David Coleman (Banks, Liberal Party) Share this | Hansard source

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.

See this speech in context