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Innovate Australia: Financing innovation

The Federal Government announced today a package of measures designed to help Australian businesses finance innovation.

"Financing the innovation process - from RD to commercialisation to export - is a critical element in building future industries," the Minister for Industry, Science and Technology, Senator Peter Cook said.

"The difficulty that small innovative firms have in obtaining finance for expansion was a consistent theme coming through consultations with industry in the lead up to today's announcement.

"In short, we need to have strong innovation in our finance markets to meet the financing needs of Australian businesses, particularly in new high-technology industries and in new markets where risks and returns are not yet well understood by all the investment community," Senator Cook said.

"While Australian companies have benefited significantly from financial deregulation over the past decade, the domestic capital market still does not provide world's best practice in financing smaller high-growth companies.

"The initiatives outlined today build on substantial support already provided in this area, and are designed to accelerate the pace of adaptation to the global market, by both financiers and SMEs."

Measures to improve the supply of equity finance form a key feature of the Innovation Statement.

. In a major new development, banks will be allowed to make limited equity investments in non-bank businesses. This will open up a very significant source of equity finance for small and medium-sized enterprises.

"The banks are very well placed given their extensive branch networks and their knowledge of their clients' businesses to provide some patient capital to fund business expansion as a complement to traditional bank loans," Senator Cook said.

To facilitate this new activity, the Government will extend capital gains tax treatment to gains and losses on realisation of equity investments in SMEs. This will apply to all taxpayers conducting a business of lending money and for whom equity investments do not constitute trading stock.

To ensure the initiative is well targeted, the capital gains tax treatment will only apply to gains or losses on investments in newly issued ordinary shares in SMEs with paid up capital of not more than $50 million.

"This will ensure that the banks do not chase the "big end of town", but that high-growth SMEs can reap the benefits.

The National Investment Council Report, Financing Growth, identified informal investors, so - called "Business Angels", as supplying equity finance for SMEs many times the value raised on formal stockmarkets.

To further enhance the efficiency of the informal equity market, the Government will:

. provide an additional $450,000 to continue the two business matching projects established under the Business Equity Information Service.

The two projects work on matching potential investors with businesses requiring an equity investor. They have attracted considerable interest - close to 2 500 enquires in the year since their launch, and an unexpectedly high rate of actual business matches.

The formal equity capital market in Australia is small by world standards. Australia has too few venture and development capital funds, specialist intermediaries used by superannuation funds and others to make and manage SME investments. Superannuation trustees are often unaware of the risks and returns provided by SME investment, and allocate a very small proportion of their total assets to the SME sector compared to other countries. The Government will address these issues by:

. providing an extra $2 million to improve the understanding of superannuation trustees and the broader investment community of the investment opportunities available in Australian companies, including for start-up venture capital.

This will include canvassing the advantages of funds holding a balanced portfolio, including a proportion in higher risk/higher return investments such as development capital and infrastructure projects.

. A series of seminars will be held bringing particular industry sectors, starting with agri- food and information technology, together with the investment community to increase mutual understanding of opportunities and investment requirements. International experts in venture capital will also be involved.

To improve the liquidity of markets for both formal and informal investors in SMEs, the Government has

. Changed the guidelines for the establishment of alternative equity markets in Australia.

"Several private sector proposals for computerised trading systems, such as BizEquity, AUSMAQ and AUSDAQ, are now under active consideration with the Australian Securities Commission. Using new technologies to quote and trade in SME shares has the potential to take a large amount of transaction costs out of the system, while still adhering to high levels of investor protection," Senator Cook said.

As a complement to these alternative equity market proposals, which will deal primarily with established SME businesses, the Government will:

. fund a feasibility study to develop a blueprint for a new "innovation market" for start-ups and small innovative companies.

"Examples of innovation markets already exist in Japan and Sweden, offering start-ups and small innovative companies an avenue to raise small amounts of capital. They do this by having far less stringent listing requirements on capitalisation, track records etc. than those currently applying to Australian Stock Exchange listings," Senator Cook said.

The Government is also aware that requirements on issuing prospectuses can impose prohibitively high costs on raising smaller amounts of capital. Government proposals to amend the fundraising provisions of the Corporations Law have just been released for public comment. They include a proposal that the present "no more than 20 offers" to raise funds be altered to "no more than 20 acceptances". This change would make it easier for SME companies to approach potential investors informally without the need to produce a full prospectus.

Many SMEs are not finance ready when they approach the capital markets. They may lack a solid business plan, adequate financial information, and management systems and governance arrangements which will enable the business to expand.

. The Government will introduce a $3 million "finance ready" program to develop greater awareness amongst SMEs of the financial options available to them, and improve their understanding of the business management and corporate governance requirements of lenders and investors.

It will include a referral mechanism for firms seeking equity finance, where companies can be referred to specialist financial advisers who can help prepare proposals. An education campaign to inform companies of alternative forms of financing such as factoring and leasing will also be conducted.

Capital markets are becoming increasingly global. The Australian financial sector will need to compete effectively with the best in the world just to maintain its share of domestic financial markets. An innovative and competitive domestic financial sector is essential to the development of Australian industry, but also provides opportunities for the export of financial services to other regional economies.

Initiatives aimed directly at enhancing Australia's global and regional financial competitiveness include:

. A new export finance guarantee product to be introduced by the Government's Export Finance and Insurance Corporation in collaboration with the banks. This move will spur innovation in export financing in the banking system as very little medium to long term finance is currently available for sizeable Australian export projects.(see separate press release).

. a feasibility study of mutual guarantee schemes. A mutual guarantee company is a financial partnership or cooperative to which SMEs make member payments, allowing the Company to guarantee loans taken out by member SMEs. These schemes have operated successfully in a number of European countries.

. a four year research program into the direction of regional finance markets and the development of new financial instruments to meet emerging market opportunities.

. amendments to the operation of the Offshore Banking Units (OBUs) regime to increase Australia's attractiveness as a location for OBU activities.

. Amendments to the Interest Withholding Tax exemption to make clear that the exemption extends to wholesale borrowing by Australian companies, and to borrowing backed by securitised home loans. This will lower costs of borrowing on overseas capital markets and should flow through the system to business and home lending rates.

Media contacts:

Russell Faull, Senator Cook's Office, 06 277 7580; 0419 236 492 Donald Brunker, DIST, 06 276 2200