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Economics Legislation Committee
23/02/2016

ORD, Mr Gavan Russell, Manager, Business and Investment Policy, CPA Australia

[17:40]

Evidence was taken via teleconference—

CHAIR: Welcome. You are the lucky one; you have caught the inquiry today!

Mr Ord : First of all, I would like to thank you for your indulgence for allowing me to step in at the last minute for Mr Drum, who is unfortunately unavailable. I thank the committee for allowing me to call in on his behalf.

CHAIR: I see your boss's picture at every airport all over billboards with a television company announcing his return to media, which is good.

Mr Ord : Yes, he has definitely built up a very high profile in the last few months. It is very good for the organisation.

CHAIR: I invite you to make a brief opening statement, should you wish to do so, and then the committee will ask questions.

Mr Ord : Yes, I would like to make a brief opening statement, if I could. Given we did not make a formal submission, I think it would be helpful.

CHAIR: Go right ahead.

Mr Ord : The introduction of the legislation for crowdsourced equity funding is another initiative that is very much needed to help encourage a more innovative and entrepreneurial business culture in Australia. Recently, we conducted an annual survey of small businesses across the Asia-Pacific, and it clearly showed that Australian small businesses are lagging behind their competitors in Asia in areas of innovation. Obviously, that is not the case for every small business, but the margin that they are lagging behind their competitors in Asia on innovation is significant. In that sense, the passage of crowdsourced equity funding legislation cannot come soon enough. As the committee would know, allowing easier access to funding from the crowd may support some innovative companies and younger business owners to access funding that they would otherwise not obtain through more traditional sources of funding. We would also like to emphasise that it should not be forgotten that New Zealand, Malaysia and a number of other jurisdictions have stolen the march on Australia in setting up their regulatory frameworks around crowdsourced equity funding. They have made that a reality. This bill ensures that we are not left behind and that we are still in the game. We therefore support the passage of the bill as is.

In saying that, we acknowledge that there are differing views on the bill, and particularly on whether proprietary companies should be allowed to access crowdsourced funding. However, given the potentially high-risk nature of investing through crowdfunding, we believe that the bill by and large strikes an appropriate balance between the funding needs of business and appropriate investor protections. If for some reason the law does not work well, we would be very supportive of the government of the day revisiting the proprietary public company test and looking at whether the investor protections are adequate as well. Equity crowdfunding, as I discussed before, is not without its challenges, particularly striking the right balance between the needs of businesses to access funding and investor protection. However, to use a quote, 'It's better to be on the train when it's pulling out of the station than trying to catch up when it's got a full head of steam.' Our position is that the bill should pass as is. We understand it is a bit of policy experimentation but, by and large, we think it is heading in the right direction.

CHAIR: Thank you very much, Mr Ord. If you would not mind, is it possible for you to send your opening statement through? I presume you are working from notes.

Mr Ord : Yes. I am very happy to do that.

CHAIR: That would be terrific. Because Senator McAllister was given such a short run I did promise I would go to her first up in questions.

Senator McALLISTER: Thank you, Chair. I am very happy with how it is all going. Thanks for your testimony, Mr Ord. I imagine your members deal both with companies that are seeking to assure their investors that they are taking a prudent and sensible approach to managing their business and with the investors themselves who are seeking assurance about their investments.

Mr Ord : That is correct.

Senator McALLISTER: That is the basis of your commentary on this set of issues. You mentioned in your closing remarks that this sector is not without its challenges and indicated that the main challenge is striking the right balance. Do you want to flesh that out? What are some of the risks that you see both for businesses that your members are dealing with and investors that your members are seeking to support?

Mr Ord : First of all, there is a very good reason traditional sources of finance—for example, banks—are reluctant to lend to this sector. It is because they consider it a very high credit risk, predominantly because these are innovative companies that do not have a strong history, do not have strong revenue growth, and the owners behind the business may not have adequate assets to back up their funding requirements. So the predominant risk is that it is a very high-risk investment; hence some of the restrictions on the amount of money that an investor is allowed to put in and also restrictions on public versus proprietary companies.

I think the main risk is around the investor protection side. Obviously on the business side the risk is that if they cannot get access to the funding then the idea may never proceed or the business may go over and set up in another country. There is quite a number of examples of Australian businesses establishing themselves overseas; our CEO often says it is quite disappointing how many Australian entrepreneurs have American accents. That is the risk on the business side, but there is also the investor side. It is a very interesting question around where you strike the right balance. This may change over time so, as I said before, it is a bit of policy experimentation. As the last witness said, I think that at some point in time the legislation should be reviewed and adapted as we go along. If at some point in time the public company test is not working, we are quite happy to revisit that and consider expanding it to proprietary companies, but first of all we should start off by testing the water with the public companies.

