Wednesday, 8 February 2017
Corporations Amendment (Crowd-sourced Funding) Bill 2016; Second Reading
I am very pleased to speak on the government's Corporations Amendment (Crowd-sourced Funding) Bill 2016, because this is a very important part of the venture capital industry in Australia, and at the moment it is a missing piece in venture capital and is holding back thousands of Australian companies that are seeking to raise capital, so it is important to provide some background on this issue and where it fits in in the economy.
Venture capital, of course, is about early-stage companies being able to raise money through equity financing where people risk their money by investing in a company in the hope that, in the future, that investment will be successful. Australia has historically a very weak position in venture capital relative to other nations, and there are a whole range of reasons for that. Our small market size is one of them, and there are others as well. Australia, relative to other economies, has had a very small venture capital industry over the years. I have worked in and around venture capital for close to 15 years before entering parliament, so I have had some experience in this area, and the industry has generally been very small indeed—so small, in fact, that the Australian Venture Capital Association estimates that venture capital investment in Australia is about 0.01 per cent of GDP. You do not get numbers much smaller than that—0.01 per cent. Proportionally, that is about one-twentieth the size of venture capital investment in the United States.
So there is a real need to boost venture capital investment in Australia, because more venture capital means more start-up companies, which means more employment. As we know, it is those start-up companies, often in the technology sector, which create the industries of tomorrow and which create so much employment—and generally high-wage jobs, which are so important in an era of relatively low wage growth. So it is very important that the government does everything it can to improve the environment so that small businesses can go out there and raise capital.
In 2014 the corporations and markets advisory committee presented a report to government in which they said that the existing rules related to crowdsourced equity funding were impractical and effectively were stopping companies from raising money. What is meant by 'crowdsourced equity funding'? Basically, what it means is raising small amounts of money from large numbers of people. That is very difficult at the moment because the requirements under the Corporations Act in terms of issuing prospectuses and various minimums for how much can be invested, and a whole range of other things, make it extremely difficult in practice to raise small investments. As a consequence, when companies are trying to raise money they generally go to large, sophisticated investors and larger venture capital funds.
But there is this whole community of investors out there who are investing in other assets at the moment—they might be property, listed shares or a whole range of things. But there is a whole asset base out there that is not really being tapped into by the venture capital sector. What this bill does is basically make it much easier for start-up companies to raise relatively small amounts of money from large amounts of people through changing the crowdsourced equity rules to make them simpler. Effectively, the bill will do this in a number of ways.
Firstly, companies in the future will be able to raise money through an online platform, without the need to go through the typical onerous processes involved in fundraising. There will be fewer of those onerous disclosure requirements and fewer requirements for issuing of documentation and so on.
There are some limitations in how much companies will be able to raise under these provisions. That is appropriate because there is a lower standard of disclosure. It is obviously appropriate to put some limits on how much can be raised in this way, so companies will be able to raise up to $5 million under the government's proposed legislation, with a $10,000 cap per year for retail investors. A retail investor could go onto the website of a company that was seeking to raise capital through crowdsourced equity. They could decide to invest up to $10,000 in that company. If the investor wanted to invest more than $10,000, then they would need to go through a more traditional process which has greater disclosure rules and so on.
It is also important that this is something for smaller companies. This is not something that the government envisages listed companies or larger companies should be able to avail themselves of. This is about helping start-up businesses to access more capital. With that in mind, companies with turnover of more than $25 million or assets of more than $25 million will not be eligible to make use of these provisions.
Also in order to protect investors, the government bill proposes that this be limited to public companies. The government is continuing to consult on extending this system to private proprietary companies, but there is significant complexity involved in doing that and so at the present moment this will be limited to public companies. If a newly-registered public company undertakes crowdsourced equity funding within 12 months of registering, it will be eligible for exemptions from some of those more onerous provisions for public companies, such as holding an AGM, having annual reports audited and mailing out annual reports, if it has raised less than $1 million from crowdsourced equity funding.
So this is very good legislation as proposed by the government. Historically, we have a weak venture capital sector in Australia. We need to improve that. We are improving that—and I will come to that in a moment—but this is a very important part of that puzzle.
