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Economics Legislation Committee

BROUN, Mr Jeffrey Cameron, Managing Director, Fat Hen Ventures Ltd

HEASLEY, Mr Timothy Ian, Director, VentureCrowd

QUIGLEY, Mr Jack, Managing Director, CrowdfundUP Pty Ltd

WILKINSON, Mr Jonathon (Jonny), Managing Director, Equitise Pty Ltd

Evidence from Mr Broun was taken via teleconference—

Committee met at 16:31

CHAIR ( Senator Edwards ): I declare open this public hearing of the Senate Economics Legislation Committee. The committee is hearing evidence for its inquiry into the Corporations Amendment (Crowd-sourced Funding) Bill 2015. The Senate referred this inquiry to the committee on 3 December 2015. The committee is to report by 29 February 2016. I welcome you all here today. The committee has received 21 submissions, which are available on the committee's website. This is a public hearing, and a Hansard transcript of the proceedings is being made.

Before the committee starts taking evidence, I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee, and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. The committee prefers all evidence to be given in public, but under the Senate's resolutions witnesses have the right to request to be heard in private session. It is important that witnesses give the committee notice if they intend to give evidence in camera. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken, and the committee will determine whether it will insist on an answer, having regard to the ground on which it is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may, of course, also be made at any other time. Finally, on behalf of the committee, I would like to thank all of those who have made submissions and sent representatives here today for all of your cooperation in this inquiry.

Thank you for appearing before the committee. I invite you each to make a brief opening statement, should you wish to do so, before we go to questions.

Mr Broun : From our point of view, we applaud the government on the broad principles that were set out in the National Innovation and Science Agenda, and we see the CSF legislation as a step in the right direction. There is a little need for some tweaking here and there, but we endorse the principle of enacting the CSF legislation.

Mr Quigley : I would like to thank the committee for affording CrowdfundUP the opportunity to present at this forum. Roughly three years ago, I left my job as a corporate solicitor to act on a vision to connect small investors with small-to-medium enterprises in the Australian marketplace. It is with great pleasure that we are here today, on the verge of seeing a crowdsourced equity funding regime implemented into the Australian marketplace.

CrowdfundUP would like to highlight a few of the hurdles that it sees in the implementation strategy of the crowdsourced equity funding regime into the Australian marketplace. Firstly, there are the licensing issues. In the adjoining explanatory memorandum, under the Australian financial services regime, platform intermediaries have a carve-out provision requiring them not to obtain a deal or arrange to deal authority. Furthermore, platform operators are not required to obtain authority to operate a managed investment scheme. However, the carve-out regimes do not go far enough and platform operators will still be required to operate under the authority of an Australian market licence. Platform operators should be seen as gatekeepers. These gatekeepers should have strict reporting regimes and compliance regimes. A lot has been said about the public company regime. The public company regime could be diverted by implementing a proprietary limited company and affording them the ability to crowdsource equity funding, throwing a lot of the responsibilities back on the platform operators.

Furthermore, the implementation strategy of only offering ordinary shares, and not affording preference shares or unit trusts, seems to stifle innovation in this sector, which has already been stifled for over three years. Preference shares and unit trusts would afford the ability of debt crowdfunding in the Australian marketplace and allow for a quasi-bond market—something that is desperately in need in the Australian marketplace.

In addition, CrowdfundUP strongly believes that cooling-off periods would lead to a possibility of market manipulation occurring on platforms. Larger investors could get momentum behind a crowdfunding campaign and let retail investors infill behind them, simply withdrawing afterwards. This is a really big concern to our platform.

The Treasury department is currently reviewing tax incentives for early-stage investing. On Wednesday, its submissions will be coming to a close. Tucked away in section 5.1 of that submission is that possibly sophisticated investors will be the only ones to derive an advantage from investing in early-stage companies in Australia. CrowdfundUP is of the strong belief that this new tax incentive for early-stage investors should be coupled with the crowdfunding legislation on foot, as platform intermediaries will be operating under strict licensing regimes. This is the best way to dispense with concerns that retail investors cannot participate in a crowdsourced equity funding regime or invest in early-stage companies.

Finally, CrowdfundUP is of the strong belief that this legislation can be passed in its current form. Whilst not in the best form at the moment, whatever form it is passed in should be revisited within 12 months, with strong engagement from industry representatives to make sure that any kinks are ironed out in the implementation. Thank you.

CHAIR: Do you agree with all that, Mr Heasley?

Mr Heasley : I have a few other comments I would like to make.

CHAIR: Go right ahead.

Mr Heasley : VentureCrowd launched in February 2014 as an equity-based crowdfunding business in Australia. At that stage, we were focusing on investment into start-ups only. We have since expanded the business into property and credit, but I understand that the bill before us really concerns only start-ups, so I will confine my comments to start-ups only.

We source start-up deals from Artesian Venture Partners, which I am also a part of. It has a range of early-stage venture capital funds that provide a number of start-up deals that VentureCrowd is able to then put onto the platform. This means that for each deal that goes up onto the platform we have looked at them for at least two rounds of funding, so we know them well. They are not deals coming off the street. To date we have done 13 deals with 10 companies. These are all Australian deals. We raised 99 per cent of the money from Australian investors. We have raised amounts between $50,000 and $4.2 million for the start-ups we have invested in.

A key feature of the way that we operate is that we aggregate investments through a unit trust, and that unit trust then invests into the start-up. That serves a couple of important functions as far as we are concerned. One is that the start-up gains a single investor only. Start-ups are very early-stage businesses, obviously. They do not have legal departments, investor registries and those sorts of thing, so they are really not equipped to deal with a large number of investors. That takes the stress off them. It also means that we are able to handle the documentation and negotiations with each of the investors. Mums and dads will become able to invest if this legislation is passed. They are not able to really successfully negotiate shareholder agreements and suchlike with companies. We feel that that is a role best undertaken by a professional such as us.

