will continue to talk to over the next little while.
As a result, I commend the government for taking the initiative of adopting this part of the financial systems inquiry and bringing a proposal before the House. The Greens will look at it in good faith and will continue to take soundings from the sector and will make the decision about whether it strikes the balance in the right way. I again thank the minister for approaching us in good faith as well and offering us information about this bill. As it progresses through this House and through the Senate, we hope that this is a bill that, either in its current form or in an amended form, will strike the right balance, because crowdsourced funding is an idea whose time has come and, if we can support it and protect people who want to invest in it as well, that is something that we as parliamentarians should do.
Innovation is constantly transforming the international financial system and this is likely to continue. Technology-driven innovation has the potential to deliver significant efficiency benefits and improved productivity, efficiency and investment outcomes right across Australia's financial system. New payment methods, innovative funding sources, better use of customer information and deeper cross-border linkages promise enormous opportunities if properly harnessed. Technology is reducing the number and need for a financial institution to secure and underwrite a financially viable contract between producers and consumer, and crowdfunding is emerging as an alternative funding source for small and medium sized enterprises around the world. There has never been a better time to start and grow a business anywhere in Australia, and from here to compete for customers located anywhere in the world.
On this side of the House, we know that funding for small and medium sized enterprises is essential to facilitate productivity growth and job creation, and crowdfunding and peer-to-peer lending can facilitate new technology enabled mechanisms for accessing finance and obtaining credit. Our future depends on us being a nation that is agile, innovative and creative. As the old saying goes: fortune favours the bold. We cannot be defensive; we cannot future-proof ourselves.
Prime Minister Malcolm Turnbull, arguably the best qualified person in any Australian parliament in the combined areas of law, commerce, banking, finance, investment, environment and water resources, constitutional change, information technology, communications, media and the arts, speaks from experience when he says:
... the disruption that we see driven by technology, the volatility in change is our friend if we are agile and smart enough to take advantage of it.
Our policy settings must facilitate entry of these disruptors rather than acting as a blockage. As part of our Growing Jobs and Small Business package, the coalition committed to introducing a new regulatory framework to facilitate crowdsourced equity funding for public companies. Crowdsourced equity funding is a relatively new and innovative concept that allows businesses to obtain capital from a large number of investors to an online platform where each investor typically contributes a small amount of money in return for an equity stake in the business.
The big challenge we must overcome right now is that start-ups and small businesses in Australia are struggling to access retail investors due to significant and ongoing compliance costs and red tape. Changing this will unlock growth and unlock innovation. I welcome the introduction of the Corporations Amendment (Crow-sourced Funding) Bill 2015 as another step closer to where we need to be to meet the challenges and opportunities that technology and innovation promise. I congratulate and thank the minister for bringing this bill forward. I have many innovative small to medium sized businesses in the electorate of Ryan which have developed some very creative and exciting world-first products and services, and they are currently looking for finance and new markets. I look forward to telling them about what we are doing today to give them another opportunity to help secure the finance they need to turn smart and clever thought into action. As I said earlier, there has never been a better time to start and grow a business anywhere in Australia.
The Foreign Minister this week provided a terrific example of where new thinking is transforming old industries, with the Australian start-up company called Flow Hive, which has made harvesting of honey from a beehive as simple as turning on a tap. The father and son team put this idea on a global crowdfunding website and they hit their funding target within three minutes—that is right, just three minutes—and they are now receiving $30,000 worth of orders every day. Like the Foreign Minister and indeed all Australians, I celebrate the success of Australian businesses that are taking Australian innovation onto the world stage. I am even more proud to be an Australian when I hear that a family owned Australian start-up businesslike Flow Hive has achieved what has been called the greatest step forward for beekeeping in 150 years. Wouldn't it be even better if the crowdsourced funding website that our creative thinkers and our innovative small to medium sized businesses used was also Australian owned and operated?
I applaud the coalition government's decision that development of a crowdsourced equity funding market in Australia is an urgent priority to support the funding needs of early-stage innovators. These reforms were considered by the Corporations and Markets Advisory Committee which identified regulatory impediments that make it costly and impractical for businesses to undertake crowdsourced equity fundraising. In this context, regulatory barriers can hinder competition and impact the market forces that push firms to innovate and perform at their best. Crowdsourced equity funding will complement other forms of crowdfunding already available, including rewards based crowdfunding and peer-to-peer lending to offer start-ups choices in how they fund their operations. It will serve as both a complement to and a source of competition to more traditional funding options for small businesses, including bank debt products.
