Katy Gallagher (ACT, Australian Labor Party) Share this | Link to this | Hansard source

Crowdsourced equity funding has been considered by parliament for quite some time, with both Labor and coalition governments progressing reform of the Corporations Act to allow for it to be introduced.

Equity crowdfunding allows start-ups or small businesses to raise capital over the internet. In return for that capital, online investors will get an equity stake in those start-ups and small businesses. It is a capital-raising platform that directly challenges the way in which the Corporations Act will operate, particularly when the number of investors exceeds the 50-shareholder mark, which would normally require a number of other legal obligations to be met. That is why Labor decided in 2013 when in government to ask the Corporations and Markets Advisory Committee—CAMAC—to consider the best regulatory framework that would allow for the operation of equity crowdfunding in Australia.

CAMAC looked at how other countries have introduced and operated equity crowdfunding within their jurisdictions. It is a very comprehensive and far-reaching report. Despite receiving CAMAC's recommendations in May 2014, the Abbott-Turnbull government dragged its feet and failed to rapidly consider and respond to this report and to do so by swiftly developing an effective viable framework for equity crowdfunding. Both the government and the opposition consulted separately with stakeholders about the equity crowdfunding framework CAMAC proposed. While very supportive of CAMAC's work, we on this side had some reservations about some of the things that were being put forward. We asked to see some refinements to CAMAC's approach and advocated for those through a discussion paper that Labor released. At the same time, the government said they had undertaken consultations that tested responses to three different scenarios: what CAMAC put forward; what New Zealand was operating as a crowdfunding framework; and the do-nothing option, which, frankly, was ridiculous, as no-one was seriously proposing that we do nothing.

We thought that New Zealand's arrangements were not suitable to overlay upon our current regulatory circumstances. We thought that elements of CAMAC's preferred approach were going to be difficult to enact because they would be cumbersome. Labor pushed for a midway point. When CAMAC brought down its report in May 2014, it took until December 2015 for the government to get its act together and unveil its legislation. On releasing their legislation, the government claimed they had consulted widely, had issued numerous discussion papers and undertaken rounds of stakeholder consultation. But, when legislation was suddenly put forward to the house in December 2015, they had not genuinely consulted with the opposition. It would become clear later that they had selectively listened to stakeholders or failed to take into account certain views.

We had previously worked in a bipartisan fashion with the Abbott government on this. We are just as keen as the government to see equity crowdfunding operate in Australia. We have a stake in this reform too because of the way we commissioned CAMAC to begin the groundwork for it. But the Turnbull government was not interested in this. They just chased the headlines, and what happened? Their 2015 legislation was roundly criticised for being cumbersome and costly and weighed down with red tape and restrictions. It was criticised because it contained a requirement that companies—small businesses and start-ups—would have to convert themselves into unlisted public companies. Again, it is worth remembering that the government told everyone it consulted it had a system that would receive widespread support and balance competing viewpoints. Labor expressed concerns about that unwieldy proposal, citing how it would impose larger costs on small businesses seeking equity crowdfunding. Despite the Abbott government's claims of being pro-business and anti red tape, it was Labor pointing out how the coalition were limiting the ability of small business to easily access capital or for investors to secure equity.

We believe a crowdsourcing funding resume needs to be easily accessible, fair and backed up with reasonable investor protection. Businesses should not be forced to change to public companies to access equity crowdfunding—simple as that. The decision to make a company publicly listed should be made by businesses when they are good and ready and not by the government. Why should smaller businesses spend a lot a money just to raise some money?

When the government's 2015 legislation was considered by a previous Senate inquiry, stakeholders indicated that putting this requirement in would limit, lower and prevent the number of businesses that would use this funding platform. Some said publicly that to go through the process of becoming an unlisted public company for the purposes of accessing this funding regime would be ridiculous. Off the back of the then Senate inquiry, the opposition made recommendations to liberalise the requirement to convert into unlisted public companies and lift the assets and turnover caps contained in the bill. We gave effect to these recommendations via amendments proposed at the time. The legislation lapsed due to the 2016 double dissolution election.