As a threshold statement, we see that there are three parties involved in a crowdfunding transaction: the investor, the start-up and the platform. Two of these parties are inherently unsophisticated, being the start-up and the investor. The platform itself is obviously very sophisticated—it is licensed and there are a number of other requirements that it needs to comply with to be in the game. Therefore, as a general statement we feel that the party that should bear the brunt of the regulatory burden of these transactions should be the one that is the most sophisticated and therefore best able to bear it. Therefore, the start-ups should be relieved of as much of the burden as possible, which brings me to the two central concerns that we have with the legislation.

Broadly, we are in agreement with most of it—the cooling-off period and the investor caps. We are quite comfortable with a number of the other provisions that have caused concern. There are two provisions that we do not agree with. The first is the requirement that to access this form of funding start-ups are forced to become an exempt public company. The second—and I am not sure that this is a deliberate provision—is in fact the prohibition on aggregation of investment. Our submission is not that aggregation of investment should be compulsory but that it should not be prohibited. Let's let the market determined which of those models is best. If start-ups want to have 50 or 60 new investors on their shareholder register that is a matter for them to determine. But after having invested in start-ups over seven years and knowing them well, we feel that that is really the last thing they want and the last thing they are able to deal with. I will leave it there.

Mr Wilkinson : We are in broad agreement on the benefits this does bring. While it is great to finally get a legal framework for equity crowdfunding, we believe the current proposal will be too restrictive and squanders this great opportunity we have to open up innovation in our country. The bill fails to grab the entrepreneurial spirit that it looks to encourage. Its shortcomings risk disadvantaging both the fundraising options of start-ups and other small and medium-sized businesses in Australia, as well as investors who are looking to provide alternative sources of capital. An effective piece of legislation to allow for equity crowdfunding is essential to the country's economic future and it is something we cannot live without. The opportunity for equity crowdfunding is vast, and it would be a significant contributor to driving innovation, growth and employment in our economy. There is also a risk, if we do not get this policy correct, that we will not be globally competitive and that we will lose companies and talent to markets with more favourable legislation. Trust me—I personally moved to New Zealand to operate our business, as we could not operate within the Australian legislation. I have spoken with many companies who would be willing to move their business to New Zealand to access the benefits of crowdfunding. In the UK, the most established equity crowdfunding market, equity crowdfunding has taken off. In 2015 it managed to raise 332 million pounds, having grown 295 per cent from 2014. That is a pretty astonishing figure, and it is continuing to grow. This represented almost one sixth of the total venture financing market for the entire UK in 2015. This was done under a well-regulated market, an appropriate policy setting that is viewed to be a medium balance of regulation. Similarly, in New Zealand we have just managed to raise over $20 million in the past 18 months of operations. While the legislation is relatively liberal, the market has been well functioning and has guided to a high-standard offering.

We want Australia to take on the world and be competitive, but this bill fails to do that. It implements some mechanisms which will distort the market and create undesired consequences for both investors and companies. Unlike any functioning equity crowdfunding market, this bill introduces cooling-off periods, allowing investors to pull their money within five days of committing it. While, at a two-dimensional level, I can appreciate that this may appear to benefit investors, in reality it will not. As an open and transparent market that gives all investors the same opportunity to invest at the same time, without relying on salesmen, there is no duress in the process. People do not require this protection.

The greatest problem that cooling-off periods introduces is that it will allow and encourage market manipulation. Manipulation will occur in two main ways. The first is similar to the stock manipulation practice of ramping. This would entail the CEO of the company making an offer, getting five or 10 of his friends to each contribute $10,000 for the capital raising at the beginning of the offer. This would give the appearance of demand and strong backing, creating momentum for the deal. As we have learnt operating in New Zealand and witnessing crowdfunding globally, momentum is often the key to a successful deal. Once the pump had been primed and more money had flowed into the offer, with other investors following on, the friendlies could quickly pull their investment with the deal being a success and other investors having been duped into investing. It is similar to ramping on the stock market.

Conversely, a competitor of the business could put the last money in to close an offer, then pull it out, potentially unwinding the entire transaction. Given the highly public nature, let alone the time and expense, needed to run an equity crowdfunding campaign, this could have a catastrophic impact on the business and even be its death knell.

One of the greatest benefits equity crowdfunding brings is the opening up of early stage capital markets. Some have suggested that it democratises capital. Allowing investors to diversify their portfolios and invest in an asset class that has long been the domain of the wealthy decreases the overall risk in correlation of investors' portfolios and increases their returns while allowing companies to access the capital they need to grow.

The bill also looks to limit this to companies only being eligible if they have less than $5 million in assets and turnover. The problem with this is that it will concentrate risk and encourage retail investors to place their money in the highest risk early stage start-ups, losing all the benefits of diversification. For companies looking to raise capital, this misses out on many of those that are most in need and, indeed, most suitable to attract the capital. Our early capital markets are broken and many businesses are forced to list on the ASX or seek funds offshore as their only way to access capital. This is more often impractical and overly costly for businesses that are focused on growth. We have raised money for three businesses in New Zealand that would not have met these criteria, and these have been three of our best opportunities to date. Two of them tried to access traditional funding through banks but could not, and they would not have been easily able to raise capital otherwise.