To get to this point today the government also had a root-and-branch examination of Australia's financial system, just as we committed to during the last federal election. As most members know, the inquiry, chaired by Mr David Murray AO, was tasked with making recommendations that would position our financial system to best meet Australia's evolving needs and support economic growth. The inquiry also recommended facilitating crowdfunding by adjusting fundraising and lending regulations, streamlining issuers' disclosure requirements and allowing retail investors to participate in this new market with protections such as caps on investment.
The government has worked hard to get the regulatory framework right so that it can fit within Australia's financial system while creating more opportunities for small to medium sized businesses to grow but also provide some safeguards for Australian consumers and investors. The government consulted widely on potential models, including the model recommended by the committee and the model implemented by New Zealand in 2014. This bill inserts a new part into chapter D of the Corporations Act to create a new regulatory framework to facilitate crowdsourced funding in Australia. Graduating the regulation of market based financing will increase opportunities for small businesses to seek finance from the general public.
The framework set out in this bill adopts key elements of the New Zealand approach, such as licensing and gatekeeper obligations for intermediaries, reduced disclosure, risk warnings and a relatively liberal approach to retail investor caps. The bill balances stakeholder views on supporting investment by reducing compliance costs for equity fundraising while also ensuring appropriate levels of investor protection.
It is no doubt fair to say that because the previous the Rudd-Gillard-Rudd governments were better at talking than doing and, because Labor was better at spending than developing new markets and growing our economy, we are now playing catch-up with New Zealand and other developed countries in this innovative area of finance. Many stakeholders recommended adoption of a framework quickly because further delays would risk impeding the development of the crowdfunding market in Australia.
The government listened and engaged extensively with industry and other stakeholders on the design of the proposed crowdsourced equity funding framework. That is why the model in this bill strikes the right balance between supporting investment, reducing compliance costs and maintaining an appropriate level of investor protection. The new crowdsourced equity funding regime will allow eligible companies to fundraise up to $5 million per year from retail investors, which is higher than that allowed under both the New Zealand framework and the model recommended by CAMAC, the advisory committee. The ability to raise higher amounts will enable entrepreneurs of innovative early-stage businesses in Australia to obtain the capital they need to turn good ideas into commercial successes.
I am also pleased the government has shown foresight in the framing of this bill so that, as the market develops, the ongoing appropriateness of these thresholds can be reviewed. This bill permits retail investors to 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. The bill also provides a regulation-making power to amend this amount as the market develops. Retail investors will not be limited in the total amount of investment in crowdsourced equity funding they can undertake, which will allow them to diversify their investments. Investors will also be protected in the form of cooling-off rights for a period of five days after making an initial investment.
The framework will enable public companies that are issuing equity through crowdsourcing to do so with reduced disclosure compared with what is required under full public equity fundraising. It also provides for newly registered public companies that meet the assets and turnover tests concessions from some corporate governance and reporting obligations.
The important role of intermediaries in the operation of an equity crowdfunding market cannot be overstated. As gatekeepers, intermediaries provide an important quality assurance role. For this reason, intermediaries will be required to hold an Australian Financial Services licence. The framework sets out certain obligations that intermediaries will need to meet, including the requirement to conduct checks on issuers before listing their offer. Ongoing responsibility for issuing licenses and monitoring the operation of the framework set out in this bill will sit with the Australian Securities and Investments Commission, which was provided with $7.8 million in funding through the 2015-16 budget for this task.
I note a number of other jurisdictions have a regulatory framework in place for crowdsourced equity funding, and consultation indicated wide ranging support for an Australian framework. Because the legislative framework and policy settings we are constructing today will need to continually evolve and keep pace with technologically driven change, we must as far as possible future-proof this regulation such that public administration will always encourage innovation.
Clearly in an age of rapid, technology driven change we simply cannot afford to 'set and forget' when it comes to rules and regulations. I note advice from the Minister for Industry, Innovation and Science that one of the most well-known stockbrokers in London said, 'Australia now has an innovation competitive advantage as a result of the coalition's changes to taxation for angel investors around capital gains tax and income tax.' Britain has been ahead of us in this area on innovation. That Australia has now leapfrogged Great Britain means our creative class and our small to medium sized businesses will be able to attract even more international investment, which will create more jobs and more growth in the economy.
