Denham Sadler
June 8, 2017

FinTechs unhappy on crowdfunding

StartupLand

FinTechs unhappy on crowdfunding

Jonny Wilkinson: The Equitise founder says the government has got its crowdfunding framework wrong

The Australian fintech community is urging the government to reconsider the requirements to be placed on startups that undertake equity crowdfunding or risk no companies taking part.

Treasury announced as part of this year’s budget that the government would be moving to extend equity crowdfunding to private companies. But it came with a catch, with a series of new reporting and compliance obligations to be placed on private companies that complete an equity crowdfunding round.

The previous bill, which allowed unlisted public companies to go down that funding route passed through Parliament with the support of the opposition earlier this year, and will come into effect in September.

The legislation was heavily criticised by Labor and the startup community, with claims it would lock out 99 percent of Australian companies. The government quickly moved to amend the legislation, presenting a draft bill last month.

Australian fintech community advisory and lobby group FinTech Australia has undertaken a roadshow around the country in the last week, consulting with stakeholders and ASIC on the draft legislation in order to formulate its own position and submission to Treasury.

Through these discussions with over 130 startup founders, investors and intermediaries, the group has identified a series of issues with the framework, FinTech Australia CEO Danielle Szetho said.

“In consultation with our members, FinTech Australia has identified a number of areas where the proposed framework could be improved, and we have shared this early thinking with other startup groups and with Federal Treasury,” Ms Szetho told InnovationAus.com.

“We are keen to get equity crowdfunding up and running in Australia but we also want to ensure the framework balances the need to be workable for startups and intermediaries, and not be over-burdensome, which will mean it is not used.”

Treasury said the new obligations that will be placed on private companies are necessary to ensure the system has integrity.

“As proprietary companies that use the CSF regime will be fundraising from the public, they will be required to adhere to additional reporting requirements and governance standards that will foster greater accountability and better decision making,” Treasury said.

“Having these additional restrictions will ensure that individual investors have appropriate protection and will also help build confidence in the CSF regime as more investors participate in CSF offers.”

Under the amendments, a private company that has completed an equity crowdfunding round will have to present a more comprehensive company register, produce financial and directors’ reports, which will be audited if they raise more than $1 million, and will be subject to party transaction rules.

These new obligations to be placed on young startups is what is most concerning to FinTech Australia, Ms Szetho said, and may prove too onerous and prevent companies from going down the equity crowdfunding route.

“We think it’s a great start, but in particular the audit requirement for companies raising more than $1 million is far too low a bar,” she said.

“The cost of an audit could be anywhere from $10,000 to $20,000 which would make the cost of this type of capital raising much less attractive than other forms, and would lead to the regime not being used by anyone.”

The original bill that passed the Senate included a number of reporting and governance exemptions for startups that converted into unlisted public companies, including not having to hold an AGM for five years and not having to appoint an auditor for five years.

These exemptions have now been scrapped.

The government admitted that the new obligations placed on startups that want to complete an equity crowdfunding campaign may be expensive and onerous, but it’s necessary to ensure confidence in the system, and that this will be cheaper for startups than converting into a public entity.

According to Equitise co-founder Jonny Wilkinson, who participated in FinTech Australia’s roadshow, these new obligations add a layer of complexity and confusion that may stop companies from taking part in equity crowdfunding.

“It is clear that the level of complexity means many people, even lawyers and professionals, are not certain of the impact and mechanics of the proposed private company framework,” Mr Wilkinson told InnovationAus.com.

“There are issues relating to the overlap between the current legislation and the new legislation, the requirement for an audit of companies who raise more than $1 million and the change of control implications of the takeover code.”

Other concerns that FinTech Australia will raise with Treasury include the $5 million cap placed on the amount private companies can raise through equity crowdfunding.

“We recommend this be higher, potentially to $50 million, similar to the US, given that we see signs of more mature startups and even medium businesses interested in using the regime,” the group said.

It will also continue to argue against the cooling-off period, which gives retail investors the chance to pull out of a crowdfunding campaign after its completion.

“This does not happen in any other market. As people are able to see the amounts invested, giving investors a ‘free-pass’ allows them to invest and then pull out, and opens up opportunities for market manipulation,” FinTech Australia said.

FinTech Australia will also recommend that the government takes the time to properly consult with the startup and tech community in order to get these amendments right the first time.

“We encourage the government and Treasury to slow the process so that we can consult with stakeholders and they can elicit more information as all parties involved get a better understanding of the impacts before it is rushed through Parliament,” Mr Wilkinson said.

The government’s original, non-private equity crowdfunding laws will come into effect in September this year, but it’s currently unclear when the amendments will be introduced to Parliament.

FinTech Australia has previously been criticised for its broad support for the previous equity crowdfunding bill, with shadow minister for the digital economy questioning whether the group had been “muzzled” by the government after receiving $200,000 in federal funding.

“We demand to know what constraints the Turnbull Government has forced upon FinTech Australia. The government has let down the startup community badly with this bill. What is more surprising is how badly the startup community has been let down by representatives of the startup community themselves,” Mr Husic said in Parliament.

Ms Szetho hit back at the claims, saying they were “unfair and inaccurate”.

“Our advocacy on the domestic policy front is funded by our members – the startups – and we’re beholden to what they want. We haven’t spent our scarce resources on speaking to politicians,” she said.

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