In fairness, there are members opposite who have in the past sought to support the venture capital sector—people like the members for Chifley and Griffith, who both do have some understanding in this space. They should be calling on their colleagues to fully support this bill as proposed by the government, because this is a bill which is good for the venture capital sector in Australia. It is good for Australian start-ups and it is something that should be supported as proposed.
But those opposite have a very poor record when it comes to taxation and its impact on Australian business. There are a couple of examples that I wanted to touch on in these remarks. Under the previous Labor government, the Australian start-up sector was given an absolutely disastrous piece of legislation related to employee share ownership schemes. Mr Deputy Speaker, you of course are familiar with how these schemes work. Basically, the way that employee share ownership schemes work is that somebody joins a company, often on a salary which is less than they would get if they were working for a larger company, and the company says to that employee, 'If you work with us for that relatively lower salary we will give you the potential to earn more in the future through access to share options. These share options, which might have very little practical value today, could be worth a lot in the future and, if they are worth a lot in the future, you could potentially do very well by selling those sell options when they vest and become shares.'
That is a very common practice in the start-up sector—or at least it was until those opposite introduced horrendous legislation which basically said, 'If today you as an employee are issued with share options which, in a practical sense, are meaningless today because you cannot sell them usually for several years and, in a practical sense they are not worth anything to you until some point significantly down the track, you must pay tax on them today.' So people would get issued share options which had no practical value, with no capacity for those shares to actually be sold, but then be presented with a tax bill for $20,000, $30,000 or whatever it was to account for the perceived value of these share options. That was absolute madness.
That meant that companies then started saying, 'We won't offer share options because it is a disincentive for employees, because they have to pay this out-of-pocket tax now on something that actually has no value now.' Those same small companies were still in a position where they could not compete with big companies on salary. So someone may have been offered, say, $150,000 from a big company and the small company could only offer, say, $80,000 or $100,000. Previously, the small company would say, 'It is true that we cannot offer you the same salary, but we will offer you these share options which could be valuable in the future.' But, under Labor's previous ESOP legislation, that basically dried up because, when you got issued with those share options, you effectively had to pay a penalty tax, which meant that most employees would say, 'I just don't want them, because I don't want that burden.' That was incredibly bad legislation, but it is a really interesting example because it shows how little those opposite understand how the economy works. It shows the very theoretically way that they think about the economy, but they do not have that practical understanding of how business actually works—how people get stuff done—and how incentives are provided.
That is an earlier example, but we have a fresh example today—and this is quite extraordinary. At the moment, those opposite are proposing as part of their suite of tax proposals to increase capital gains tax by 50 per cent in all areas in which capital gains tax is currently paid. Let's take the example of somebody who has a farm in regional Australia. Maybe that farm is not doing so well and maybe they need to take on some investors to invest in equipment and capital to make that farm do better. Those opposite are saying, with their current policy—and this is something that we really need to reflect on—that if the investors in that farm are successful, when they sell their investment, they should pay 50 per cent more capital gains tax. So if you are that farmer and you are going to try to raise money, that is not going to make your task easy at all; it is going to make it very difficult.
Similarly, let us say you have a situation in suburban Australia where manufacturing is under pressure and a factory closes. Sometimes management and workers might try to get together and keep a facility running by buying that factory and keeping that business going. Under Labor's policy, if they did that and said, 'Actually, we are going to put some money together and keep this factory going,' they would pay 50 per cent more tax on their investment in that factory. That is just an extraordinarily bad idea.
This proposal from Labor applies in every single industry in Australia and every single region. Not just in cities but in every country town and every regional centre, Labor say that capital gains tax should be 50 per cent more—every industry, every town, every state, every suburb. I think it would be very useful for the Labor Party to articulate more clearly to the Australian people why they think it is a good idea to increase capital gains tax by 50 per cent on absolutely everyone in Australia across all industry sectors. It is an extraordinarily bad idea.