Following the election, the government reintroduced the bill in November 2016, but, while it heeded some of Labor's recommendations—specifically, those regarding the assets and turnover cap—it stubbornly clung to the demand for businesses to become unlisted public companies simply to access equity crowdfunding. When it released its new legislation, start-ups were quick to point out how unhelpful the legislation would be. Andy Giles, the co-founded of start-up Veromo, told the Financial Review:

Currently, the thought of switching to a public company to avail ourselves of a potential wider investor base is unthinkable.

On top of this, the government made other changes to its proposed bill that caused the opposition some concern. For instance, after all the public support for improving the rights and protections for mum-and-dad investors generally, the government decided to water down cooling-off protections in this bill. This is a matter I will return to later.

Not surprisingly, Labor referred this new bill to a Senate inquiry. During the second Senate inquiry, stakeholders raised precisely the same concerns about the public company requirement. References to this were common. Dr Marina Nehme, from the University of New South Wales law faculty, noted

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.

Another stand-out submission was from the Australian Small Business and Family Enterprise Ombudsman. What is remarkable is that the ombudsman, set up by this government to speak up for small business, could barely disguise its deep reservations about the bill. They submitted to the recent Senate inquiry, and the ombudsman's views massively undermined the government's position. The ombudsman commented:

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

They added:

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

Critically, the ombudsman said:

… 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.

That is the submission by the Australian Small Business and Family Enterprise Ombudsman, not an industry group or someone who could be dismissed by the government as a mere disgruntled stakeholder. This is a person empowered by the government to consider the impact of government legislation on small business, and that is the ombudsman telling the Turnbull government it can do better and that it should get it right the first time. We agree. You would think that the ombudsman, representing the kind of business eager to be involved in equity crowdfunding, would be listened to by the Turnbull government, but, unsurprisingly, no, it was not.

The ombudsman is not the only party raising concerns about the constraints contained in this bill. Note the remarks of Employee Ownership Australia and New Zealand to the inquiry:

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.

They go on to say:

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.

They have clearly outlined why it is unreasonable for the government to lump unnecessary regulatory and financial burdens onto the smart and entrepreneurial people Australia's economic future relies upon.

Concerns with the government's approach continue to mount rather than subside. In recent weeks, for instance, we had the following concerns levelled at this bill by VentureCrowd COO Sunny Yu:

We maintain that the public company requirement is unnecessary and creates significant burden and uncertainty for startup businesses looking to access this alternative and innovative source of funding. We need to be careful that the right approach is being taken and that the laws are effective to help startup businesses and achieve its objective of ultimately unlocking productivity and innovation in Australia.

The other aspects of this bill the opposition is concerned about relate to investor protections. Specifically, it has watered down the cooling-off period for investors from five to two days. Many of these investors will be mums and dads, grandparents, people trying to get ahead to retire and new investors using a new instrument platform. In other words, this new market may see retail investors put in tens of thousands of dollars and be told, 'You've only got two days to change your mind.'

Not keeping investor protections in this instance is one of our big concerns with the legislation. We do not think the bill strikes the right balance at all. The Treasurer twisted himself up when he tried to address this during consideration in detail in the other place. The Turnbull government had decided with business interests ahead of putting mum-and-dad investors first when he said:

We think it is better to design the regulation and the system in a way that will avoid gaming of the system, rather than to chew up endless resources in enforcement.

He simply lapped up the shaky logic of business interests that want to water down investor protection and potentially undermine confidence in this new, riskier fundraising platform.

Mum-and-dad investors should be protected so the pool of capital available to businesses expands as a consequence of new investors having confidence in the market. The protections are about building trust in the system. You cannot have a crowdsourced funding market without having the trust of the crowd. And, while talking about investor protection, we would like to see the government actually spell out how the $7.5 million allocated to ASIC for regulatory oversight would be used. The government often points to this money but rarely explains in clear terms how exactly the money will be expended.

During the recent Senate inquiry, stakeholders expressed concerns about the government's proposal to limit cooling-off rights for retail investors. For instance, I draw the Senate's attention to the submission of Chartered Accountants Australia and New Zealand, who said:

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. Once crowd-sourced funding becomes more established, this cooling off period can then be reviewed and revised as appropriate.

