Main issues
Introduction
2.1
As the committee found in its previous 2015 bill inquiry, for the most
part, submitters welcomed the introduction a legislative framework for CSF as a
means of providing an environment conducive to the growth of new businesses and
their retention in Australia. However, many submitters did not support the bill
in its entirety.
2.2
Many of the concerns raised by submitters in this inquiry were
considered in the committee's previous report.[1]
This chapter will examine views on the two main amendments to the previous bill:
increasing the eligibility cap from $5 million to $25 million and reducing the
cooling-off period from five working days to 48 hours. The chapter also
explores the issues raised by submitters with regard to the potential expansion
of the CSF framework to include proprietary companies.
Eligibility requirements
2.3
The bill sets out the criteria that businesses would have to comply with
in order to be considered an eligible crowd-sourced funding company.[2]
Broadly:
- the company is a public
company limited by shares;
- the company's principal place of
business is in Australia;
- a majority of the company's
directors (not counting alternate directors) ordinarily reside in Australia;
- the company complies with the
assets and turnover test;
- neither the company, nor any
related party of the company, is a listed corporation;
- neither the company, nor any
related party of the company, has a substantial purpose of investing in
securities or interests in other entities or schemes.[3]
Assets and turnover test—$25
million
2.4
The EM noted that, given the CSF regime is intended to assist
small-scale businesses, restrictions have been placed on the size of company
that can access the regime.[4]
The legislation makes clear that the value of the consolidated gross assets of
the issuer and any related parties must be less than $25 million at the
time the company is determining its eligibility to crowd fund. The EM explained
that the gross asset cap is based on:
...the value of consolidated gross assets of an issuer and
any related parties for integrity reasons to ensure that the cap applies
appropriately to related parties of the same group.[5]
2.5
As well as satisfying the asset test, the company and related parties
must also have consolidated annual revenue of less than $25 million.[6]
Subsection 738(H)(2) of the bill defines the assets and turnover test which
forms the eligibility criterion.
- The company complies with the assets and turnover
test at the test time if:
- the value of the
consolidated gross assets of the company, and of all its related parties is
less than:
-
$25 million; or
-
if the regulations prescribe a different amount—the prescribed amount; and
- the consolidated annual revenue of
the company, and of all its related parties, is less than:
-
$25 million; or
-
if the regulations prescribe a different amount—the prescribed amount.[7]
2.6
In his second reading speech, the Treasurer, The Hon Scott Morrison MP,
explained that setting the threshold at $25 million would 'enable a broad range
of companies to make use of crowd-sourced equity funding and provide investors
with a wider range of investment opportunities.' The Treasurer also observed
that as the market develops, the ongoing appropriateness of these thresholds
can be reviewed.[8]
2.7
The Australian Small Scale Offerings Board (ASSOB) considered the
increase in the threshold would be critical to the success of CSEF framework.
ASSOB noted that a significant proportion of the CSF issuers on its platform to
date (over 170 companies) already had intellectual property valuations alone in
excess of $5 million, even though many did not have any turnover. It observed
that the lower $5 million cap would have precluded many companies from accessing
CSF:
If it is the intention for this legislation to be used by
innovative start-up and early stage companies to help develop new industries
and jobs within Australia, the $5 million cap will preclude many and continue
the trend of these companies seeking funding and talent offshore.[9]
2.8
Chartered Accountants Australia and New Zealand (CA ANZ) also supported
the change of the turnover threshold to $25 million, noting that it now aligns
to the small company reporting threshold. CA ANZ had previously recommended that
the thresholds be aligned to those in existing reporting frameworks.[10]
2.9
CA ANZ did raise concerns that the gross assets threshold has also been
increased to $25 million. It noted that the small company gross assets threshold
is $12.5 million. As such, it recommended the gross assets threshold be revised
to $12.5 million to align the CSF limits with existing reporting
frameworks.[11]
2.10
Fat Hen Ventures welcomed the revised asset/revenue threshold. Indeed,
Fat Hen Ventures expressed the hope that threshold may be increased to $50
million in the coming years as the CSF framework is reviewed. It submitted that
it is the unlisted companies with revenue/assets to $50 million that struggle
to access equity capital for growth of up to $5 million.[12]
2.11
Fat Hen Ventures stressed the need for vigilance to ensure that
companies do not try to reduce their gross asset base to below the $25 million
threshold by 'creative means' in breach of Australian Accounting Standards—by
writing down or writing off intangible assets to get below the $25 million cap.
