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Monday, 20 March 2017
Page: 1322


Senator WHISH-WILSON (Tasmania) (11:21): 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.