My colleagues have touched on some of the issues that we also share, one of those being the requirement for a company to convert to a public company, albeit with limited reporting requirements. This will still be extremely onerous and will create problems for a company, as once you become a public company it is nearly impossible to revert back to being a private company. This can limit long-term opportunities for many businesses. Many types of investors will not invest in public companies, particularly venture capitalists.

The limitation to have only one class of share, being an ordinary share, significantly limits the business's ability to raise capital on fair terms now and in the future, and no functioning equity crowdfunding market has a limitation on shares. Most dealers in the UK and New Zealand utilise two classes of shares to delineate between significant investors and small investors, which allows them to better manage their register and their shareholder base. Rather than treating retail investors as idiots, a far more appropriate response would be to help educate investors through a simple government-endorsed booklet that goes to every registered investor who signs up to a platform, detailing the risks of equity crowdfunding and how the market operates. By limiting companies to issuing five million within a 12-month period and also limiting retail investors to investing $10,000 in any one project, the market has enough protections in place and does not need the mechanisms that have been introduced that will have unintended consequences.

There are many benefits to equity crowdfunding, and not just the capital that it raises. With the current bill we will stifle our chance at creating an open, fair and transparent marketplace for private companies to access capital and grow. Thank you.

CHAIR: In reviewing your submissions, two of you seem to be in favour of cooling off periods and two of you do not. Mr Brown, do you want to put some more meat on your submission about cooling off periods, please?

Mr Broun : Sure. I want to make two observations on what the previous speaker said.

CHAIR: Sure. Go right ahead.

Mr Broun : Certainly, I agree with the previous speaker that we deal a lot with proprietary limited companies looking to access funding from a broader range of investors—that way it mitigates the risk by people investing a modest amount of money, and they can achieve some good outcomes in aggregate. We also believe that the five million gross asset and gross revenue limit is too low. We see the venture capital market in Australia in the private equity groups—their minimum investment now is probably somewhere around 10 million, probably towards 20 million, so there is a lot of very good small proprietary companies that would certainly be north of five million. We would like to see that limit be 20 million and, probably, ideally 50 million, but I guess we have got to start somewhere.

There is certainly a crisis in Australia in that small unlisted company space, and I agree with the previous speaker that not everyone is willing to invest into a start-up which is a fairly high risk. Many people in their 40s and 50s would also like to allocate some percentage of their investable assets into private investment, but where they are more comfortable—perhaps with an established company. Ideally, in a succession planning area where the founder is looking to sell down it is very hard for a founder to get $4 million or $5 million to be able to retire and have the management team access that sort of funding. I guess that, in an ideal world, we would like to review that $5 million limit.

The other thing on the company side is that we mostly see proprietary limited companies. We accept that public companies do have certain clarity and rigour around the company, constitution, the offers and tag-along provisions. But with proprietary limited companies, as a recommendation, the Corporations Act is quite outdated in limiting non-employee shareholders to 50—it should be at least 100. The 20/12 rule really should probably end up being more 50/12 or 100/12. Overseas proprietary-style companies have the capacity to have larger member registers, and it is just a function of life these days that proprietary companies often struggle to keep within the 50 non-employee shareholder limit.

With the cooling off period, I agree there is certainly potential for manipulation. I guess it will get back to the intermediary and some of the oversight by ASIC. I personally do not have a problem with a five-day cooling-off period but I can see that it can be manipulated, so there could be added rigour around that or just deleting the cooling-off period would fix that potential risk.

CHAIR: What would be the added rigour?

Mr Broun : I will defer to the lawyers in the room for that.

CHAIR: Mr Quigley—I will come to you all—do you want to comment on cooling off? It is obviously an issue which has come up.

Mr Quigley : I think cooling off is not the main issue, but it is an issue. Cooling off—

CHAIR: I just want to get it out of the way.

Mr Quigley : Yes. I will try to be short and succinct for the committee. Having come from Perth, from a mining town, where backdoor listing is the way to go, market manipulation is quite a talked-about subject. If you can nip market manipulation in the bud, so to speak, quite easily by removing this, then why not? I do understand that it is there to protect the retail investor, but, as my opening address outlined, we think retail investor protection should fall back on gatekeeper obligations of an intermediary—going through the right announcements, as Mr Wilkinson said, such as information statements along the way and properly educating an investor. Removing that cooling off period, still having the appropriate level of protection, just removes the possibility of manipulation throughout these platforms.

Mr Heasley : I suppose, just as a matter of general principle, we would always allow an investor to withdraw if their circumstances had changed. I think trying to hold someone to a deal that they have realised immediately thereafter they do not want to be in it is not the game we want to be in anyway. That is a practice we follow currently. I really have not thought terribly deeply about the market manipulation points. I have tried to confine my submissions to the main issues because we have to get this legislation through in one form or another—so nothing further.

CHAIR: No worries.

Mr Wilkinson : I agree with Tim, and our market practice in New Zealand on the two maybe three rare occasions where someone has approached us to cancel an investment has been to use our own discretion, which we are allowed to do within our New Zealand licence as a financial service operator. I would suggest that as an AFSL holder the platform should have that discretion rather than build into the mechanism which borrows from PDS and some other existing financial services law, which is not open and transparent. People can be placed under duress or people do not necessarily see how much money is going into something at any one time or it is a fund. So these existing practices where it is appropriate—

CHAIR: PDS being a product disclosure statement.

Mr Wilkinson : Yes.

Senator McALLISTER: Mr Wilkinson, you mentioned your experience in New Zealand. Could you let us know how the New Zealand regime treats cooling off issues for this sector. Is it silent on the question?