Some potential crowdfunding platforms argue for the cooling-off period to be reduced from five days to two because they are worried about rivals gaming the system—signalling an intent to invest without following through with the investment. While we appreciate that concern, we do not support retail investors being made to shoulder greater risk instead of devising an appropriate market or regulatory measure to manage this type of event. ASIC, with enough guidance, could keep a close eye on frivolous or mischievous investors that pull funding as a disruptive mechanism against business rivals. We intend to move amendments to give effect to our view that the cooling-off period should be increased. We hope the Senate will back the call to support mum-and-dad investors.

There are other concerns we have with the bill—for instance, that it requires small business or start-ups to set up systems to individually respond to inquiries from a broad range of investors under the bill. They are meant to somehow field calls from any number of potential investors. How is a start-up supposed to have a sophisticated investor relations framework to do that? These are small outfits. Why wouldn't you compel them to field these inquiries individually, instead of allowing the platform, or the intermediary, to manage these inquiries? Having pointed that out, we will allow the government to demonstrate how its approach is more efficient and business friendly. We will simply coordinate our focus on the areas spelt out so far in this contribution to the debate: liberalising and freeing up the proposed equity crowdfunding framework while ensuring retail investors have enough time to contemplate a proposed investment.

The second point is easily addressed by simply increasing the cooling-off period to the five days originally envisaged by the government. The first point—liberalising the framework—can be done easily by one simple step. If a small business or start-up elects to use crowdfunding to raise capital, and it enters into an agreement with an intermediary to use their platform for this purpose, then the usual demands of the Corporations Act would be suspended other than for the other expectations triggered by the bill being debated. We put that forward by way of an amendment the last time and it has not been picked up this time. Apparently, the government thinks it is too hard to do. We think these are both reasonable propositions.

We would have hoped that the government would support these changes; however, it appears the government is not interested in bringing in an equity crowdfunding system that works. It just wants to introduce any system and then fix it up later. The Treasurer himself admitted in the other place that the government is working to bring in further legislation down the track that would do some of the things we have asked for, such as opening the crowdfunding market to privately held companies. This is because the government knows that the deficiencies in this bill may mean that the take-up of the new system might be low. He said:

As Treasurer, I will be bringing subsequent measures that build on this bill …

This sounds reasonable to start with, but those changes will also make this legislation pointless, because, if the government do indeed bring a second piece of legislation forward, we may have the problem of two systems operating at once, and we believe they should get this right from the beginning. Do not introduce a capital-raising platform for small business that 99 per cent of small businesses cannot access and then tell them, 'Don't worry, it will be fixed sometime down the track.'

We acknowledge that some stakeholders have expressed some support for this bill, but frankly that support is simply riding a sigh of resignation. These stakeholders gave up on the government bringing in a comprehensive framework. Remember, CAMAC brought down their recommendations nearly three years ago now, so some have been prepared to accept whatever the government dumps on the table. We do not agree with that position. We want to get this right the first time, not just chalk up a cheap win that needs to be undone later. Do not waste the parliament's time by coming along later in the year to fix the legislation. We know what is wrong with it now.

Again, we are just as keen as the government to see an equity crowdfunding platform or framework in place. It was Labor in government that tasked CAMAC to begin the job of developing an equity crowdfunding framework. We do support the government in progressing this further, and that is why we will not oppose the second reading; however, we will be putting forward amendments during the Committee of the Whole. We do not want to play games on this and we hope the government sees sense here.

To conclude, I will ask some questions I hope the government can adequately answer during this debate. Why is this half-baked bill being forced through? Why are we doing this in a two-step way instead of just doing this all at once? Why are you still insisting on the unlisted public company regime? Why are you reducing the cooling-off period and limiting the amount of time that new investors—retail investors, and mum-and-dad investors—have to consider whether or not they will go ahead with a considerable investment? Will the government spell out in very clear terms for the benefit of the Senate how exactly the $7.5 million allocation to ASIC for the introduction of equity crowdfunding is going to be expended? Which unit within ASIC will be responsible for providing oversight into the implementation and ongoing operation of crowdfunding in Australia, and how many ASIC officers will be assigned to this task? Further, how much money will the government be investing in boosting public awareness and understanding of equity crowdfunding? Can the government guarantee that by the end of this sitting it will have legislation to introduce that allows for a viable equity crowdfunding platform to work in this country?