Senator McALLISTER: One of the objections is that the process of converting to a public company could be quite expensive. Are you in a position to comment about the costs associated with a small business converting to a public company?

Mr Ord : In terms of costs, I would have to take that on notice. I do note that the legislation tries to make it easier than it would normally be, but I could take that on notice and come back to you with some indicative costs of what it might be.

Senator KETTER: I have a follow-up question on that: I note that BDO have made a comment in their submission that the requirement to become a public company is likely to be daunting as well as costly to start-ups and small business. Apart from the costs, would you be able to comment on what they are perhaps alluding to there?

Mr Ord : That is a fair observation—that establishing a public company can be daunting—but there are good public policy reasons for that. As I think one of the senators said before, this particular committee has had a number of inquiries into recent harrowing consumer protection stories, so there are some very good reasons why the policy settings are as they are, and that is primarily built around decades of corporate failure and addressing those corporate failures. It can be daunting, but with the right advice it should not be that daunting; it should be quite achievable. As I said before, it does strike the right balance between investor protection and the funding needs of business. We are very willing to support exploring that further should this legislation not work as intended, but I think as a starting point this legislation should pass as it is.

As a colleague said to me recently, the downside of getting this more conservative approach wrong is less than the downside of getting the alternative approach wrong. That is why I think we should start off on this case. I do accept that it can be daunting to move to a public company, but I think the public interest is best served by this current approach at this present point in time.

CHAIR: As a point of clarification, the cost of ASIC registration is about $75, it takes about two months and they are probably going to get legal advice anyway. Isn't it ongoing compliance that is the issue and why the bill gives it a five-year exemption?

Mr Ord : Yes, I agree with that: ongoing compliance is the bigger issue. The five-year transition period where the public company requirements are lesser—the disclosure requirements are lesser—we think, again, is an adequate period to allow a business to get up to speed with the public company requirements.

Senator KETTER: Going to the issue of the $1 million audit threshold, there have been a couple of suggestions that it might be—and I am looking at the BDO submission here:

…more appropriate for some level of independent financial procedure to be performed in relation to the CSF Offer Documents and ongoing financial reporting, rather than imposing an audit once $1 million has been raised.

I know you say that the bill should be passed as is, but would you like to comment on that suggestion?

Mr Ord : I think there is some validity in that point. The main point around that sort of independent check or audit is that part of the disclosure requirement is to help create a secondary market so that investors can dispose of their investments. If we do have this sort of disclosure regime with some independent checks, I think that would better support a secondary market evolving, like a stock market as exists today. Whether that is through the BDO proposal or as audit, we are happy either way. As long as there is some sort of independent verification of the financial information—and I am talking from a consumer point of view; that they are confident the business is a going concern, that it will exist and that it will actually make an investment—we do not mind either way how that is achieved. The BDO point is quite valid and we would support their approach or your audit approach. Either approach would achieve a similar outcome.

Senator KETTER: In comparison with an annual review, instead of an audit, what would you say is the merit of that?

Mr Ord : It might be a bit of a lesser review. I am not an audit expert myself, but it might be a bit of a lesser review. The costs might be a bit less. However, the person engaged in the review would still be required to follow the auditing standards. It would still have similarities to an audit, but some might see it as an 'audit light' program, and some investors may not feel that they are getting the adequate protection of a full audit, so that is the downside of that sort of special engagement or that sort of lighter style of audit.

CHAIR: I am just looking for your comment, and we will finish up on this one. The reduced disclosure environment provided by this crowdfunding regime—you think it is appropriate for more complex arrangements like managed investment schemes, but how do you see it protecting the retail investors, the crowdsourcing funders that, as it is proposed, it is likely to attract?

Mr Ord : That is a very good question. At the moment, as I said, it strikes an appropriate balance, but I think that it is important for policymakers to review those proposed changes to disclosure requirements to make sure that they are still adequately protecting consumers. I think this is an area that will have to be monitored carefully by policymakers and by ASIC. It is an area of risk, no doubt, for the investor and for the regulator as well, so we are very cautious of that. On balance we think it is there at the moment, but we know it needs to be monitored very carefully.

CHAIR: We thank you for waiting for us. I know you had to wait for a little while, and we appreciate your time in coming, Mr Ord, obviously at short notice. We thank you for your evidence and wish you a good evening.

Mr Ord : Thank you to the chair and to the committee.

CHAIR: Thank you.

Senator McALLISTER: Thank you, Mr Ord.