Mr Wilkinson : It is silent, but it effectively reverts to the financial service provider to use their own discretion in such matters. As a financial service provider in New Zealand you sign up to some general practices and principles that you apply and people can complain. Similar to Australia, there is an independent complaints area. So if you are acting in an unscrupulous fashion or you are holding someone to an investment—those sorts of things—people can complain about it. There is no place within the legislation for equity crowdfunding that expressly states you have to allow for it.

Senator McALLISTER: Is that consistent in the New Zealand regime with the treatment of other classes of investment or is that a unique carve-out for the crowdfunding sector in New Zealand?

Mr Wilkinson : It is for similar types of investment. This is very similar to the ASX in that a trade happens in real time and you can see money going into an offer and the deal is done. Nothing is forcing you to go into that deal at any point in time. You make that decision yourself. In New Zealand there is in the peer-to-peer lending space and the debt space a similar proposition. There is a transparency in the process, and that transparency does not allow for cooling. I believe they do have something similar to our PDS regime in some other financial products, but they are different products that are not in an open, transparent fashion where you can see how much money is being raised and how much you are allowed to contribute at any one point in time.

CHAIR: Will you come back to Australia now if this bill goes through, or when this bill goes through?

Mr Wilkinson : I have returned home as of October last year, and we have the business set up and operating—there are a few people running the business in New Zealand for us—in anticipation of the legislation changing. We are currently building our business, and we have built in flexibility so that, if the legislation does not fall in our favour, we are going to revert to doing something more similar to what the VentureCrowd guys are doing and basically serving sophisticated and wholesale investors.

CHAIR: So what is in this bill that would not go in your favour—that would prevent you from commencing your business here?

Mr Wilkinson : The restrictions around public companies and ordinary shares. There are going to be a lot of people out there that are deterred from entering into equity crowdfunding as companies if you are forced to become a public company. There is also the inflexibility of having ordinary shares as the only class of shares you can issue. Again, from a lot of companies' perspective and even investors' perspective, that might not work. So, depending on how those play out—

CHAIR: So that is drop-dead for you, is it?

Mr Wilkinson : We are going to have to come up with solutions around it, which ultimately means the only people we are going to really service are your existing sophisticated and high-net-worth investors that access this asset class as is.

CHAIR: Sure. I have to declare that I ran, up until I entered this place a couple of years ago, an unlisted public company which had a series of shareholders, and at various times through the last 20 years this would have been very helpful given the traditional methods of raising equity and what have you. In the context of what I just said, this is a new funding stream but with considerable governance and disclosure exemptions which are available to those that would traditionally have limited access to other sources of funds. So I guess you would like to see as part of your assertions—and you too, Mr Broun; I ask you to consider this—the asset and turnover caps lifted. Is that right?

Mr Broun : Yes. We just see a lot of private companies that would benefit from having that cap increased to close to $20 million. I think what is going to happen, unfortunately, is that there will be the CSF regime, which will have the CSF offer document et cetera, but a lot of capital will still have to be raised through the traditional means of public companies issuing prospectuses. Unfortunately, it will just defeat the whole purpose of why we would like to engage in the crowdsourced funding regime.

CHAIR: Isn't that the point of this? Those companies have traditional sources of funding anyway.

Mr Broun : Not really, no. For companies looking for up to $5 million to $10 million, it is quite a difficult roadway for them to raise money. It is too small for institutional investors, so they need to rely on opening it up to more of a broader investment base through the retail side of things, which we could do.

CHAIR: Did any of you fellows do the beehive fellow that raised $12 million?

Mr Quigley : Yes.

CHAIR: Who did that?

Mr Quigley : Sorry, I saw it.

CHAIR: You saw it?

Mr Wilkinson : He did that through Indiegogo, which is one of the reward-based platforms. People had had dealings with him, trying to then encourage him to put a formal business structure around it so that they could actually turn the hundreds of thousands of orders into a real business and make it all function. But we did not raise any equity crowdfunding for him, no.

CHAIR: So how does he get to raise $12 million outside this environment? That is what was reported.

Mr Quigley : To that point, he was preselling, so it was a preselling mechanism, in much the same way as a group buying site would operate. You go and put a product or service, or a future product or service, on the internet and say: 'Would you like to buy this? In gratitude, in three months, when it is produced, we'll provide you with the beehive.' The big difference between this regime and that regime is that normally that guy will sit around a kitchen table and present that to his family or friends if he is looking for working capital. What we are saying is that an unlisted public company will then have all of these triggers and mechanisms throughout it, so you cannot expand on the 20/12/2 rule to get that private money. That is the seed capital; they might get a start-up from their thought process to this next funding round.

CHAIR: In short, he sold a lot of beehives and then used that money to start his business, whereas you are looking at seed capital for the business rather than sales?

Mr Heasley : Yes.

CHAIR: Got it.

Mr Heasley : I think there is an important distinction: there is rewards crowdfunding and there is equity crowdfunding, and that was a rewards crowdfunding transaction, so no equity was available in that case.

CHAIR: I've got it. I will not spend any more time on it now.

Senator KETTER: Mr Heasley, tell us how many firms in Australia are currently offering crowdfunding as a means of supporting early stage innovation?

Mr Heasley : I do not know because there is no public marketplace for the transactions undertaken. I know we have done 13. I am not aware of how many others have been done in Australia—and something I omitted to say at the outset is that we are obviously sourcing all of our money from wholesale investors only. There is somewhere between 200,000 and 400,000 wholesale investors in Australia, and the best estimate is they control $57 billion. There is a reasonable market there, but obviously the prize in what we are talking about here in the legislation is opening it up to a much broader sector of the Australian populace.

CHAIR: Can I get a clarification on that? You say wholesale investors. Are we talking about sophisticated investors—you know, those who earn in excess of $250,000 income or with $500,000 worth of net assets?