We suspect the government will not be able to answer these questions in a meaningful way, although we do look forward to the minister's response. We will be, as I flagged earlier, prepared to move amendments to address some of the shortfalls that we have identified in this contribution today.

Nick Xenophon (SA, Nick Xenophon Team) Share this | Link to this | Hansard source

I rise to make a brief contribution to this debate and to outline my position and that of my colleagues on the amendments proposed by the opposition to this bill, the Corporations Amendment (Crowd-sourced Funding) Bill 2016.

I think the Economics Legislation Committee report gives a fairly neat summary of what crowdsourced funding is:

Crowd-sourced funding … also known as equity crowdfunding or investment-based crowdfunding, is an evolving concept in corporate capital-raising. Broadly, the term describes a company seeking funds—particularly start-up or early-stage capital—online from 'the crowd'. In exchange for cash, the company offers its equity. Equity offers are published through an online portal, also known as a funding portal; that is, a website.

That is a fairly neat summary in the economics committee's report on this bill.

I would like to start off by acknowledging the efforts of the member for Chifley, Ed Husic, who has devoted a lot of time and energy to this legislation. I also note and recognise the work of the government in responding to some of the concerns raised about the first version of the bill. This bill was previously debated in the 44th Parliament but lapsed on 9 May 2016. The main differences between the two versions of the bill are an increase in the assets and turnover thresholds of eligible companies from $5 million to $25 million and a reduction in the cooling-off period for retail investors from five business days to 48 hours. I welcome the increase in the turnover threshold but have some concerns about the reduction in the cooling-off period.

I note that the Senate Economics Legislation Committee in the majority report recommended that the cooling-off period remain at 48 hours. There were a range of views put forward by stakeholders. Equitise regarded them as 'one of the greatest potential threats to the fair and orderly operation of the market', while Chartered Accountants Australia and New Zealand recommended the five-day cooling-off period due to the fact that 'crowdsourced funding is a new form of investment'. The opposition's dissenting report expressed concerns at the higher risk that crowdsourced equity funding represents to mum-and-dad investors.

On balance, I think it is appropriate for the cooling-off period to remain at five days as originally proposed. The committee recommended that the government monitor carefully the implementation of the legislation and undertake a review of the legislation two years after its enactment. I would need to hear very firm undertakings from the government in relation to this review. The monitoring and review process as recommended by the committee is an appropriate and essential way to monitor the effectiveness of the cooling-off period, but I believe that cooling-off period ought to be five days, not two—not 48 hours. As crowdsourced funding becomes more established, the cooling-off period can be reviewed and, if appropriate, revised, but caution, a prudential approach, is to say that it ought to be five days for the sake of consumers for this new form of investment. So we will be supporting the opposition's proposed amendment to extend the cooling-off period to five days.

In relation to the issue of limiting access to crowdsourced funding to public companies, I note the concerns raised by the opposition and the Australian Greens. Excluding proprietary companies from the regime in the bill is concerning, but I note that the government has indicated its intention to develop and introduce a framework allowing proprietary companies to access crowdsourced funding 'as a priority' and introduce a bill in the 'near future'. I know that Senator Gallagher has been quite critical of that, and I can understand why she has. I am interested in hearing from the minister as to the time frame the government has in mind for introducing this framework, to fulfil the undertakings it has given, and when parliament can expect to see a bill reflecting this. I think the 'near future' is not specific enough. I think former Prime Minister Rudd used to say 'in due season', so at least it has not said that, but 'near future' does not seem to be specific enough. That is something that the government needs to address, I believe, in the committee stage.