This government, by contrast, through the National Innovation and Science Agenda, has reduced tax. There is no capital gains tax on investments in start-ups under the angel investment reforms; taxes have been reduced for those who invest in early stage venture capital limited partnerships; and, of course, there is a 20 per cent income tax deduction for investors in early stage start-ups. Those things have been very well received. We are seeing a boom in Australian venture capital at the moment. It is on the most solid ground it has ever been on. The innovation and science agenda and the tax measures contained in it have been instrumental in creating an environment of confidence in which, increasingly, Australians are coming forward to start businesses and invest in start-up businesses. It is a fantastic thing.
The crowd-sourced equity bill as proposed by the government should be supported by those opposite and, indeed, by every member of this House. I commend the bill to the House.
It was Robert Menzies who said:
We took the name ‘Liberal’ because we were determined to be a progressive party, willing to make experiments, in no sense reactionary but believing in the individual, his rights and his enterprise …
Free enterprise has been at the heart of the Liberal tradition since the party's inception. Even today, half a century after Menzies first spoke those words, free enterprise remains the answer to many of the social and economic challenges our nation faces. One such challenge, a challenge that is both social and economic, is youth unemployment. Young Australians right across the country, and especially in rural and regional areas, are struggling to find work. Approximately 300,000 young Australians from 15 to 24 years of age are officially unemployed. This one relatively narrow age bracket equates to nearly a third of all Australians who are currently unemployed.
This problem is not uniquely Australian, by the way; it is a global phenomenon—almost an epidemic, some would argue. While our youth unemployment rate, at 13.3 per cent, is a very serious issue, in France it is 26.2 per cent; in Spain, 42.9 per cent; and in South Africa, a catastrophic 54.2 per cent. Whose responsibility is it to solve this problem, and what sorts of solutions are out there? With the erosion of civil society over recent decades, responsibility for addressing social ills has shifted more and more to the state, to the government. As a society, we have become overly reliant on government to address social ills, and youth unemployment is as much a social ill as it is an economic one.
In lamenting the ever-growing reliance on government, I am not suggesting we back away for a moment from providing a safety net for those in need, although more can be done—and, indeed, is being done—to embed the principle of mutual obligation in our social security system. I am, nevertheless, suggesting that we need to be more creative in finding solutions to address the scourge of unemployment, and youth unemployment in particular. As a parliament, we need to rise to the challenge Menzies set and embrace free enterprise by empowering individuals to help themselves; to make it easier for people to not just find jobs, but to create their own; to encourage people to use their own enterprise to establish their own small businesses. In other words, I am one who believes entrepreneurship is a solution to unemployment. Not a silver bullet by any means, but a solution nonetheless, and one that offers great potential and warrants further exploration. And it is in this context, that I rise today to support the Corporations Amendment (Crowd-Sourced Funding) Bill 2016.
Turning an idea into a commercial reality is not easy. Like many of us here on this side of the House, I come from a business background and I know from firsthand experience the taste of success and the distaste, if you like, of failure. I know what it is like to put my own money and reputation at risk to employ others, and to make a business work. Starting a business is not easy, and it is especially tough for young people. Young Australians who wish to start their own business face three unique challenges: (1) they lack money; (2) they lack business experience; and (3) they lack a personal network across the real market economy. We need to find new ways to help young people address these three challenges, and I believe this bill will go some way to help address at least that first challenge—accessing money, accessing the capital required to get a business off the ground.
I am confident in making this claim because I have seen crowdfunding work for this very purpose in my own electorate of Fairfax on Queensland's Sunshine Coast. I founded a not-for-profit organisation a few years ago called Generation Innovation, which creates heroes out of everyday locals between the ages of 15 and 25 by helping them take ideas and turning them into commercial realities. In the first year, 2015, three start-ups emerged and the people's favourite, elected by the local community, was a grade 12 student from Mountain Creek State High School, Harry Thompson, who started a smoothie business called Swift Smoothies. In the second year, 2016, we had four start-ups emerge, and the people's favourite was Aaron Ehrlich, a tradie from Maroochy River, who started a business called Mates with Boats. I am looking forward to the 2017 program that will start soon, but my point is this: when it came to raising seed capital for Harry, for Aaron and for the other young budding entrepreneurs of those five other businesses, we helped them crowdfund locally. Each of those businesses reached their targets because locals contributed as little as $10. They went to the crowd and the locals supported them.