Mr Heasley : Or $2.5 million in investible assets, or is a sophisticated investor—

CHAIR: So high net worth individuals?

Mr Heasley : Yes.

CHAIR: Let us talk about those because that puts a face to wholesale investment, otherwise it is just wholesale money.

Senator KETTER: We have got crowdfunding services out there. Can you explain how that is operating in the absence of this type of legal framework that we are considering as part of this bill?

Mr Heasley : It is operating okay for us. As I said, I do not think that is where we are—what we are trying to do is open this up. So there are probably 400,000 out of 24 million people who can access it; we are trying to open it up to the rest more broadly. There is no limitation on the companies that can currently apply for crowdfunding through our service, but there is a limitation on the investors that can apply. Obviously we have a two-sided market there, and one side of the market is missing.

Senator KETTER: You have said that your type of business will not exist in the future if this bill was passed. Can you tell us why your form of crowdfunding should be allowed to continue? What are the benefits of—

Mr Heasley : Sorry, our business will exist but the way in which we conduct it would not be—we would not be able to conduct it for retail investors. We would continue to do it for wholesale investors because we believe it seems to work for everyone. The investors like it, the start-ups like it, and we like it.

CHAIR: So there will still be a place for you?

Mr Heasley : There will still be a place for the wholesale part of the market, but the retail part—we would not be able to aggregate investors in that way, and so a start-up wanting to raise one million bucks through 100 investors would have 100 new shareholders and they have to deal with them in one-on-one negotiations.

CHAIR: You could though.

Mr Heasley : You could, but that would be your sole job.

CHAIR: So he is not going out of business, Senator Ketter. He just chooses not to get into that retail space—is that right?

Mr Heasley : Correct.

CHAIR: You could add another branch to your business.

Mr Heasley : We could certainly do that. There is absolutely no—we could do it. We would probably not, and I do not think the best companies will apply under that regime because they have to become public companies.

Senator KETTER: You have made a comment in your submission about the level of consultation with the industry. Can you elaborate on that?

Mr Heasley : I made this submission in February 2014 and I visited Treasury sometime during 2015 with Kerry Chikarovski, who was helping us come up here and talk. I met with Treasury. Our submissions and statements have been consistent throughout: the public company regime is an administrative and regulatory nightmare to foist onto start-ups. It is also unnecessary because it is trying to solve a problem that does not really exist. They do not want to have to be able to have 50 shareholders. Or if they do, at least allow the alternative. We would say that our submissions were not listened to and certainly were not acted on. And I am not aware of either government having gone out and talked with start-up bodies about this and whether this worked for the start-ups. It does not matter whether it works for us really, but it matters whether it works for the start-ups because they are the ones we are trying to stimulate. That is the part of the economy we are trying to get working, so let us remove the burdens. Let us remove the hurdles. Let us make it easy for them. Put the burden on to the platform. We can handle it. Make us regulator licensed. Carve out exemptions. Let us take on that weight, not the start-ups. They do not want to run shareholder registries.

Senator KETTER: Perhaps you could just tell us how difficult it is for smaller companies to turn themselves into unlisted public companies? What are the inconveniences involved?

Mr Heasley : They have to go and see a lawyer. They might be spending somewhere between $5,000 and $10,000, and these are really early-stage businesses often. There is an expense there. There are then ongoing compliance obligations. There have been some carve-outs under the bill, I agree. But why are we forcing them to do this, when 99 per cent of Australia's companies will go through their entire life cycle and never become a public company? They will go from start to death, and many of them will become very big organisations, but they will never become public companies. So why are we forcing this on them? Because there is this quaint provision in the Corporations Act that says once you get to 50 shareholders you have to. So we are sort of reverse engineering it. We are saying, 'Here's a new form of financing. Let's force it into this old legislation and make it work that way.' Instead, why don't we say, 'Here's a new form of financing. Let's exempt it.' Let us say that VentureCrowd is a registered platform. Therefore, any business that goes through it is subject to some exemption, and as long as it is raising money through this it is exempt from 5C, so aggregated investments are allowed. It does not become a public company, and investors can be protected in other means.

Senator McALLISTER: I have a follow-up about this. On a number of occasions your evidence has been about shifting the burden of regulation on to the intermediary, and I am not sure whether that is also the position of others on the panel. But I think it would be useful for the committee to hear what that model would look like and what kinds of regulatory obligations would then accrue to the intermediary. How would that work through the life cycle of the investment, not just at the point of the funding process?

Mr Heasley : I do not think the requirement that start-ups become an exempt public company under the draft legislation is about investor protection. I do not think it is at all, and if it is those protections can be provided in other ways—by imposing burdens of disclosure, caps, cooling-off periods and other sorts of things. They can all be imposed. There is no problem with that. The reason that the exempt public company structure has been suggested is because of the provision of the Corporations Act that says 'once you have 50 shareholders you must become one'. Most of these companies, even those that go through equity-based crowd funding, may not even get 50 shareholders. They may not get there, but there is an assumption implied in this that they all will. They may not get there, but we are saying, 'Well, let's not worry about that. You're just going to be a public company and you're going to suddenly join this—

CHAIR: So you are suggesting a fairly massive change to the Corporations Act?

Mr Heasley : No, I do not think so. I think it is just a series of exemptions. You license the providers, as we are going to be licensed anyway. There is going to be a new way in which we are licensed, and we are going to have a new name, or the licence we are subject to will. And any business that goes through us to raise finance is therefore exempt from certain provisions. It is just a carve-out.

CHAIR: Do you think that would delay the introduction of this bill? Would that be a detriment to your business?

Mr Heasley : It may delay it. It has been quite delayed already. My view is that it is probably more important to get it right than to just force something out there.