Fat Hen Ventures advised:
It is important in our opinion for the Intermediary and
possibly ASIC to review any sudden write down of assets to comply with the
asset test for CSF. We believe it is important for CSF‐aspirant companies to adopt Australian
Accounting Standards in any event to ensure readers of a CSF Offer are
properly informed about the profit and loss and balance sheet of the Issuer
company.[13]
2.12
ASSOB raised similar concerns, noting the challenges for intermediaries
to accurately assess a company's assets and turnover without audited accounts.
ASSOB observed:
From our experience as a crowdfunding platform which has
raised funds for over 170 companies in seven years, very few (if any) companies
in the start-up and earlier stage have audited accounts at the time of first
applying to list on the ASSOB platform. ASSOB insists that companies convert to
a limited entity before they list, however their accounts are unlikely to be
audited for a period of up to 12 months after that.[14]
2.13
BDO Australia raised concerns about the clarity of the wording of
Section 738H(2)(b) of the draft bill in relation to the definition of the 12
month period for testing the $25 million turnover cap. BDO Australia noted that
the EM outlines the turnover cap as follows:
The turnover cap is based on the consolidated annual revenue
for the 12-month period immediately prior to the time when determining
eligibility to crowd fund. New companies that have not been operating for a
full 12 months will still be able to crowd fund as long as their consolidated
annual review for the period is under the $25 million cap. [15]
2.14
BDO Australia considered that further clarity would be beneficial to
explain what is meant by 'the 12-month period immediately prior to the time
when determining eligibility to crowd fund', as in its view this could be
interpreted in a number of ways. BDO Australia recommended that the test should
be based on a 12 month period ending within three months of the turnover
eligibility test being performed.[16]
Committee view
2.15
The committee notes that the proposed regulatory framework is
specifically intended to assist small-scale businesses and specific
restrictions on the size of the companies that can access the regime support
this proposal. As the CSF regime is new and evolving, the committee suggests the
government review eligibility requirements once the regime is in place to ensure
the ongoing appropriateness of the thresholds.
Investor protection and the cooling off period.
2.16
The Treasurer, in his second reading speech, noted that the government
had consulted extensively on the design of the proposed CSEF framework. He
maintained that the model CSEF framework detailed in this bill 'strikes the
right balance between supporting investment, reducing compliance costs and
maintaining an appropriate level of investor protection'.[17]
2.17
The EM noted that in order for CSEF to be sustainable:
...any regulatory framework needs to balance reducing the
current barriers to CSF with ensuring that investors continue to have an
adequate level of protection from financial and other risks, including fraud,
and sufficient information to allow them to make informed decisions.[18]
2.18
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) emphasised
the need to provide strong investor protections as part of the CSF framework,
as a crowd sourced equity market is likely to attract small, relatively
unsophisticated and inexperienced investors to high-risk, generally illiquid[19]
venture capital style projects.[20]
Cooling off period
2.19
The proposed cooling off period has been reduced to 48 hours. The
cooling off period in the 2015 bill was 5 days. The EM noted that:
...a reduced cooling off period of 48 hours will provide
issuers and intermediaries with greater certainty about the amount raised via a
CSEF offer while retaining a reasonable period for investors to withdraw after
making an investment.[21]
2.20
The cooling off period measure drew a variety of responses and differing
views, with some arguing against its introduction altogether, and others
suggesting that it be extended.
