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Monday, 20 March 2017
Page: 1314

Senator GALLAGHER (Australian Capital TerritoryManager of Opposition Business in the Senate) (10:47): Crowdsourced equity funding has been considered by parliament for quite some time, with both Labor and coalition governments progressing reform of the Corporations Act to allow for it to be introduced. Equity crowdfunding allows start-ups or small businesses to raise capital over the internet. In return for that capital, online investors will get an equity stake in those start-ups and small businesses. It is a capital-raising platform that directly challenges the way in which the Corporations Act will operate, particularly when the number of investors exceeds the 50-shareholder mark, which would normally require a number of other legal obligations to be met. That is why Labor decided in 2013 when in government to ask the Corporations and Markets Advisory Committee—CAMAC—to consider the best regulatory framework that would allow for the operation of equity crowdfunding in Australia.

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

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

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

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

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

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

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

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

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

Currently the Bill excludes over 99.7% of companies from accessing CSF. Such a reality defeats the purpose for introducing legislation to facilitate CSF as only a very small minority of companies will be able to raise funds through this mode of finance.

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

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

They added:

This means that the vast majority of potential small business users of the new framework must wait for another, soon-to-be announced round of amendments and regulations before they can begin to make the necessary decisions and adaptions, including possibly taking the decision to switch legal structures and become a public company

Critically, the ombudsman said:

… we believe it would be more straightforward for small business if the current amendments were held off so that the full package of amendments were introduced at the same time.

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

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

Most companies only move themselves into the public company domain as a precursor to listing or when they reach a size that they are equivalent to a listed company. The key reason for this is the increased requirements on the company around reporting, disclosure, financials etc. and the costs associated with this. One of the key costs is the requirement to have an auditor and audited accountants (which smaller companies may not need). This can be significant costs for a smaller organisation, from $15,000 per annum.

They go on to say:

The financial statement and content requirements also may cause some concerns for entities that do not wish to give full disclosure for competitive advantage. The current transition period does not deal with the fundamental issue, which is the cost and complexity of this regime.

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

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

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

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

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

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

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

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

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

We also note the change to the cooling off period from 5 days to 48 hours for investors. Crowd-sourced funding is a new form of investment for many investors in Australia, we recommend the cooling off period is 5 days at this initial stage of adoption. Once crowd-sourced funding becomes more established, this cooling off period can then be reviewed and revised as appropriate.

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

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

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

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

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

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

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

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

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

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