Mr Quigley : We did put that at an industry roundtable discussion with the treasury department over 12 months ago. We did talk on this point as an industry collective quite strongly—that this could be carved out and proprietary limited company shareholder numbers could be increased to 100 by a simple carve-out. With the whims and woes of government changes in the last three years it has just been lost in translation. That is an easy fix.

CHAIR: It is on the record now. Mr Broun, do you have anything to add on that specific issue?

Mr Broun : The way we see the landscape, if the proprietary limited companies were allowed to have, say, 100 shareholders and if, instead of 20/12, it were 50/12, that would alleviate a lot of the initial start-up problem. We find that the start-ups are often looking only for $200,000 or $300,000, and that could be facilitated through having just 100 shareholders and a 50/12 regime. Ninety-nine per cent of the 2.2 million proprietary limited companies are happy with what they are doing and they will never want to go through a CSF regime, so we are only talking about one per cent of proprietary limited companies that actually would grow to a stage of needing to go to the next step. If the proprietary limited thresholds were changed—and it is not very difficult to go to 100 shareholders and a 50/12 regime—that would alleviate a lot of the small capital that needs to be raised. Then for the next stage of their life they go through a CSF regime. They become a public company. It is $500, and these days for lawyers with constitutions you are talking a couple of thousand. So it is not a difficult step-up for them to then get onto the larger raising through a CSF round.

Senator KETTER: Mr Wilkinson, going back to your experience in New Zealand, I am interested in anything—apart from what you have already talked about—that you believe is essential to running this type of platform.

Mr Wilkinson : What the New Zealand legislation and then the FMA, who are the ASIC equivalent, have very smartly done is put a lot of the onus onto the platform. You need to tell the regulator, as you are going through your licensing process, how you operate. You need to prove that you have the capabilities and that the way you operate and the size of the business are relevant to what you are doing. It was not a kind of a one-size-fits-all. Recognising that it was a new model and a new licensing framework, they wanted to consult with businesses and work out what was appropriate. There is a lot of burden placed on the platform, the intermediary, and they are the ones who control a lot of what happens. Thereafter they have some protection in place for the investors, and then companies are required to make certain disclosures and are beholden to existing directors laws, which are very similar to what we have in Australia. Thereafter the market will guide itself. It is pretty liberal. It is a fairly open market in New Zealand.

It seems to be working very well. The standard has been kept. There are eight licensed platforms, four of us who have raised so far and the other four, two of whom have tried and had offerings that were not up to scratch. The market responded; people did not invest in those companies. People are much more savvy than you would expect, and the open and transparent nature of the equity crowd-funding process allows for the rigour and the discourse; people asking questions and wanting to know: 'You have stated this figure in your financial projections. Where did that come from? That seems unreasonable'—those sorts of things.

So the model, if it is left to do what equity crowd-funding does itself, is pretty effective and pretty efficient at operating. What we have learned from New Zealand is: do not get too bogged down with trying to create mechanisms or things that you perceive might give protection to investors, or putting in place requirements for companies to do certain things, because in reality, over time at least, the market will guide towards those qualities and standards. We already have a whole lot of things within the Corporations Act that require companies to disclose certain things. When companies get to a large proprietary company level they have to get to a new standard. What New Zealand did was very smart in that they saw how it could operate, went with a more liberal setting to begin with and are going through a process of reviewing it. They may indeed come back and restrict it somewhat, but the indication is that they will not. Then they allowed all of the operators in the market to operate in a very consultative fashion, which is what has happened there.

MBIE, who are the Treasury equivalent, are consulting people in an ongoing fashion. The FMA, who are the ASIC equivalent, are reviewing and talking with people. We meet with them once or twice a month to touch base and let them know what is coming. If there is anything abnormal that we do not think is appropriately catered for in the licensing or the legislation we kind of run it by them or make suggestions—'This is our take on it', or 'We have our legal opinion and we are going to do this, and we are just letting you know'—that sort of thing. So it is a pretty fair market that seems to be operating very well. I think that is what we have learnt.

CHAIR: In New Zealand they have different proprietary and company distinctions in their corporations act, don't they? We do not have that. I just put it to you: in saying that, you then create a two-tiered system, don't you? I do not see how where somebody gets their funding from mitigates their obligation for governance and disclosure.

Mr Wilkinson : You are right; there are underlying differences. It still comes back to some central principles. They have a restriction on 50 shareholders, but that relates to their takeovers code of practice. If you are a company that has more than 50 shareholders, then you become our equivalent of maybe a public company and you have certain obligations you have to adhere to. Independent experts need to come in if there is a significant change in capital or a restructure or a takeover event. They are similar to us in that when you reach a certain size you have different disclosures—for instance, our large proprietary company difference where once you hit a certain size in a proprietary company you do have certain disclosures. So they have some similar principles but they do have not the problem we have with the two classes. That is a fundamental problem.

CHAIR: That is a big problem. That is based on consumer information and protections in our system. It is probably not as rigorous in the New Zealand one.

Mr Wilkinson : It is to an extent. It is just that there is not the clear distinction between the two classes of company. There are other requirements that force the same outcomes.

CHAIR: No worries. I am conscious I am pinching time from my colleagues.

Senator KETTER: I understand Senator McAllister also has some questions. But looking more broadly than New Zealand because in your submission you comment about a range of countries and you seem to have been taking note of what has been happening there. Can you tell us: what are the major differences between the systems operating in those other countries and what has been proposed in this bill?