Amending the Corporations Act to give effect to this policy objective is not a simple task, and it needs to be approached with caution and care. It should have been done by the government so that a complete crowdsourced-funding framework could be passed by the parliament. My concern with the amendment proposed by the opposition, as sympathetic as I am to it, is that it may have a whole range of unintended consequences in the sense that the legislative framework is not there to include proprietary companies and that the other consequential amendments that would need to apply in terms of probity and other prudential requirements for proprietary companies are not there for this. They are not there in this amendment. Even though I think that it is clear that this is the path that we need to go down sooner rather than later, we must have the right legislative framework.

However, the bill before the chamber should pass. I do have concerns, as I said, that the opposition's proposed amendment to allow for a wider range of start-ups to access the crowdsourced-funding regime may have unintended consequences at best or, at worst, jeopardise the passage of this legislation. So we are not inclined to support the opposition's proposed amendment (1) on sheet 8047 as circulated. While it would have made more sense to present a bill that does not exclude proprietary companies, this bill should pass, as it is an important step to open up early-stage capital markets, which will ultimately help businesses to grow and therefore create new employment opportunities.

In closing: we live in a fast-moving world. Through advancements in technology, the rapid exchange of ideas has opened up business opportunities that generations before us would never have believed possible. These are business opportunities that, if implemented properly, can support families and communities through the creation of jobs, but we must have an appropriate consumer protection framework. The importance of fostering potential small businesses must not be underestimated.

Going forward, crowdsourced equity funding will play an increasingly important role in small businesses realising their ideas and ambitions. It is encouraging to see that the government is taking action to help grow small businesses and start-ups in Australia. Crowdsourced equity funding is one part of this equation. I believe this bill ought to go further, but it needs to be done in a carefully considered and appropriate framework. It will be interesting to see the extent to which these provisions are taken up by companies and investors alike. However, we must remain vigilant and responsive to the needs of small businesses. After all, they are an integral part of our economy and society. If this bill achieves what it is meant to, that is unambiguously a good thing.

Jenny McAllister (NSW, Australian Labor Party) Share this | Link to this | Hansard source

I rise to make a number of short remarks about the Corporations Amendment (Crowd-sourced Funding) Bill 2016 and to associate myself with the remarks made by our shadow minister Senator Gallagher. This is a really interesting area of business development. These are new models for small businesses and medium-sized enterprises to raise funds in ways that they have not been able to do previously. It does not mean, of course, though, that this sector is immune from exactly the kinds of problems and challenges that confront us in regulating all kinds of business enterprise. In this, as in all other things, we are looking to get the balance right between freeing up enterprises as far as is practical and possible to attract capital to get their ideas off the ground and protecting investors so that particularly retail investors, mum-and-dad investors, do not find themselves exposed to risks that they did not understand at the time when they placed their money in this company or find themselves exposed to legal constraints or problems that they did not anticipate.

In that regard, it is extremely frustrating that the bill that is before the Senate at this time presents only a partial response to the set of questions that we face for this sector. It is unbelievable, in fact, that this policy process was kicked off by Labor back in 2013, and here it is in 2017 and the government is proposing to establish a regime that, from the evidence given to the Senate committee, will only apply to perhaps one per cent of Australian companies. Doubtless, the government's response to this will be to say: 'Oh well, no matter. Those companies that are presently proprietary could convert themselves and become public companies.' But this is not real answer at all because, as Senator Gallagher and others have pointed out, that decision to translate your business operation to a public company is costly. Having made the transition, which is in itself costly, additional costs are brought in once you have converted to being a public company.

It is also the case that the government, having recognised that this is only a partial solution, has already signalled its intention to bring further legislation into the parliament to address the shortcomings of this legislation. It is an extraordinary situation where we are presented with a bill that is, by the government's own admission, imperfect and, in fact, incomplete. The practical consequence, one suspects, is that many businesses will just hold off engaging with this legislation at all until the second tranche of legislation is brought through. That raises the question: why wouldn't we defer it? Why wouldn't we have waited? Why wouldn't the government have completed its policy work and brought into this chamber a full package so that businesses and, indeed, senators could make a decision based on all of the facts and all of the policy propositions and not just on some of them.

