Natasha Griggs (Solomon, Country Liberal Party) Share this | Hansard source

Under the heading 'Innovation' in chapter 3 of David Murray's financial system inquiry report, he paints a cautiously optimistic picture of the role of new technologies and business practices in Australia's economy of the future. To provide a context for the legislation we are debating today, I will place on record a precis to the important chapter in David Murray's overall volume of work:

Chapter 3: Innovation

Technology-driven innovation is transforming the financial system, as evidenced by the emergence of new business models and products, and substantial investment in areas such as mobile banking, cloud computing and payment services.

Although innovation has the potential to deliver significant efficiency benefits and improve system outcomes, it also brings risks. Consumers, businesses and government can be adversely affected by new developments, which may also challenge regulatory frameworks and regulators’ ability to respond.

The Inquiry believes the innovative potential of Australia’s financial system and broader economy can be supported by taking action to ensure policy settings facilitate future innovation that benefits consumers, businesses and government.

The Inquiry’s recommendations to facilitate innovation aim to:

These recommendations will contribute to developing a dynamic, competitive, growth-oriented and forward-looking financial system for Australia.

The past couple of sittings have seen the federal government begin to shape its legislative response to the Murray inquiry, and the Corporations Amendment (Crowd-Sourced Funding) Bill is part of that overall picture. But its origins are more closely linked with the government's national innovation and science agenda, which will shape economic development in this country in the years and decades to come.

Crowdsourced equity funding—or crowdfunding, as it is sometimes called—is an emerging way for start-ups and early-stage businesses to access the funding and investment they need to move the size and scope of their businesses up to the next level. At the same time, it maintains adequate protections for retail investors who share in the risks and the successes of these businesses.

The legislation will allow unlisted public companies with less than $5 million in assets and less than $5 million in annual turnover to raise up to $5 million in funds in any 12-month period. Companies that become an unlisted company in order to access crowdsourced equity funding will receive a holiday of up to five years from some reporting and governance requirements. In order to allow investors to make informed decisions, companies raising funds through crowdfunding will be required to release an offer document. To ensure that mum and dad investors are not exposed to excessive risks, a cap of $10,000 per issuer over a 12-month period will be introduced.

The Australian Securities and Investments Commission will have oversight of the new arrangements, and this legislation represents a fundamental change in our business investment landscape, blending key aspects of the Corporations Act as it relates to public and proprietary companies. In Australia, there is a historical distinction between public and proprietary companies which underpins the Corporations Act. A proprietary company is a company registered under the Corporations Act that is limited to having no more than 50 non-employee shareholders and, generally speaking, must not offer shares to the general public or undertake other fundraising activities that would require the use of a disclosure document. Proprietary companies are generally relatively small and closely held, and have lower corporate governance and reporting obligations than public companies. A public company is a company registered under the Corporations Act that is not a proprietary company. It is important to note that public companies are not required to be listed on the Australian Stock Exchange. In fact, only one per cent of public companies actually list on the Australian Stock Exchange.

The government's CSEF, or crowdsourced equity funding, framework will not apply to listed public companies. The distinction between the rights and obligations of proprietary and public companies is an underlying rationale of the Corporations Act 2001 and applies to all companies. If crowdsourced equity funding were to be facilitated through the proprietary rather than the public company structure, there would need to be an exemption from the 50-shareholder limit and a prohibition on making offers to the public. The proprietary company obligations would also need to be increased to require an offer document for crowdsourced equity funding offers to the public. If such exemptions were to be a part of the crowdsourced equity funding framework, once no longer eligible for the disclosure and reporting exemptions the proprietary companies would be required to undertake one of the following two actions to bring them back into line with the Corporations Act 2001. Option 1: if the company wished to continue with more than 50 shareholders, it would need to convert to a public company and then comply with the increased disclosure and reporting rules. Option 2: if the company wished to continue as a proprietary company, it would need to undertake a selective share buyback until it had fewer than 50 shareholders. This is a time-consuming and costly process and would see companies lose significant amounts of capital in paying out shareholders.