2.21
CA ANZ did not support the change to the cooling off period from 5 days
to 48 hours for investors. It noted:
Crowd sourced funding is a new form of investment for many
investors in Australia, we recommend the cooling off period is 5 days at this
initial stage of adoption. Once crowd-sourced funding becomes more established,
this cooling off period can then be reviewed and revised as appropriate.[22]
2.22
Some submitters, such as Fat Hen Ventures and ASSOB, were supportive of
the cooling off period being reduced to 48 hours, noting they had previously
put forward recommendations to this effect.[23]
2.23
Overall, Equitise supported the bill on the condition that the government
conducts a review and looks to remove some of the restrictions that seek to
limit the market. In particular, Equitise opposed the cooling off periods, regarding
them as 'one of the greatest potential threats to the fair and orderly
operation of the market'. Equitise explained further:
The Bill misses the fundamental tenant of equity
crowdfunding, it occurs in an open and transparent fashion where all investors
have the same access and opportunity to invest without and form of duress.
Cooling Off or the ability to rescind an investment will create opportunities
for manipulation and will result in the unwinding of successful transactions or
even the success of those which would have otherwise failed. None of the
established and functioning equity crowdfunding markets utilise Cooling-Off
periods and the pragmatic approach would be to allow platforms to apply their
own discretion for the cancelling of trades in situations where it is
appropriate. [24]
2.24
Similarly, CrowdfundUP did not support the inclusion of a cooling off
period, arguing that it should be totally eliminated to provide the surety to
live projects and remove the possibility of misrepresentation.[25]
2.25
Equitise noted none of the established and functioning crowdfunding
markets internationally use cooling off periods, arguing that the pragmatic
approach would be to allow platforms to use their own discretion for the
cancelling of trades in situations where it is appropriate. This is the way the
New Zealand model operates and, in its experience, Equitise found that it had
proven effective. Equitise encouraged the government to review, and ideally
remove, cooling off periods in the future.[26]
Committee view
2.26
The committee considers that the reduced cooling off period of 48 hours
seeks to strike the right balance between providing intermediaries and issuers
with certainty and maintaining an appropriate level of investor protection.
Access to crowd-sourced equity funding for proprietary companies
2.27
As at March 2015, approximately 99 per cent of all registered Australian
companies were proprietary companies. There were approximately 2188000
proprietary companies (the vast majority likely to meet the definition of small
proprietary company) and approximately 22100 public companies.[27]
2.28
The EM noted that the government, in response to stakeholder feedback,
began consulting on whether CSEF should be extended to proprietary companies.
On 4 August 2015, the government released a public discussion paper on whether
CSEF could be extended to proprietary companies. The EM noted that:
...the feedback from this consultation is being considered, and
any policy options to facilitate CSEF for proprietary companies will be
developed after the introduction of legislation to facilitate CSEF for public
companies.[28]
2.29
With regards to extending the CSEF framework to include proprietary
companies, the Treasurer stated in his second reading speech:
...the government is
continuing to consult on extending the regime to proprietary companies, which
are generally prohibited from offering shares to the general public. I have
instructed Treasury to continue developing a framework for proprietary
companies as a priority and would expect that an extension of the framework
will be introduced through subsequent legislation in the near future.
In the meantime, this bill provides proprietary companies that
wish to raise funds from the crowd access to the option to convert to a public
company and receive exemptions from some of the more costly governance and
reporting requirements for up to five years.[29]
2.30
Overall, many submitters were of the view that the proposed eligibility
criteria should be extended so as to include a broader cross-section of the
business community. The Business Council of Co-operatives and Mutuals argued
that the bill does 'not serve the capital needs of small or start-up
enterprises, particularly cooperative or social enterprise models'.[30]
2.31
In particular, submitters were keen to extend access to CSEF to
proprietary companies. A number of submitters indicated they were currently
participating in the Treasury consultation process with regards to proprietary
companies.
2.32
Dr Marina Nehme observed that the bill 'excludes over 99.7% of companies
from accessing CSF'. She noted:
Such a reality defeats the purpose for introducing
legislation to facilitate CSF as only a very small minority of companies will
be able to raise funds through this mode of finance.[31]
2.33
TMeffect, an independent intermediary, did not believe the CSEF
framework went far enough to include early stage ventures in crowdfunding,
stating:
We have worked on this too long to concur with the direction
that has been taken, and believe that any proprietary company announcement will
do little to relieve small CSF issuers from the true cost of this funding
pathway.