I want to talk just a little bit about risks. I mentioned in my opening remarks that a key thing we need to do is make sure that investors—particularly retail investors—are not exposed to risks that are unexpected or unreasonable if they invest through this mechanism. This is a new market and investors are going to take a little time to work out what the risk profile is and what it means for them if they make an investment. It makes sense in that way to proceed cautiously. To that extent, the decision to reduce the cooling-off period seems a mistaken way to address some of the industry concerns raised through the consultation process. Reducing the cooling-off period to 48 hours seems to expose retail investors to a set of risks that are too great, given the fledgling nature of this industry.

That is, of course, a problem not just for retail investors but also for the sector itself. I want to point to some of the remarks made by the Australian Small Business and Family Enterprise Ombudsman about this because they talk about the need to promote confidence in the crowdsourced equity market. In their letter that came in in January this year the ombudsman says that they:

… emphasised the need to provide strong investor protections as part of the regulatory framework, noting that a crowd-sourced equity market can be expected to attract small, relatively unsophisticated and inexperienced investors to high-risk, generally illiquid venture capital-style projects.

It made the point that strong measures are needed not only to protect the investors individually, but also to maintain confidence in the crowd-sourced equity funding market and small business investing generally.

Their concern is that if the protections are not right and if we do have a series of big disasters it will take time for that market to recover, and that is why proceeding cautiously seems to me to be sensible. It is why I support the amendment signalled by Senator Gallagher to increase the cooling off period to the original proposal, which was five days. That seems to me a much more sensible way to deal with the risks associated in this sector.

I just want to conclude by emphasising how disappointing it is that we vote in this chamber on a partially developed policy proposal. If government has an intention to develop a whole package that deals with both private companies and public companies, why not present all of that together so that businesses can see how these two regimes will interact and so that senators can understand that that interaction will be a coherent response to the opportunities and the challenges posed by this sector? It is disappointing that we find ourselves in this situation. Of course, I should indicate that I will be supporting the amendments proposed by Senator Gallagher.

(Quorum formed)

Peter Whish-Wilson (Tasmania, Australian Greens) Share this | Link to this | Hansard source

Crowdsourcing finance is a very new and evolving space. It is exciting. It has developed to promote and facilitate innovation, which is something that we absolutely need and which, as a parliament, we have a responsibility to play a leadership role in. We have had a number of stakeholders consulting with us on the Corporations Amendment (Crowd-sourced Funding) Bill 2016. We have seen it go to committee. It has taken years to get to this point. As you may know, Mr Acting Deputy President Marshall, I have a background in finance and I have watched this develop over the years, with a lot of interest. I have seen an innovative group of people get together in Byron Bay and develop a system where anyone can produce their own honey from their own backyard, using a whole new technique that was pioneered through crowdsourced funding. I know those people. I know the guy who has been working for the company to promote this system.

The concept around crowdsourced funding is fairly simple. If you provide your own equity—that is, you put some money into a venture—you are given access to that technology. You are given a unit—that is, you can have your own honey-producing unit set up in your own backyard—and you can buy that unit at a good price. You are guaranteed access to that by having provided crowdsourced funding. We are looking at developing a legislative framework—that is, laws and regulations—around this issue. To this day, crowdsourced funding has not been regulated, so we need to be very careful about the risks and the unintended consequences that go with this. It appears that it is a simple thing for us to do; but, in reality, it is a lot more complicated than that, as we need to weigh up promoting and facilitating innovation in Australia versus putting in place investor protections that we have confidence will work.