Mr Wilkinson : I do not know about all the countries in great detail. The UK is the most established market. It has been operating since about 2011. The FCA, their regulator, opened things up and allowed them to sort of flourish at the outset, and then changed their policy setting along the way and reacted to what had gone through in the marketplace. As I referenced, they have just done 332 million pounds. They have gone from about 10 million pounds in the first year, 2011, to 332 million pounds over four years. That is a significant amount of money flowing to companies that drive innovation and growth in the economy.

So they have obviously managed to find a pretty decent policy setting that seems to be working. A few companies have failed, but that is the nature of private early-stage companies and that is normal. We would be worried if companies were not failing, because that would mean the system was not quite right and things were being propped up. But they have also had some successes, which is fantastic. And they are getting to a stage where, after four years of operations, they are starting to get some decent data and experience out of there where you can see what is happening. So they are doing a great job. It is probably the best functioning, most established market.

The EU countries have some different country-by-country issues that revert to overall EU requirements and the ability for capital to flow between the two. Some of it is complicated. They have tried to rely on some existing securities laws in each of those countries. That does not seem to quite work. The idea of a fresh take on western securities laws that are steeped back in the 1920s when the US reacted to mums and pops being put into penny stocks and losing all their money and the evolution of that for investor disclosure in securities.

There are other markets that seemed to be moving along. The US has just spent five years fumbling over their equity crowdfunding laws. Two years ago the SEC was basically given a mandate under what they called JOBS Act III to come up with an effective regime. They came back with a 900-page guiding document as to what framework they were suggesting, and it was just apparent that that was never going to work.

Malaysia has recently released a market. It is reasonably restrictive and very early on. I think only one company has successfully raised to date. Singapore is looking at it, but again looking at it being reasonably restrictive and leaning towards more sophisticated investors. So, really, the United Kingdom and New Zealand are the two shining markets that have had a fresh take and effectively rewritten or carved out a new piece of regulation to allow for equity crowdfunding.

Mr Quigley : If I may just interject there. I recently travelled to the UK on a financial technology trade envoy with the UK government. One of the key components with the implementation of the UK system is the regulator in its initial phase of dealing with equity crowdfunding; it was flexible, approachable and nimble. It seems that the current bill is drafted to be a cover-all. I think it is really important that we actually see action and see something enacted into this place and that it is acted on and then revised in a short period of time. The worst thing that could possibly happen is we all sit on our hands and it becomes four years compared to three years.

John just mentioned the JOBS Act title III. The rough comparison between what we currently are looking at and what the JOBS Act is showing is the unlisted public company. The investor levels and the issuer can go up to $20 million. It actually boosts it up to $50 million, which is sort of that bridge between going into the listed stock. It is a completely different market. You will see an ASX-listed company here for $2 million, with the NASDAQ having minimum base requirements. So it is two different markets. But really the envy of platform operators in Australia would be something like the UK jurisdiction; they operated under a loose old law, and the regulator was set up and flexible to start working.

So I would suggest that we get something done and try to instruct the regulator, who we have been working with for the last 12 months, applying for our own AFSL. It has been rigid, it has been inflexible and it has been costly.

We need to work like a joint team so we do not lose companies going to other jurisdictions and we can actually implement this regime in Australia.

Senator KETTER: Thank you.

CHAIR: Senator McAllister.

Senator McALLISTER: So many questions and so little time. I want to follow up on this question of the potential of proprietary companies to play a role, which is presently not accommodated in the legislation. We talked a little about the challenges around disclosure and communication with the investors, post the fundraising period. Mr Quigley, your submission was one of the ones that dealt with this issue. Do you have a view about the appropriate way that ongoing disclosure to investors might be managed by proprietary companies under the Australian system?

Mr Quigley : In the first instance, if this goes through as a public regime, we will most definitely be operating a platform in conjunction with our strategic partner, BDL Australia, offering small enterprise the opportunity to crowdsource equity funding in Australia. Secondly, we believe that the platform operators or intermediaries should be held to a high level of account under the Australian financial services regime—to maintain a share register, ongoing reporting of companies. And they should be the ones that impart that.

Senator McALLISTER: That is not something that happens just at the beginning? That would happen over the entire life cycle of the—

Mr Quigley : No. As a member of the financial services ombudsman, we are in the financial services industry operating under retail licence now. There is strict compliance. We invest heavily in compliance plans and disaster plans; it is the exact same opportunity to implement this into the crowdsourced equity funding regime. What we do strongly put to this committee is that a crowdfunding intermediary should not be required to operate under an existing market licence or obtain its own market licence. We applied, for ourselves, for a market licence exemption in early 2013. The costs associated with applying for a market licence run into $300,000 to $400,000, which is cost inhibitive for all the platforms here.

CHAIR: Australian financial services?

Mr Quigley : Australian market licence, which is almost the next rung up. What this legislation in its current form is saying is that we will need to go and partner with an existing market licence operator. Where we see this is that it is a licensing issue, in between a market licence and an Australian financial services licence. The legislation is drafted to get you everywhere.

CHAIR: We got it. We hear you.

Mr Heasley : Can I just comment on your question, Senator McAllister, because we are reporting on the transactions that we have already raised for in Australia. We provide regular information to our investors, quarterly, and they are start-ups, so quarterly is adequate because sometimes there is not that much happening. But there are also ad hoc inquiries, so that is something that can very easily be done by a platform and should be done. I think that is part of the platform's role. A small, unsophisticated investor has a lot less leverage with a start-up company who has a million things to do other than reporting to the shareholders.

Senator McALLISTER: Can I turn to something quite different, and this will be my final line of questioning, because I am conscious of the time. I think a number of you raised in your submissions the limitations associated with requiring ordinary fully paid shares as the only method of fundraising. Do any of you want to elaborate on that a little more?