In contrast, the government's crowdsourced equity funding public company model requires no further action at the end of the crowdsourced equity funding exemption process beyond complying with the standard public company disclosure and reporting rules. The government's crowdsourced equity funding framework anticipates that crowdsourced funding accessing companies are seeking to grow through capital sourced from a crowd or, to use the more conventional corporate language, shareholders.

As I described earlier, to facilitate this growth the framework provides exemptions for up to five years for compliant crowdsourced funding companies from the most regulatory burdensome aspects of administering a public company. After that holiday period or upon no longer being eligible for the crowdsourced funding framework—for example, due to company growth beyond the turnover and asset caps—crowdsourced equity funded companies with more than 50 shareholders will need to comply with the reporting and governance arrangements like all other Australian public companies.

Intermediaries play an important role in crowdsourced funding and will vet companies seeking to raise funds, run offers including suspending or closing offers where there are disclosure concerns, and handle investors' money. ASIC will develop a separate Australian financial services licence authorisation for crowdsourced funding intermediaries. Australia is not alone in regulating the role of intermediaries in crowdsourced funding ventures. The New Zealand and United States models also require them to be licensed. Crowdsourced funding intermediaries must comply with certain obligations, including conducting prescribed checks around the identity of issuing companies and their officers, confirming the issuing company is eligible to use crowdsourced equity funding and checking that offer documents contain the required content and are not misleading or deceptive. Intermediaries must ensure that a risk warning appears prominently on their platforms at all times, provide an application facility for investors, ensure cooling-off rights are available to retail investors, disclose fees paid to the intermediary by the issuer, stop an offer if the intermediary knows the offer document is defective and enforce the per-issuer investor cap. In answer to the question: how will an intermediary determine if it has conducted the prescribed checks to a 'reasonable' standard, the government proposes to include direction on what could be considered reasonable in the regulations, along with details of the checks themselves, to increase certainty for intermediaries.

The intent of this bill is to assist start-ups and other small businesses that may have difficulty accessing equity funding due to the costs of disclosure and other requirements, which is why the gross assets and turnover caps are set at a $5 million limit. We have set a $5 million assets and turnover test as it ensures the framework is appropriately focused on start-ups and genuine small businesses. The $5 million fundraising cap is consistent with the maximum limit under ASIC's business introduction and matching services class order. The $5 million limit is higher than equivalent limits in the United States and New Zealand.

Concessions from corporate governance and reporting requirements only apply to newly incorporated or converted public companies because these obligations can be costly for small companies. Newly incorporated or converted public companies that make a crowdsourced funding offer within 12 months of registration will benefit from interim exemptions from holding annual general meetings, having financial statements audited and sending annual reports to shareholders.

These concessions are intended to facilitate access to crowdsourced funding for companies that cannot yet meet the public company obligations. They are not intended as a means by which existing public companies should reduce their reporting or interactions with their existing shareholder base.

The $5 million cap acknowledges that investing in early-stage companies can be risky. While crowdsourced equity is an exciting new asset class for retail investors, lower disclosure requirements may also make it more difficult for retail investors to assess the relative risks of offers. For crowdsourced funding to be a viable long-term option, investors must have confidence in the sector and the investments they make.

A retail investor cap will mitigate investor risk by limiting exposures to individual offerings and issuers. The coalition government intends to keep the cap under review and the regulations will allow for amendment over time if the government feels this is appropriate. The legislation provides the minister with additional exemption powers in relation to Australian market licences. The Australian market licence regime was designed with large public exchanges in mind and imposes obligations that may not be appropriate for other market types.

The minister currently has the power to exempt a market from the need to hold an Australian market licence or clearing and settlement licence but does not have the power to exempt a market from individual obligations. There is no scope to tailor a licence to suit the circumstances of an individual market. This means markets may be required to comply with obligations that are clearly excessive in their particular case or exempted from obligations that would be appropriate. Extending the exemption powers will provide for more effective and flexible licensing regimes that could appropriately respond to and facilitate innovation.

In conclusion, I should point out that the government will also consult on options to facilitate crowdsourced debt funding during 2016. I commend the bill to the House.

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