The coalition are the real friend of small business, and we will always consider any emerging issues, concerns and aspirations for consumers, investors and business operators surrounding the scope and application of these laws. I welcome amendments in this bill to ensure the Australian market licensing and clearing and settlement licensing regimes can be tailored to operators of emerging and specialised markets, such as crowdfunding intermediaries. This will reduce the compliance burden for operators of these markets.
The framework set out in this bill will enable Australia's innovative early-stage businesses to obtain the capital they need to turn good ideas into commercial successes. I congratulate and thank the minister for bringing this bill forward, because it delivers on our commitment to foster innovative economic activity. This bill unlocks a new source of funding for small to medium sized enterprises that will push and pull more opportunities for Australian innovators and those other creative thinkers and doers into developing new products and services for the domestic and international market. As I have said before, there has never been a better time to start and grow a business anywhere in Australia and, from here, to compete for customers located anywhere in the world. I commend the bill to the House.
It is with great pleasure that I rise today to speak on the Corporations Amendment (Crowd-sourced Funding) Bill 2015. This bill is designed to help facilitate crowdsourced equity funding in Australia, which is an innovative and increasingly popular concept. Crowdsourcing allows businesses to obtain capital from a large number of investors through online platforms, where each investor typically contributes a small amount of money in return for an equity stake in the business.
It is worthwhile reflecting on one of the reasons that I think this legislation is so important, and this was touched on in the Treasury discussion paper on this particular topic back in 2014. The discussion paper makes the observation that:
Small businesses are a significant driver of productivity and economic growth. However, obtaining affordable finance to fund development of innovative new products is difficult in some cases.
… … …
Difficulties in accessing debt finance can arise as a result of gaps in information between lenders and borrowers. As the provision of debt finance requires an assessment of a business' ability to service the debt, small businesses and start-ups that do not have adequate evidence of past performance or prospects for success can face particular challenges accessing credit.
… … …
Some banks have noted that they decline approximately twice as many loan applications for start-ups as for established small businesses …
That is why this bill is so important to our small business and start-up sector.
We are in a time where our government is encouraging innovation—innovation that creates jobs, creates opportunities and creates economic growth for Australia. Crowdsourcing is an opportunity to provide an alternative funding avenue that unlocks a new way of funding business start-ups. The member for Ryan used a fabulous example, which the Prime Minister had used, in Flow Hive. Equally, in my electorate of Forde, we have fabulous innovative businesses such as Beovista, A1 Rubber, Poppy's Chocolate and Beenleigh Artisan Distillers. While they are a large business not a small business, they are constantly looking to innovate and develop their product, and they are the oldest operating rum distillery in Australia. Recently, Zarraffa's have announced that they are going to move their headquarters to Beenleigh. They are looking at doing some additional, really innovative things in the building that they have purchased. So it is not just an administrative. I am sure that everyone in this House has in their electorates some businesses that are at that cutting edge of innovation and technological development.
It is an innovative economic concept that has helped launch many successful businesses. That is the importance of this crowdsourced equity funding. For retail investors, it creates an opportunity, which they do not currently have, to invest in small companies and start-up companies. Therefore, it is time for the government to catch up and provide a framework that will deliver sound outcomes and opportunities for these businesses and investors to take part in crowdsourced equity funding, and that is what this bill is about.
Crowdsourced equity funding was found by the Corporations and Markets Advisory Committee to be costly and impractical for businesses, due to regulatory impediments in the Corporations Act. This bill responds to those findings by establishing a legislative framework for crowdsourced equity funding that will address these regulatory impacts.
The coalition government made a commitment in the 2015-16 budget, as part of the Growing Jobs and Small Business package, to introduce legislation that facilitates crowdsourced funding in Australia. This government is committed to supporting the growth and success of Australian business. As we continue passing legislation from the jobs and small business package, complemented by the recent launch of the National Innovation and Science Agenda, there really has never been a more exciting time to establish and grow a business in Australia.
The framework our government is introducing in this bill will enable public companies that are issuing equity through crowdsourcing, to do so with reduced disclosure compared with what is required under a full public equity fundraising. For newly registered public companies that meet the assets and turnover tests, this framework provides concessions from some corporate governance and reporting obligations, to ensure that investors are able to make informed investment decisions and are not exposed to excessive losses. The framework also sets out the minimum disclosure requirements and a $10,000 per issuer per 12-month period investor cap for retail investors.