The contributions made by this type of crowdfunding were effectively donations, and such a model would not fall under the system being established by this bill, which relates to equity funding. However, I mention it here because from my own firsthand experience in helping young people go all the way from idea to the market I have seen that microfunding through crowdsourcing works. That is why I speak today with such tremendous confidence in this bill and its potential to unleash the ideas of everyday Australians that can be taken to the market that would otherwise never see the light of day. In speaking to this bill, I wanted to make that point—that it will encourage free enterprise, assist young people in particular and make it ever more possible for everyday Australians to start their own businesses. Beyond being a major catalyst for getting new businesses started here in Australia, crowdfunding also offers opportunities for existing small and medium-sized companies that already play such a vital, significant role in the Australian economy.
This is just the sort of bill that gives substance to the Prime Minister's call for agility and diversification as we expand our economy to reflect a rapidly changing world and economic landscape. The internet provides new opportunities for economic growth, opportunities for hardworking Australians and their families and opportunities for entrepreneurs and business owners to raise capital from the crowd, to create jobs and to go for growth. That is what this bill does.
As the Treasurer said when he introduced it in November last year, it opens up new and innovative sources of funding for Australian small businesses and start-ups, and this is critical because, as things currently stand, the system is inadequate and overly cumbersome. We heard that from the previous speaker, the member for Banks. Compliance costs for companies that wish to access crowdfunding are high, and it is the start-ups and the small businesses that feel it most. Larger companies will continue to have access to conventional means of attracting capital for equity, but, for the smaller players, crowdfunding opens up a much-needed funding channel, and we therefore need to keep the cost of compliance down for those smaller players wishing to participate.
Regulators will of course still need to have full confidence that accountability measures are fit for purpose, but these mechanisms cannot be so onerous as to impose further compliance costs that end up discouraging businesses from taking part. A compromise position that has been put forward in this bill is that companies will have to be registered public companies in order to crowdsource equity under this system, but there are important and substantial concessions over a five-year period. They will not have to go to the considerable expense of having annual reports audited if their crowdfunding is less than $1 million, they will not have to provide an annual report to investors other than by posting it on the web and they will not have to hold an annual general meeting. Disclosure will still be required but not at the level of a full disclosure statement, which can be expensive to develop, obviously.
The regulators that will govern this new disclosure regime will still ensure that investors have adequate information to make reasoned decisions and will continue to have the ability to make direct contact with companies to satisfy themselves before committing their cash for equity. Investors will be protected by a limit of $10,000 per investment, and they will have a 48-hour cooling-off period. There will, however, be no limit to the number of crowdfunding investments an investor might make.
The other extremely important element of this bill is the requirement for crowdfunding intermediaries, the organisations that have developed to provide crowdfunding services to companies, to hold an Australian financial services licence. This is a quality control measure, a reassurance for both the investor and the company seeking support from the crowd via the services of an intermediary that the Australian Securities and Investments Commission, ASIC, will have their backs. If the parliament supports this legislation it will take effect six months after it receives royal assent.
There are, obviously and maybe inevitably, contentious points in this bill. There is a view that the requirements on companies wishing to engage the crowd to raise equity remain onerous, but others say it is going to be too easy. Some say that the cooling-off period for investors is too short; others say it is too long and that the limit on investments is too low or too high, or some say there should be no limit at all. This is uncharted territory for this parliament, no doubt. It is unchartered territory for many jurisdictions, only some of which have undertaken the work to establish a framework that seeks to take advantage of this new web based 21st-century funding format as a means of promoting economic opportunity, growth and increased employment.
As the information revolution continues to unfold, new technologies emerge and industries move accordingly. There will, inevitably, be further amendments, over time, to bills such as this. For now, though, this bill before us deserves to be supported, and we need to get on with it. It is a genuine and valid effort to maximise the benefits of crowd sourced equity funding for small businesses and start-ups while protecting the integrity of our financial system and the safety of the crowd. In opening an avenue for new and existing businesses to better engage the crowd, what we are witnessing is the further democratisation of capital. We are seeing the free enterprise vision of Menzies, from half a century ago, continue its relevance in this modern age. I commend the bill to the House.
