Crowdfunding bill under threat
Jonny Wilkinson: the "political landscape and process has proven to be very difficult"
After a tumultuous and 'exhausting' four-year journey, the government’s equity crowdfunding bill is set to safely pass through the Senate next month, despite being dubbed a “dodo” and “self-defeating” by the Opposition.
The Corporations Amendment (Crowd-sourced Funding) Bill 2016 was introduced to the lower house in December last year, but Labor quickly withdrew its support and referred the bill to a Senate inquiry.
The Senate Economics Legislation Committee returned its findings last week, recommending that the bill be passed and reviewed in two years’ time. Greens Treasury spokesperson Peter Whish-Wilson said the party would support the bill, meaning it will likely safely pass the Senate during the next sitting week in March.
It would become law within six months.
But the Opposition fiercely criticised the government approach to equity crowdfunding in Australia, claiming it is too restrictive and would lock out most startups and small businesses, and that it does not have enough protections for retail investors.
The bill had been rushed through without properly addressing these shortcomings, shadow spokesman on the digital economy Ed Husic said.
“They’re just shoving it through so they can get the announcement effect. They’re not doing it for the sake of a good system, they’re doing it for the sake of a good headline,” Mr Husic told InnovationAus.com.
Treasurer Scott Morrison called the bill an important part of the government's “forward-looking agenda” when he introduced it last year.
“Crowdsourced equity funding is a truly innovative concept. The framework set out in this bill will enable Australia’s innovative early-stage businesses to obtain the capital they need to turn good ideas into commercial successes and the jobs that will follow,” Mr Morrison said.
“The government has consulted extensively on the design of the proposed crowd-sourced equity funding framework. The model detailed in this bill strikes the right balance between supporting investment, reducing compliance costs and maintaining an appropriate level of investor protection.”
Under amendments to the Corporations Act 2001, unlisted public companies with annual turnover or gross assets of up to $25 million will be able to offer equity in exchange for funding from retail investors.
These companies will be able to raise up to $5 million annually using this method, while investors can put up to $10,000 into an unlimited number of campaigns.
A two-day 'cooling off' period will follow all campaigns, giving investors a chance to reconsider their funding.
This funding method has previously only been available to sophisticated investors in Australia, and its expansion to all Australians has received broad bipartisan support, but disagreement over the details has prevented it from being enacted until now.
A dissenting report from Labor Senators released last week said the government’s changes are merely “cosmetic” and the bill remains “self-defeating”.
“It continues to lock out startups and small businesses by requiring them to convert into public companies,” the report said.
The biggest criticism of the legislation centres on the mandatory conversion into an unlisted public company that all businesses wanting to access equity crowdfunding must perform. It is complex and expensive process for cash-poor startups.
Mr Husic said the legislation needs to be amended to allow as many companies as possible to access this funding method.
“It’s inexplicable that the government, after this period of time, has been unable to work out a way to enable PTY companies to be included within the equity crowdfunding regime,” Mr Husic said.
According to UNSW Faculty of Law’s Dr Marina Nehme, more than 99 per cent of Australian businesses are proprietary companies that would not be able to access this funding method.
“Such a reality defeats the purpose of introducing legislation to facilitate [crowdsourced funding] as only a very small minority of companies will be able to raise funds through this mode of finance,” Dr Nehme said.
Sunny Yu, the COO of equity crowdfunding platform VentureCrowd, agreed, saying the government's bill is “limited in its application” and fails to address the “realities and practicalities of crowdfunding”.
“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,” Mr Yu told InnovationAus.com.
“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.”
But Equitise’s Jonny Wilkinson, who worked with the government on the legislation, said the 99 per cent stat is misleading.
“The reality is that the vast majority of the 99 per cent of companies that are quoted as being proprietary companies are not suitable nor will they ever use this as a funding channel,” Mr Wilkinson told InnovationAus.com.
“Labor have chosen to make this a political issue.”
Treasurer Scott Morrison has already signalled the government’s intentions to further amend the Act to open equity crowdfunding to proprietary companies later this year.
“The government is continuing to consult on extending the regime to proprietary companies, which are generally prohibited from offering shares to the general public,” Mr Morrison told the Parliament.
“I have instructed Treasury to continue developing a framework for proprietary companies as a priority and would expect than an extension of the framework will be introduced through subsequent legislation in the near future.”
But Mr Husic said the government should “go back to the drawing board” now and include the changes in the current bill.
“If the government takes this off the table we won’t criticise them for that, we’ll welcome that,” he said.
“They should spend a few months getting it in shape for PTY companies and then bring it back. Why bring in a system that’s going to be potentially redundant when they bring in those changes?
This is a view echoed by the government’s own Australian Small Business Ombudsman Kate Carnell.
“Any effective regulatory framework to enable crowdsourced funding as an option for small Australian businesses must extend to those that are now structured as proprietary companies,” Ms Carnell said in a submission to the Senate inquiry.
“If a further round of amendments is indeed months away, we believe it would be simpler, more certain and 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.”
When the bill is introduced to the Senate next sitting week, Labor will move an amendment to increase the cooling off period from 48 hours to five days to reduce the risk for retail investors and will push to “liberalise” the structure to allow all companies to access the funding method.
“We’re still in talks with the crossbench, and we’ve had some positive sounds out of some of them,” Mr Husic said.
“We think there’s a good chance of amendments. We’re going to see what we can do between now and then.”
The bill’s inevitable passing next month is the culmination of a trouble-plagued four year journey of bringing equity crowdfunding to Australia.
In 2013 the then-Labor government tasked the Corporations and Markets Advisory Committee to investigate crowdsourced equity funding, which delivered its recommendations to the Abbott government in May 2014.
Eighteen months later in December 2015 the now-Turnbull government brought forward legislation to introduce the method, but was heavily criticised and was rejected by the Opposition, which said it was “unwieldy, costly and too cumbersome for many startups and small businesses”.
Revisions to this led to the amendments currently before the Senate and the bill that will likely come into law.
Mr Husic said these protracted and frustrating delays, which many in the industry said have left Australia lagging behind much of the world, are the result of the government refusing to cooperate with the Opposition.
“We have consistently flagged to the government our preparedness to work with them. Apart from one or two people the government has ignored that,” Mr Husic said.
“They’ve brought in legislation that gets criticised and then we’ve moved amendments reflecting industry concerns. Then they go away and bring back another piece of legislation with the same flaws.”
Mr Wilkinson said this has been a “long and exhausting process”.
“Unfortunately the political landscape and process has proven to be very difficult for getting through what is a great piece of legislation,” he said.
“We have poured our hearts and energy into making this a success so we can assist fantastic Aussie companies to get funded.”