This view is based upon Treasury’s ‘one size’ model, grouping
proprietary and public under a single umbrella, and a refusal to look at the
alternate of a separate regime for small issuers (including crowd funders).
...
The failure to review alternate small business friendly
models after this length of time is inexplicable.[32]
2.34
Live Performance Australia (LPA), the peak body for Australia's live
performance industry, submitted that, in the event that CSF arrangements are
introduced for proprietary companies, its primary concern was that existing
arrangements of small scale personal offers and sophisticated investor
exemptions be preserved. LPA noted that under the current bill, the majority of
its members would not be in a position to benefit from CSF as they are
proprietary companies and therefore would not be eligible to make CSF offers.[33]
2.35
LPA considered that despite corporate governance and reporting
concessions for up to five years for companies that register as, or convert to,
a public company limited by shares after the commencement of the CSF framework,
the significant burden of becoming a public company would most likely be
prohibitive for its members.[34]
2.36
In relation to expanding the CSF framework to include proprietary
companies, LPA proposed increasing the current shareholder limit of 50 for
proprietary companies. In addition, LPA explained:
...reform would be necessary to ensure proprietary companies
are not subjected to onerous administrative and reporting requirements - for
the simple reason that many small businesses do not have sufficient resources
to meet those requirements, and the reform would become counterproductive.[35]
2.37
ASBFEO agreed that in order to enable crowd-sourced funding as an option
for small businesses, any effective CSF framework must extend to those that are
now structured as proprietary companies.[36]
ASBFEO noted that the government had indicated a further round of amendments
addressing the participation of proprietary companies in the coming months.
ASBFEO also noted that the vast majority of potential small business users of
the new CSF framework will therefore have to wait for the:
...soon-to-be-announced round of amendments and regulations
before they can begin to make the necessary decisions and adaptions, including
possibly taking the decision to switch legal structures and become a public
company. The incomplete nature of the current proposal imposes a burden of
uncertainty on small businesses who may wish to avail themselves of new
fundraising opportunities.[37]
2.38
While ASBFEO supported the legislation, it contended that if a further
round of amendments is only months away, as indicated, it may be simpler, more
certain and more straightforward for small business if the current bill was
held off so that the full package of amendments could be introduced at the same
time.[38]
2.39
Fat Hen Ventures did not share ASBFEO's view, submitting that the most
pressing matter was to pass the current bill and establish the CSF framework,
before any assessment extending the CSF regime to proprietary companies:
The priority is to get a CSF regime up and running in this
country as soon as possible to deliver on the Innovation Statement and make it
easier for fast growing/emerging companies to access capital in a more
efficient manner. Australia is behind many other countries in relation to CSF
and part of Australia’s economic outcomes depends on a CSF regime being in
place. Australia will lose fast growth enterprises to jurisdictions with CSF if
we delay much longer.
Once the legislation is in place and running smoothly, we
would be happy to see the Government assess extending the CSF legalisation to
proprietary companies but such a 'stage two' movement would need to be coupled
with major changes to Corporations Act (i.e. extending the current 50 non‐employee cap and Offer
logistics etc) and therefore it is our strong recommendation to get the current
Bill into legislation soonest with a genuine intention to assess Pty Ltd
company application some time thereafter.[39]
2.40
CrowdfundUP also supported the inclusion of proprietary companies in the
CSF framework. In addition, it pointed out that the issue of debt crowdfunding
had yet to be addressed, noting 'Australia is fast falling behind its regional
neighbours in the aspect. This month, Indonesia launched its debt crowdfunding
framework'.[40]
2.41
Equitise acknowledged that the government and Treasury had shown good
speed and that there appears to be momentum to having the complementary
proprietary framework come through in the first half of 2017.[41]
2.42
CPA Australia expressed the view that if proprietary companies are
permitted to access CSEF, it would be appropriate that they be subject to
additional transparency obligations that would be comparable to public
companies accessing CSEF. It reasoned that such a change is necessary to
provide an appropriate balance between the financing needs of business and
investor protections. It noted that, unfortunately, this would inevitably have
regulatory burden consequences.[42]
Proposed new company type
2.43
Dr Marina Nehme observed that one of the core challenges for extending
the CSF regime to proprietary companies is that they are not designed to raise
funds from a large group of shareholders. The two main characteristics of
proprietary companies are that they cannot raise capital from the public and
they are limited to having 50 non-employee shareholders. Dr Nehme noted:
This is part of the reason why proprietary companies face
fewer regulations – they provide very little protection to shareholders. They
are not required to hold an annual general meeting, for instance, and do not
need to provide their shareholders with financial statements or comment on the
company’s performance. Further, a shareholder might find it very difficult to
sell their shares in a proprietary company as this may require not only finding
a buyer but also getting the board of directors’ approval.