It is not the government's role to help pick a winning concept or business idea. What we can do is create the right economic conditions for small businesses and start-ups to grow and thrive, and take steps to remove unnecessary regulatory barriers. The framework set out in this bill will enable Australia's innovative early-stage businesses to obtain the capital they need to turn good ideas into commercial successes. It is only through turning those good ideas into commercial successes that we grow and develop our economy. The great thing about Australia is that we have a history of innovation, and we should be very proud of that. Yet, we should also be disappointed at the fact that many of those innovations ended up offshore as a result of a lack of capital to help develop and grow them here onshore.
Crowd-sourced equity funding will also offer a new funding option for Australian small business. It will complement other forms of crowdfunding already available, including the rewards based crowdfunding and peer-to-peer lending to offer start-ups a choice in how they fund their operations. It does not take much of a search on the internet these days to find peer-to-peer or crowdfunding options. Many of those are now local but a lot are still overseas. Hopefully, this legislation will also encourage those organisations to set up their operations here in Australia so that the operations are contained here locally. This will serve as both a complement and a source of competition to more traditional funding options for small business, particularly in relation to bank debt products. One of the major issues for our small- to medium-businesses is the gap in the cost of capital compared to large listed entities. That gap in capital cost can in a lot of cases be roughly double. So this option creates an opportunity for our small- to medium-business sector to be able to compete on a more level playing field with the big end of town.
The government has consulted extensively on the design of the proposed crowd-sourced equity funding framework, and the model detailed in this bill strikes the right balance between supporting investment, reducing compliance costs and maintaining an appropriate level of investor protection. Schedule 1 of this bill inserts a new part into chapter 6D of the Corporations Act. This sets out the various elements that comprise a crowd-sourced equity funding framework. Australia's crowd-sourced equity funding regime will allow eligible companies to fundraise up to $5 million per year from retail investors. This amount is higher than that allowed under both the New Zealand framework and the model recommended by CAMAC. The ability to raise higher amounts will enable entrepreneurs of innovative early-stage businesses in Australia to obtain the capital they need to turn good ideas into commercial successes.
Schedule 2 of this bill sets out a number of concessions for newly-registered public companies that have restructured in order to access crowd-sourced equity funding. Provided a company undertakes crowd-sourced equity fundraising within 12 months of registering as a public company, it is eligible for exemptions of up to five years from the requirement to hold an annual general meeting; have annual reports audited if it has raised less than $1 million from crowd-sourced equity funding; and provide its annual reports to investors, other than publishing them on its website. Further, companies fundraising under this framework will be able to offer equity securities to retail investors, with lower disclosure than currently required. This measure will improve access to crowd-sourced equity funding for small businesses and start-ups, as a full disclosure document can be costly and time consuming to prepare.
The government has listened to stakeholders on how to best balance the fundraising needs of business with investor protection. The framework in this bill permits retail investors to 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. The bill also provides a regulation-making power to amend this amount as the market develops. Retail investors will not be limited in the total amount of investment in crowd-sourced equity funding they can undertake, allowing them to diversify their investment portfolio. Investors will also be protected in the form of cooling-off rights for a period of five days, after making an investment.
Another element of this bill reflects the importance of intermediaries in the operation of equity crowdfunding. As a gatekeeper, intermediaries provide an important quality assurance role and, in recognition of this, intermediaries will be required to hold an Australian financial services licence. Requiring intermediaries to be licensed will provide issuers and investors alike with confidence in the integrity of the intermediary and their capacity to carry out the obligations of operating a crowd-sourced equity funding platform.
This bill delivers on our government's commitment to foster innovative economic activity by unlocking new sources of funding and equity. I commend this bill to the House.
Firstly, I would like to thank those members who have contributed to this debate. The Corporations Amendment (Crowd-sourced Funding) Bill 2015 gives effect to the government's commitment to facilitate crowd-sourced equity funding in Australia by introducing a framework which will reduce the regulatory impediments for small businesses, particularly early-stage businesses, seeking to obtain equity finance.
The government consulted widely on the provisions contained in this bill. This process began in late 2014, following release of a discussion paper that sought to canvass stakeholder views on possible models for a crowd-sourced equity funding framework. These models included the framework adopted in New Zealand and the model recommended by the Corporations and Markets Advisory Committee, otherwise known as CAMAC, in its review of Australia's equity crowdfunding landscape. Over 40 submissions were received, and two stakeholder roundtables were hosted by Minister Billson to discuss the design of the framework. The government acknowledges the efforts of stakeholders to provide feedback and to help guide development of the framework in this bill.