The new platform that we are debating in this bill before us today and that, hopefully, we will pass presents us with lots of challenges. I have worked in finance. I have seen high-risk financing, even with proprietary limited companies and public companies listed on the stock market. I have seen promoters of publicly listed, small cap companies mining the shareholders for years, without producing anything. I have seen the human behaviour behind wanting to get a shareholding in companies that you think are winners—being on a good thing. We have here a new financing structure that has very little oversight but where there is easy access for small investors, especially in high-risk investments. Let's be honest, most technologies and ideas that have been associated with crowdfunding are high risk by nature. They are at an early stage of development. Normally, these high risk, early stage development investments are dealt with by what we call 'angel' investors or 'sophisticated' investors. They can have a portfolio of investments. They can say: 'I can take on 20 very high risk, early stage developments. If one of them comes off then I can stand to make a significant profit, but the other 19 might fail.' What we are dealing with here today is a structure that allows any Australian to put up $10,000 of their hard-earned money into a crowdsourced funding platform, into essentially what is a high-risk investment. Unfortunately, as much as there are a lot of really good people, and mostly honest people, who have used the crowdsourcing platform to date, a legislative structure that makes it easier for people to go out there and raise capital, promote capital, is going to be like throwing out berley for sharks. I am sorry, that is what I have seen in my experience. There will be unscrupulous people out there who will be quite happy to put up concepts that they know have very little chance of success. They will raise money. They will spend that money. They will live off that money. They will swindle investors. So, whatever we do today, we have to be very cognisant of the fact that we need to protect investors as much as we possibly can. That is why I think capping limits is a sensible thing to do. It may be that $10,000 or $5,000 is lot of money to some people and it may not be a lot to others; but, at the end of the day, it is still very important for us to look at how we can reduce risks to investors.

I accept a lot of the points that Labor have made here today. Investor protections are important, but I do not think the key investor protection is necessarily going to be around the cooling-off period. I do believe it is around transparency issues, with giving proprietary limited companies this structure at this point in time. There are a number of extra risks associated with the proprietary limited structure versus the publicly listed structure. I still have some concerns about publicly listed structures in this overall debate and how easily they may be manipulated by unscrupulous promoters—but at least they have reporting requirements. They can take a larger investment of $10,000. I welcome the government continuing to work on the issue of giving broader access to proprietary limited companies, but at this point in time I think that is even risker than the proposal that we have in front of us.

Risk and return are well-established principles that most of us understand, certainly most students of economics and finance understand, and that those two go hand in glove. I know that a lot of Labor people—and Senator Dastyari is in here—who initiated the FoFA laws are well aware of the asymmetry of information. Unfortunately, what we have seen over the years and what has been evident during the FoFA debate is how easy it is for investors to get caught up in these kinds of things. You hear about it at local barbecues. It is a horse that they have got to back. They have to get into some of this things. Before you know it, people who have not necessarily done their homework, who do not necessarily understand the risks and who are not necessarily financially literate are caught up in these things and end up losing their money.

The bill that we are proposing to pass today has liquidity risk. If I put in $10,000 of my money even into a publicly listed company to invest, for example, in a new technology or the manufacturing of a new product, what do I get out of the $10,000? What do I get out of that? If that company wants to go the next step beyond crowdsourced funding—for example, it may choose to become a publicly listed company—how do I get my equity in that company valued properly? Who does that valuation? If a company goes to the stock market, what is my initial contribution priced at? Then there are the owners of these technologies who are seeking crowdsourced funding. If I buy a $10,000 stake in a crowdsourced project, do I know what the equity component is of those who already own that company, and what they are going to be cashing in at if it goes to the next step? There are a lot of questions I have that still need to be answered. But at least the structure we have in place at the moment has a potential period of time in the future where we can assess this as a parliament after we see how it goes and come back and address some of these risks.

At the moment, I believe that there is a need to finance higher risk projects through crowdsourcing and have a proper regulatory structure around that. But I get a very strong sense that this is going to be adaptive, this is going to be a work in progress, and I for one will certainly be keeping a very close eye on how this progresses. I hope my cynicism about human nature proves to be incorrect and that actually a number of Australian companies are able to successfully crowdsource; get projects to fruition, which of course we all want to see; see wealth created for their investors; and employ Australians and generate futures. That is necessary and you need financing to do that, but we need to be very careful that we are protecting investors here today.

I note that my concerns have been shared by a number of submitters to the committee inquiry—that there is very little data for us to ascertain and measure these risks in the future, and, if I could use a scientific term, we need to use the precautionary principle as much as possible here today. That is we need to give this a go. We need to see how it goes. We need to revisit it. That is why the Greens will be happy to support this legislation.