Mr Wilkinson : I was speaking to lawyers in the past week, just talking about these sorts of things. It reflects, in our view, that you are creating a level of inflexibility that is painting companies into a corner. Many companies may have an existing class of share that is different to an ordinary share. I can speak about our company. We have gone out and raised venture capital financing. We have an ordinary share which we founders hold and then we have a preference share that the investors have. It is very similar; it just effectively sits them a little bit further in a waterfall and confers some rights on them, which is pretty reasonable as to the market practice.

The other thing, though, is that in the UK and New Zealand there is no restriction. No functioning equity crowdfunding market that I am aware of has a restriction on one class of share and an ordinary share. The market practice is to have a threshold and, say, if you were investing more than $25,000 you will get an A-class share or an ordinary share, which has the same rights, and then if you are investing less than $25,000 you get a B-class share, which has the same economic rights; it just does not have the same voting rights. That is how you can very effectively allow companies to have a broad register without having to worry about the burden of 500 people showing up to an AGM or people calling you up expecting to have a say in the business.

We have used that in New Zealand. It is very effective. It is what the market convention is in the UK as well. It is reasonable to allow for some flexibility around the class of share. The way we build it in, and the template constitution we give to companies, is that, upon listing or an exit event, that converts to an ordinary share so that everyone then is on equal footing when you get to a certain stage. It is an efficient way of dealing with that problem.

The other thing is that you could even be putting investors out; they may miss out on an opportunity if they are forced to receive ordinary shares or the other existing investors have a different class of share, so you might actually be relegating them to a lower level if, through equity crowdfunding, you can only have an ordinary share.

Senator McALLISTER: Right. I get the strong sense that each of you, as advocates for your sector, are very concerned to build an industry from the outset that has a kind of integrity about the way you operate. But, of course, that is not something we can assume when we are establishing a regulatory regime overall. Are there any restrictions that any of you would recommend about the nature of the shares that might be issued? Obviously this committee has been through some quite harrowing consumer inquiries over the last couple of months and we are very conscious of some of the risks, particularly around debt financing of share purchase and some of those issues. Are there any kinds of shares that you think ought to be off the table?

Mr Heasley : From our point of view, this is not an issue that we have thought about very deeply, because we believe that all shareholders in a company should be on the same terms, regardless. I know that is not a view that everyone shares, but that is what we try to do. That said, I am not sure really that any great benefit is served by having these restrictions in the act. I do not know why you would not let the market determine that.

Mr Quigley : I understand your concerns about consumer affairs. I suppose if we look at the Murray inquiry, that was to address equity and debt crowdfunding within this country. Debt crowdfunding is a quasi bond market. It opens up innovation and the creation of wealth. The Australian bond market is not a mature market, so a crowdfunding platform is a great facilitation tool for this. We have talked about the UK regulatory aspects. CrowdCube, one of the leading platforms over there, has a debt crowdfunding facility which it offers through a different class of shares. Taking that into account, we would strongly consider offering debt financing via the form of a corporate bond on platform—so, no restrictions.

Mr Wilkinson : I think that the way the offers are made to disclose all of what is going out—it is very public—deals quite adequately with it. If a class of share is saying, 'Okay, all the investors don't get this right and don't get that right', and then under these events they might convert and you are then relegated below everyone else, that it is going to become apparent and the market will effectively turn away from that. No-one will invest, because there will be enough scrutiny, and if there is something unfair or unreasonable in the class of share then the market will just move away from it. People will not invest in a proposition like that.

Senator KETTER: I will just place on the record that there probably are a number of other questions that we would have liked to ask. Would it be possible for the witnesses to take some of those on notice?

CHAIR: Are you happy to take some questions on notice if we get them to you in the next 24 hours or so?

Mr Quigley : More than happy.

Mr Heasley : Yes.

CHAIR: Okay, we will do that, and perhaps it could have a quick turnaround, if that is okay. Mr Broun, did I hear you disappear? Clearly, I heard him disappear!

You have made a big effort to come here. If there is anything that you want to get out in the next 30 seconds I am happy to give you 30 seconds—if there is something that you think we have not covered that you would walk away and be cranky that you did not cover it. While you are thinking about that, I will ask: how much money has been raised in New Zealand with crowdsourced funding?

Mr Wilkinson : 'Equity crowdfunding' is the globally accepted term. There has been just over $20 million in the past 18 months.

CHAIR: And is that the sum total that has been raised out of New Zealand?

Mr Wilkinson : Yes.

CHAIR: Right—now that you have had that 10 seconds of notice, Mr Quigley, what—

Mr Quigley : I would cover the point to not limit it just to start-ups—small to medium-sized enterprises are the class order business introductory service does—and try to keep this open-ended so that it can be reviewed and adapted and then revisit this legislation in 12 months.

CHAIR: Mr Heasley?

Mr Heasley : Just further to Jonny's comment about the amount raised, we have done $10 million through our platform here in Australia over the past 18 months. As I said, I am not sure whether that is all that has been done, but—

Mr Quigley : We have done 1.5.

Mr Heasley : And otherwise we have had a very good hearing. Thank you.

Mr Wilkinson : We did not necessarily flesh out that $5 million in assets and turnover a great deal, but we think that is extremely important, because by focusing the risk on the lower end of the market you are going to have investors investing in the riskiest assets possible. Also, it does not fill the greatest need for companies, and it is not tied to anything—it is no existing figure, it is arbitrary, it does not link to anything within the Corporations Act. It fails to recognise that in Australia a lot of companies will go and list on the ASX because they think that is an alternative source of capital when they should not.

CHAIR: Thank you very much for taking the time and the expense to come in here to speak with us today.