A proposed framework for Australia, a hybrid of the New Zealand and CAMAC models, was outlined in a separate consultation paper in August 2015. Targeted consultation was undertaken on the draft legislation, and further public consultation was undertaken following the introduction of the legislation into Parliament. In line with the Corporations Agreement of 2002, the Commonwealth also sought and received the agreement of the states and territories to the amendments contained in this bill.
Overall, there was broad support for developing a framework that incorporates elements of the model recommended by CAMAC and a model adopted by New Zealand. The framework that the government has introduced into parliament reflects improvements suggested by stakeholders during consultations and seeks to ensure the balance between supporting investment and reducing compliance costs for the issuers of crowdsourced equity funding offers, while maintaining an appropriate level of investor protection.
For equity crowdfunding to be a viable funding source, it is important that the framework can operate effectively to benefit businesses and investors. Like in New Zealand, intermediaries will play an important role in the operation of Australia's equity crowdfunding market with the framework setting out certain obligations that are necessary for facilitating crowdsourced equity funding offers. Intermediaries will act as gatekeepers, ensuring that certain disclosure and other requirements are met by issuers before their offer is listed on the platform.
The crowdsourced equity funding framework proposed in this bill allows eligible companies to fundraise up to $5 million per year from retail investors with reduced disclosure obligations compared to traditional public equity fundraising. We are also streamlining public company corporate governance and reporting obligations for companies that become established as a public company in order to access crowdfunding.
In Australia, unlike other countries, the distinction between the rights and obligations of proprietary and public companies is an underlying rationale of our Corporations Act and applies to all companies. Australian proprietary companies are limited to 50 non-employee shareholders and as such have reduced reporting and governance arrangements than public companies. By providing a holiday for up to five years from the most onerous reporting and governance requirements for unlisted public companies, this framework facilitates equity funding from the 'crowd' while ensuring that the normal obligations that apply to all Australian companies with a larger number of shareholders apply once this time has passed. The government's approach in this matter was supported by the Productivity Commission's inquiry report into Business Set-Up, Transfer and Closure on 30 September 2015. The framework will provide a number of protections, including offer documents providing basic information about the offer and a per issuance investor cap, to ensure investors can make informed decisions without being subject to excessive levels of risk.
I acknowledge that some people found the limits on the fundraising threshold too low, while others argued that the investment limit should be higher than what is currently in the bill, or be removed altogether. The government has listened to stakeholder views on how to balance the fundraising needs of businesses while ensuring investors remain adequately protected. The bill also provides a regulation-making power that will allow these thresholds to be reviewed over time, as the market develops. To accommodate market developments, the bill also provides the minister with an exemption power to exempt certain market operators, including intermediaries, from specific obligations under the Australian Financial Market Licensing regime. This will enable the government to more readily tailor the regime to intermediaries operating in the crowdfunding market, as it matures. This exemption power will apply from the date this bill receives royal assent.
During the debate the issue of whether collective investment models, such as unit trusts or managed investment schemes, should be permitted to use the crowdsourced funding framework was raised. Under this structure, investors place their funds in trust with the managed investment scheme, which becomes the shareholder in small companies on the investors' behalf. Under the Corporations Act, managed investment schemes that accept investments from retail investors are subject to disclosure, licensing and other obligations that are specific to the risks of this investment structure. The crowdsourced funding framework would prevent a managed investment scheme from utilising the crowdsourced funding framework to raise funds from the public. This is because the reduced disclosure environment provided by the crowdfunding regime is not appropriate for more complex arrangements like a managed investment scheme.
The crowdsourced funding framework in this bill will take effect six months after it receives royal assent. Over this period, the Australian Securities and Investments Commission will put in place systems, processes and guidance to effectively administer the framework and provide additional certainty to industry. The government provided $7.8 million to the Australian Securities and Investments Commission in last year's budget to facilitate this.
This bill fulfils the government's 2015-16 budget commitment and our response to the Financial System Inquiry to introduce an equity crowdfunding framework. Its introduction will enable entrepreneurs of innovative early-stage businesses in Australia to obtain the capital they need to turn good ideas into commercial successes. It will also open a new form of investment class to provide an additional investment option for investors.
I commend the bill to the House.
Question agreed to.
Bill read a second time.