First of all, I would like to thank those members who have contributed to this debate, including the excellent contributions from the member for Fairfax and the member for Banks. I also commend the member for Banks for the outstanding work he has been doing on these issues more broadly, particularly now in his responsibilities as the chair of the House of Representatives Standing Committee on Economics, on this and related manners in the banking and financial services sector.
This Corporations Amendment (Crowd-Sourced Funding) Bill 2016 gives effect to the government's ongoing commitment to help transition the Australian economy from the mining investment boom to a more diversified and resilient economy. The bill will facilitate crowd sourced equity funding in Australia by introducing a framework which will reduce the regulatory impediments for small business, particularly early-stage businesses seeking to obtain equity finance.
The government consulted widely on the provisions contained in this bill, and this process began in late 2014 following the 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 in its review of Australia's equity crowdfunding landscape. The government acknowledges the efforts of stakeholders to provide feedback and to help guide development of the framework in this bill.
Our proposed framework for Australia was outlined in a separate consultation paper in August 2015, and targeted consultation was undertaken on the draft legislation. Overall, there was broad support for developing a framework that incorporates elements of the model recommended by the Corporations and Markets Advisory Committee and a model adopted by New Zealand. The framework that the government has introduced into parliament reflects improvements suggested by stakeholders during consultations. It seeks to ensure the balance between supporting investment and reducing compliance costs for the issuers of crowd sourced equity funding that it 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 crowd sourced equity-funding offers. Intermediaries must be licensed and will have gatekeeping obligations, ensuring that certain disclosure and other requirements are met by issuers before their offer is listed on the platform. The crowd sourced equity-funding framework proposed in this bill allows eligible, unlisted, public 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.
The government has also continued to work on extending the regime to propriety companies, which are generally prohibited from offering shares to the general public. The government has asked Treasury to develop a framework for proprietary companies as a key priority, and I would expect that extension of the framework will be introduced through subsequent legislation in the near future. I am very pleased to be bringing the opposition up-to-date with the developments in that area to ensure that they also have a good understanding of the time line for introducing those additional measures, which I know they have expressed interest in.
The framework being introduced now will provide a number of protections, including offer documents providing basic information about the offer and an investment cap for retail investors of $10,000 per issuer, per 12 month period, to ensure investors can make informed decisions without being subject to excessive levels of risk. The government has also listened to stakeholder views on how to balance the fundraising needs of businesses while ensuring investors remain adequately protected. As part of this bill, the government has increased the eligibility threshold to $25 million in assets and annual turnover. This will help a broader range of companies make use of crowd sourced equity funding and provide investors with a broader range of investment opportunities. This bill also provides regulation-making powers 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 powers to exempt certain market operators from specific obligations, under the Australian market licensing and clearing and settlement facilities licensing regimes. This will enable the government to more readily tailor these regimes to particular market operators, including intermediaries operating in the crowdfunding market. These exemption powers will apply from the date this bill receives royal assent.
The crowd sourced 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 guidelines to effectively administer the framework and provide additional certainty to this industry. The government provided $7.8 million to ASIC in the 2015-16 budget to facilitate this.
This bill fulfils the government's commitment, our response to the financial systems inquiry and our National Innovation and Science Agenda, 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.
Together, this package delivers on the government's commitment to support small and start-up businesses, which are critical to building a modern and diversified economy and providing jobs for all Australians. This is an important bill in the progression of this agenda, but it will not be the last. There will be further bills that move into additional areas in this space which will provide further opportunities. There has been extensive and lengthy consultation in getting to this point, and it is now important that we take this step and then take the steps that must follow in subsequent legislation. With that in mind, I commend this bill to the House.
The original question was that this bill be now read a second time. To this the honourable member for Chifley has moved as an amendment that all words after ‘That’ be omitted with a view to substituting other words. The question now is that the amendment moved by the member for Chifley be agreed to.