Historically, when a company required more funds than 50
non-employees could provide, they would convert into a public company. Counting
on a wider base of investors and owners, public companies are more heavily
regulated, addressing many of these concerns.[43]
2.44
Dr Nehme explained that new sources of funding, such as CSF, were
beginning to blur the lines between public and proprietary companies. As a
result, we should consider introducing an intermediary form of corporation that
sits between the two.[44]
Dr Nehme did not consider that removing the shareholder cap or adapting the
format of proprietary companies would be the best approach to enable access to
the CSF regime for proprietary companies. Instead, she argued that the
establishment of a new form of company may be necessary. Such a company may:
...allow entrepreneurs to access CSF when they outgrow a
proprietary company, while also providing some protection to investors.
Designing such a company form will ensure Australia does not fall behind the
rest of the world, and will promote a different type of entrepreneurship. The
foundation of such a company can be found to a certain extent in the proposed
exempt company put forward by the Bill.[45]
2.45
CPA Australia also raised the possibility of introducing a new type of
corporate entity. It noted:
Such an entity could
also be subject to new rules such as giving it a limited life of say five years
unless shareholders agree to extend its life, say for another five years, or
agree to change to a different type of company structure (on the condition that
it meets the tests for that structure).
In relation to
changing company type, Part 2B.7 of the Corporations Act 2001 (s 162 etc.) is
fairly permissive about change of company type and could with amendment
accommodate the idea of allowing the CSEF entity to change form.[46]
Review of legislation
2.46
In its report on the 2015 bill, the committee recommended careful
monitoring of the implementation of the legislation. The EM noted that the
government and ASIC will continue to monitor the development of the CSF market
to ensure that the changes to the law are operating as intended.[47]
The committee notes the government has also committed to undertake further
consultation on extending the regime to proprietary companies.
2.47
Some submitters emphasised the importance of undertaking a post
implementation review.
2.48
CPA Australia urged the committee to recommend that the government conduct
a post-implementation review of the CSEF legislation within its first three
years of operation. CPA Australia stated that the post-implementation review
should consider whether the changes to disclosure, governance and audit
requirements for eligible companies under the bill are effective in protecting
and informing investors, and have also supported the creation of secondary
markets where investors can on sell of their investment.[48]
2.49
The Australian Institute of Company Directors also reasoned that a
post-implementation review would benefit the industry by improving confidence
in CSF for Australian business and investors as well as ensuring it is
operating as intended.[49]
Recommendation 1
2.50
The committee recommends that the government monitor carefully the
implementation of the legislation and undertake a review of the legislation two
years after its enactment.
Committee view
2.51
The committee understands the important role that CSF can play as a
means of providing emerging innovative businesses with access to the capital
they need to, establish, grow and remain in Australia.
2.52
The committee acknowledges that, overall submitters welcomed the
introduction of a legislative framework for CSF. The committee also recognises
CSF's role in facilitating an environment conducive to the future growth of new
Australian businesses, including CSF's ability to provide investors with a
wider range of investment opportunities. Coupled with the recognition of the
benefits of the CSF, the committee notes the cautionary advice of some
submitters who highlight the need to adequately monitor and review the
implementation to ensure CSF's success.
2.53
Finally, the committee supports the recent adjustments to the CSF
framework which were included in this bill, as well as the commitment by the
government to consult further on extending and fine tuning the framework to
include proprietary companies to ensure the CSF is fit for purpose.
Recommendation 2
2.54
The committee recommends the Senate pass the bill.
Senator Jane
Hume
Chair
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