Monday, 20 March 2017
Corporations Amendment (Crowd-sourced Funding) Bill 2016; In Committee
In my speech in the second reading debate I flagged a number of questions and indicated that I would be moving two amendments. I seek leave to move the amendments on page 8047 together.
(1) Schedule 1, item 14, page 10 (line 17), omit paragraph 738H(1) (a), substitute:
(a) the company has an agreement with a CSF intermediary that is legally enforceable;
(2) Schedule 1, item 14, page 32 (line 27), omit "48 hours", substitute "5 business days".
I would also like to flag that I want the questions put separately when the time is appropriate. I will not delay the Senate further with the amendments I am moving. Amendment (1) on page 8047 would allow privately held companies access to this important capital market. I indicated in my speech that we are moving this amendment so small businesses and start-ups are not denied access to this important new capital-raising facility due to the onerous reporting burdens and regulations of becoming a public company. Amendment (2) simply increases the investor cooling off rights from two days to five days. I hope that I can get support from the Senate for both of these important amendments.
The government will not be supporting these amendments today, although, in relation to the first issue that Senator Gallagher has raised, the government is entirely sympathetic to her position and what I believe Senator Whish-Wilson as well has been putting on the table. The issue is that extending crowdfunding to proprietary companies is not simple and would require significant changes to the law. It would represent a fundamental change to the traditional concept of a proprietary company. The opposition's amendment would be inconsistent with the current law, which prohibits a proprietary company from engaging in any public fundraising that would require disclosure to investors. Extending the crowdsourced funding regime to proprietary companies is a priority for the government. The government expects to consult on draft legislation in coming months. Consultation will be essential to ensure an appropriate balance between investor protection and opening up crowdfunding for innovative early stage companies. The overwhelming majority of stakeholders support proceeding with this current legislation to allow public companies to begin crowdfunding as soon as possible. As one submission to the Senate inquiry noted:
Australia will lose fast growth enterprises to jurisdictions with CSF if we delay much longer.
In relation to the second issue, the cooling off period, the government has reduced the cooling off period available for retail investors from five days to 48 hours in response to stakeholder concerns that a longer cooling off period would incentivise rivals to disrupt the crowdfunding offer by subscribing to the offer with the intention of withdrawing within the cooling off period. The 48-hour withdrawal period provided for in this bill presents a balanced approach. It reduces the risk of gaming by rivals and ensures investors have sufficient time to reconsider their investment decision. There is no international consensus on the need for a legislated cooling off period or on the optimal length of a cooling off period. For example, there are no legislated cooling off rights under the New Zealand crowdfunding model. In the government's judgement, the proposed cooling off period of 48 hours provides greater protection than that available for investors in public equity offers such as IPOs, who generally do not have access to cooling off periods at all. For these reasons we will not be supporting the amendments.
In response to some of the questions that were raised, implementing this framework will involve a range of areas across ASIC, including staff from the Corporations and the Investment Managers and Superannuation areas, the Registry and financial markets. ASIC will have a range of enforcement options available to address misconduct in the crowdfunding market. Specifically, crowdfunding intermediaries will be required to have an Australian financial services licence. Where there is misconduct, ASIC can impose conditions on a licence, suspend or cancel a licence or ban individuals from the industry. Where specific obligations of intermediaries or companies are breached, ASIC can issue an infringement notice or take a person to court to seek to impose a penalty.
I alluded to this question in my speech in the second reading debate. As you know, one of the key investment risks is liquidity risk. If I subscribe $10,000 under this legislation towards a crowdsourced project, has there been any work done on whether there will be an allowance for a secondary market for people to trade out of their investments? Are there any thoughts as to how those investments will be valued at a future period in time? I understand that this is a new, evolving area, but it is still to me very risky unless I understand how investors will be able to cash in, I suppose, on their investments in the future.
The advice provided to the investor at the time of considering an investment under this process would make very clear that this is an illiquid investment. So, obviously, individual investors will have to make judgements in that context of being very explicitly advised that this is an illiquid investment.
Yes, it is an illiquid investment if there is no structure or secondary market. Will there be rights? Will ASIC, as part of their role, look at how the values of those investments may change over time and how they will relate to future capital raisings or listings on stock markets?
As I said in response to the questions by Senator Gallagher on the intermediaries, in order to run a secondary market, which they could, they would have to be appropriately licensed with an Australian financial services licence, and they would have to comply with all of the relevant consumer protection requirements that come with that.
I want to quickly address this. As I alluded to in my second reading debate contribution, we have considered the pros and cons of a two-day or a five-day cooling off period. We understand that there are risks either way. It is fair to say the Greens have come down in this debate on the side of protecting investors, and that we feel that the five-day cooling off period would be preferable to two days. This is a risky financing platform, and five days is a reasonable period of time for people to consider their investment in what is essentially a high-risk investment. It is potentially a high return on investment, Chair, but it is also certainly a high risk, and we do not believe the extra three days, the loss of three days, would be that significant.
I would just make one point, and Senator Cormann may wish to answer this, although he may not: I do not necessarily understand how competitors might game the system with the cooling off period. I understand how the promoters of the system themselves may game the system by getting in bids to make this look like it is a sure thing and everyone should get some. I do feel that the extra period of cooling off is an added investor protection, and that would outweigh any potential risk over that three days of gaming the system. So the Greens will be supporting Labor's second amendment.
The TEMPORARY CHAIR: The question is that amendment (2) on sheet 8047 be agreed to.