In relation to Labor's amendments, I have not dealt with the cooling-off period yet. My understanding is there are risks either way with extending or shortening cooling-off periods. You may say that shortening a cooling-off period, from five days to two days, gives investors less time to withdraw from a process. For example, if I need to raise $1 million through crowdfunding, I have a certain period of time where I can raise that money if I am a company. But the longer you leave the crowdsourcing process open the more that process can be manipulated by investors.

I have seen this with what we call book-build processes in equity financing on the share market. You see it with trading on the share market. People put in bids at certain prices, they try and make it look like there is a huge demand for this crowdsourcing project and then they withdraw those bids further into the book-build process. That could be easily manipulated with a cooling-off period. Someone could say, 'Put your $10,000 into this. There's been enormous demand for it. Everybody's getting some. This is your chance to get in on the ground level.' The longer that process is open the more likely it is going to be manipulated. At least a shorter cooling-off period actually reduces that risk. I know there is a trade-off either way, but we need to be cognisant of the fact that there are risks for longer book-build processes. In fact, I understand some book-build processes, in Korea and other places, for this kind of high-risk financing go for the whole period—even up to six weeks, in the case of the prospectus time. So we are ambivalent on the cooling-off period, between two and five days. They are both, in my opinion, fairly short periods of time.

In relation to a proprietary limited company being included in this particular bill today, I am aware the chartered accountants have made a number of comments on why they do not want to see propriety limited companies introduced at this stage, as have a number of other stakeholders. I am concerned about phoenixing, as we have a lot of problems in this country with phoenixing already, and proprietary limited companies will introduce more risk in terms of these companies raising capital through this particular crowdsourcing platform. What do we do? At the moment a proprietary limited company is limited to 50 investors, but we are going to be talking about raising millions of dollars through issuing $10,000 allotments. If I need $1 million, how many investors am I going to have to have on board? More than 50. I do not see, and I certainly have not seen, anything from the Labor Party as to how we are going to solve that particular issue. If we are going to look at extending this to proprietary limited companies, these are the kinds of basic things that I do not believe I have seen information on yet that will allow me to support that. I understand the government is working on that.

Let us keep this really simple. This is high-risk financing. It is fine if people can afford to lose $10,000. We need to make sure that they are aware of the risks associated with this kind of investing. We need to have the best possible regulatory structure we can around this to protect investors, as well as facilitate that innovation that we desperately need in this country. This is a good place to start. We will be watching this very closely as it progresses over time, as I am sure will Labor, Liberal and crossbench senators. I say today that the Greens will be happy to support this bill.

Mathias Cormann (WA, Liberal Party, Minister for Finance) Share this | Link to this | Hansard source

I would like to thank those senators who have contributed to this debate. This bill delivers on the government's ongoing commitment to support the transition of the Australian economy from the mining investment boom to a more diversified economy, through fostering innovation and entrepreneurship.

This bill introduces a legislative framework for crowdsourced equity funding which will make it easier for small businesses, particularly early stage businesses, to make use of equity finance. The government is also continuing to work on extending the regime to proprietary companies, which are generally prohibited from offering shares to the general public. The government has asked Treasury to develop a framework for proprietary companies as a key priority, and I would expect that an extension of the framework will be introduced through subsequent legislation in the near future.

The framework detailed in this bill will allow unlisted public companies with assets and turnover of less than $25 million to raise up to $5 million per annum through crowdsourced equity funding with reduced disclosure obligations. This framework will also provide a holiday for up to five years from the most onerous reporting and governance requirements for unlisted public companies. To ensure investors can make informed decisions and are not exposed to excessive risk, the framework sets out the minimum disclosure requirements and the retail investor cap of $10,000 per issuer per 12-month period. Online intermediaries will need to be licensed to perform certain gatekeeping obligations and ensure that certain disclosure and other requirements are met by issuers. The Australian Securities and Investments Commission will provide ongoing supervision of crowdsourced funding in Australia—in relation to the Senate Economics Legislation Committee's recommendation that the government closely monitor implementation of the legislation and consider the need for a potential review.

This bill is another example of how the government is supporting small and start-up businesses, which are critical to Australia's economic transition and delivering jobs and growth to all Australians. I commend this bill to the Senate.

Question agreed to.

Bill read a second time.