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

If I can get straight to the point, Minister, around secondary markets: if I were to take my $10,000 allocation in a proprietary limited company that was set up, would I be able to sell my allotments through CSF intermediaries? I know that they actually are placing the book bill to get these things financed in the first place. But will they be playing a role in secondary markets—not just the primary capitalisation of these businesses? Will they play a secondary role? Will they be providing advice to investors? And will they do any research around the nature of these equity investments, whatever they be?

Zed Seselja (ACT, Liberal Party, Assistant Minister for Treasury and Finance) Share this | Link to this | Hansard source

I would say a couple of things in response. Obviously, by their nature, investments in small unlisted companies, including CSF companies, will be illiquid. All CSF offers must include a risk warning that discloses to investors the risk that their investment will be illiquid. However, the bill includes provisions to allow CSF shareholders to transfer their shares to other people without counting towards the 50-shareholder cap that exists for proprietary companies if that transfer occurs before the company is listed on a financial market. This provides some flexibility for CSF shareholders who may wish to exit their investment. If over time a secondary market for CSF shares develops, the operator of that market will need to obtain an Australian market licence and comply with relevant consumer protection requirements.

Internationally we see secondary markets emerging, firstly by trading between existing shareholders. In addition, I think you asked whether financial advice could be provided. Crowdfunding intermediaries are not allowed to provide advice on crowdfunding offers. This is to mitigate potential conflicts of interest between the intermediary and investors.

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

That's pretty much what I was told last time when we had a committee stage on this—that potentially there may be a secondary market and financial intermediaries may provide a brokering function. You said there's been some development of these kinds of markets overseas. Have any existing financial licence holders in Australia shown interest in registering for this? Does it have to be a separate registration? For example, can an existing stockbroking equities company now take on a role of buying and selling share parcels in these CSF companies? Have they expressed any interest in it? How will that be regulated?

Zed Seselja (ACT, Liberal Party, Assistant Minister for Treasury and Finance) Share this | Link to this | Hansard source

I am advised that it is in a formative stage and that there hasn't been interest expressed as yet but that any brokers in future would obviously have to have an Australian market licence.

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

I understand that. But there are obviously a lot of them that do, and they will buy and sell pretty much anything—such as movie tickets, concert tickets or whatever—and they will charge commission. So this is something I am going to watch very closely. It is, as you say, very high risk. It's illiquid.

I am also concerned about the exit strategies. What kind of requirements will there be for companies that set up and decide to list publicly or sell their assets or even their entire company to a third party? How will the contributions of unit holders, especially early unit holders, be valued in relation to the sale of the assets? I am also very interested on a personal level in how that would occur in relation to the existing shareholders, the ones who have already set up these businesses. How do their contributions get valued compared to new CSF shareholders?

I will give you an example. I've set up my honey business. I've worked on it for five years. It is my idea. I put the original capital in to make the prototype. I know it works. I then set up a CSF company. I raise $5 million. I have to come up with a value for issuing those CSF parcels to individual investors. How do we look at the interaction between how I value my own shares, because I set it up, and other shares? Is it preliminary to the CSF stage of development? When it gets to the next stage—if it ever gets to the next stage—where it is commercialised and monetised through the share market or for a sale, what requirements will there be to make sure that initial investors get looked after and get an adequate return? If there is no secondary market, how do you price that?

Zed Seselja (ACT, Liberal Party, Assistant Minister for Treasury and Finance) Share this | Link to this | Hansard source

Once a proprietary company has a successful CSF offer, without a specific exemption the general takeover provisions would apply as the company would have more than 50 shareholders, whether CSF, employee or other. An exemption from the takeover provisions is consistent with a light-touch regulatory approach to the CSF regime. The takeover rules are very complex and would be difficult and costly for proprietary companies to understand and comply with. While there will be no legislative provisions on takeovers, it is common for proprietary companies to have tag rights in their constitutions which allow smaller shareholders to participate in a buyout. Proposed revisions to regulations for the CSF regime will ensure that the existence or not of these rights is disclosed in the CSF offer document. In terms of sale of assets, related party rules would apply.

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

I know there are a whole range of motivations as to why people put their money into these things. Sometimes they just want to see them happen and be successful for philosophical reasons or whatever. But an investor has to know their exit strategy and their pathway. I think that needs to be very clearly spelt out such that they are going to get fair and equitable treatment in the valuation of any exit strategy, whether they sell on a secondary market or whether they get bought out.

You said takeovers there. I did listen to that carefully and I read it in the explanatory memorandum, but sale of an asset can be quite different to a takeover, and a takeover can be hostile or it can be nonhostile. So I am a bit confused as to what we are dealing with here. I understand if it's a hostile takeover why you would want to exclude them, but in terms of the sale of their business or their asset to a third party is that also what you're classifying as a takeover?

Zed Seselja (ACT, Liberal Party, Assistant Minister for Treasury and Finance) Share this | Link to this | Hansard source

I've laid out in terms of takeovers and I also added in the answer that in terms of sale of assets, in the circumstances you've outlined, that that's where the related party rules would apply.

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

I would like to continue to prosecute this, but I don't feel I am going to get the answers or the detail today. I will just make the point that I will be watching, and the Greens will be watching, this very closely to see how it develops. We hope it's very successful, that it raises lots of money and that it does the right thing, but I remain sceptical until proven otherwise.

Doug Cameron (NSW, Australian Labor Party, Shadow Minister for Human Services) Share this | Link to this | Hansard source

I move the Labor amendment in my name on sheet 8386:

(1) Clause 2, page 2, (table item 2, column 2), omit "day after the end of the period of 6 months beginning on the day", substitute "28th day after".

Labor is proposing this amendment to reduce the time it will take for proprietary companies to access the crowdfunding source equity regime from six months after royal assent of this bill to 28 days after royal assent.

I note that Senator Seselja has indicated government support for that amendment and I thank him for that. Previously, there had been no explanation from the government as to why they had built these delays in. Given the government has indicated support, I might just leave my comments at that. I commend our amendment to the crossbenchers as a sensible proposal.

Zed Seselja (ACT, Liberal Party, Assistant Minister for Treasury and Finance) Share this | Link to this | Hansard source

Just briefly, as I indicated earlier, the government will be supporting the opposition amendment. The government is committed to fostering a more innovative and creative Australian economy, and crowdfunding enables start-ups and early-stage businesses to access the funding they need. Of course, in order to secure legislative passage and to implement this important reform as soon as possible the government agrees with this amendment.

Since this bill was introduced, the CSF framework for public companies has been implemented, intermediaries have been licensed, offers successfully made and preparation for the extension to proprietary companies has been advanced considerably. The government has conducted consultations on the draft regulations needed to support this extension and is ready to put them in place promptly following the passage of the bill.

Bill, as amended, agreed to.

Bill reported with an amendment; report adopted.