Background and overview

1.1        Labor Senators recognise the importance of opening up capital pathways for early-stage innovators to drive employment and economic growth in Australia.

1.2        Traditionally early stage innovation firms and start-ups have relied upon support of venture capital and angel investors. However Australia has lagged behind other countries that have begun introducing regimes to facilitate the operation of equity crowdfunding platforms as an alternative method of accessing investor support.

1.3        In 2013 the previous Labor Government tasked the Corporations and Markets Advisory Committee (CAMAC) to recommend an appropriate framework to allow crowd-sourced equity funding - or equity crowdfunding, as it is popularly referred - to operate in Australia. Its final recommendations were delivered to the Abbott Government in May 2014.

1.4        It took the Abbott-Turnbull Government an additional 18 months to bring forward its first version of equity crowdfunding legislation in December 2015 – legislation that was so flawed it was roundly criticised for being unwieldly, costly and too cumbersome for many start-ups and small businesses seeking to access crowdfunding. This criticism emerged despite government claims that it had consulted widely with stakeholders and that the legislation reflected the stakeholder views.

1.5        As a result of criticisms of its previously proposed equity crowdfunding regime, the Turnbull Government has now introduced this revised Bill.

1.6        While Labor Senators remain open to working constructively with the Turnbull Government to advance the development of a viable equity crowdfunding framework, the changes to the proposed equity crowdfunding bill are either simply cosmetic or present a watering down of retail investor protections.

1.7        Labor Senators also note remarks made in the second reading speech to the Bill that indicate the Turnbull Government is proposing to introduce a new equity crowdfunding regime in the near future that would make the framework proposed include privately held companies in addition to publically held companies.

Key contributions from the written submission process

1.8        Labor Senators note that the Government’s decision to introduce this legislation late in the last sitting week of 2016 and have a final report delivered just after the first sitting week in 2017. This has limited scrutiny of a flawed Bill in an effort to rush through legislation that is likely to be superseded by a revised framework that will be introduced through new legislation during the course of the year. This is a remarkably poor approach by a government that has presented itself as business-friendly and wanting to avoid the imposition of red tape and extra business costs.

1.9        Having reviewed the submissions and taking note of the views expressed previously, it is very clear that the Government's proposals have, once again, drawn a mixed reaction.

1.10      References to the bill excluding privately held companies were common.

1.11      Dr. Strong (UNSW Law Faculty) notes that:

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

1.12      The Australian Small Business and Family Enterprise Ombudsman comments that:

As noted in the prior consultation papers around 99% of Australian companies are proprietary companies and a majority are small businesses.

...

This means that the vast majority of potential small business users of the new framework must wait for another, 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... we believe it would be more straightforward for small business if the current amendments were held off so that the full package of amendments were introduced at the same time.           

1.13      Employee Ownership Australia and New Zealand said:

Most companies only move themselves into the public company domain as a precursor to listing or when they reach a size that they are equivalent to a listed company. The key reason for this is the increased requirements on the company around reporting, disclosure, financials etc. and the costs associated with this. One of the key costs is the requirement to have an auditor and audited accountants (which smaller companies may not need). This can be significant costs for a smaller organisation, from $15,000 per annum. The financial statement and content requirements also may cause some concerns for entities that do not wish to give full disclosure for competitive advantage. The current transition period does not deal with the fundamental issue, which is the cost and complexity of this regime.

1.14      The Business Council of Co-operatives and Mutuals also raised concerns that the Bill:

...does not serve the capital needs of small or start up enterprises, particularly those using co-operative or social enterprise models.

1.15      Regarding the lifting of the eligibility cap from $5 million to $25 million, the Australian Small Scale Offerings Board states:

ASSOB considers this increase to be critical to the success of the legislation.

1.16      The changes to the cooling off period attracted attention as well. Chartered Accountants Australia and New Zealand raised concerns about the reduction of the cooling off period for equity purchases from five days to two days:

We also note the change to the cooling off period from 5 days to 48 hours for investors. 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.

Specific Measures

1.17      Labor Senators note the changes to increase asset and turnover caps and Labor Senators welcome this. Labor had proposed amendments to the previous legislation liberalising these caps.

1.18      Labor Senators remain concerned that the legislation fails to deal with the biggest shortcoming of the previous legislation: that it continues to lock out start-ups and small businesses by requiring them to convert into public companies. Evidence submitted to the inquiry pointed out that this would also translate to higher costs for companies – meaning businesses would have to spend a lot of money for the sake of raising funds. We presume the government knows how self-defeating this is, which is why it has publicly acknowledged that it is contemplating future changes to this regime even before this Bill is debated by the Senate.

1.19      Labor Senators are also concerned by the changes to reduce the cooling off period from five days to just two days. In the Australian context, equity crowdfunding represents a new investment platform offering securities that are of a considerably higher risk. Mum and dad investors should have time to re-consider their decision to make a sizeable investment into higher risk companies. Labor Senators believe the Turnbull Government is putting mum and dad investors at risk by watering down the cooling off period and we urge that a five day cooling off period be instituted, as envisaged by the previously proposed legislation.

1.20      Labor Senators note the comments that the Government is working on a crowd-sourced equity funding framework for private firms. Given that this bill with its current requirements will not meet the needs of small businesses and start-ups looking for capital, this bill should be amended to allow for crowd-sourced equity financing for privately held companies.

Conclusion

1.21      This Bill addresses some shortcomings of the old bill, but introduces new problems and still fails to address the needs of start-ups and small businesses. The Government should go back to the drawing board, consult with industry and come back with a framework that is suitable for both private and public companies.

Recommendation 1

1.22      Amendments be made to the Corporations Amendment (Crowd-sourced funding) Bill 2016 to ensure that the compulsion to convert to an unlisted public company is dropped and the government amend the Bill to allow for a wider range of start-ups and small businesses to access the equity crowdfunding regime.

Recommendation 2

1.23      Make amendments to the Corporations Amendment (Crowd-sourced funding) Bill 2016 to strengthen retail investor protections, by ensuring that a five day cooling off period is instituted.

Senator Chris Ketter                                             Senator Jenny McAllister
Deputy Chair                                                         Senator for New South Wales

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