Corporations Amendment (Crowd-Sourced Funding for Proprietary Companies)
House of Representatives, 26 February 2018
Watch Matt's Speech
Mr KEOGH (Burt) (16:46): Mr Deputy Speaker Irons, I note your recent contribution to the prior debate as well where you tried a play on words with METRONET. I thought it was particularly courageous to try to talk about state debt, particularly in light of the recommendations and findings of the report handed down last week. But I digress.
Let me come now to this second piece of crowdsourced funding legislation from this government. I think I can sum it all up by saying: finally. Finally there is a little bit of common sense coming from the Turnbull government. Labor actually began the moves to introduce equity crowdsourced funding via our reference to the Corporations and Markets Advisory Committee to advise on an appropriate framework to allow for this. It handed down its final recommendations to the government in May 2014, which was about the same time that the government announced its plans to abolish the Corporations and Markets Advisory Committee. But now here we are, standing at the beginning of 2018, and the Turnbull government has finally got its act together and introduced an equity crowdfunding regime that might actually be able to be used by some start-ups—or at least more than three of them. So much for being the party that apparently supports small business!
In the wake of the 2008 global financial crisis there was a huge decrease in small-business activity. It has long been recognised that one of the greatest hurdles that start-ups face is building capital investment. Access to equity is a huge challenge. Companies that are eligible to be registered as proprietary have to have fewer than 50 non-employee shareholders. The Corporations Act imposes different rules and obligations on these proprietary companies, reflecting the small number of members that they have, that equity and risk is often kept closely held through their shareholders and that the members of those companies are likely to have a much greater understanding of the day-to-day running of those businesses.
Crucially, a proprietary company is unable to raise funds from the public. For entrepreneurs, who often form their business start-ups as proprietary limited companies, this presents some pretty big hurdles when it comes to raising the funds that are required to get their businesses off the ground. Founders resort to putting their family savings on the line, remortgaging their houses and taking out massive loans—and that's just to start. To get the further funding needed to take that next big leap is even more difficult. This prevents everyday people who are interested in doing these things from investing in perhaps the next Uber, Airbnb or Spookfish, as we have in Western Australia. It prevents organisations such as Lucky Chan's in Northbridge, which was the first pub to be crowdsourced funded in Australia, from being able to have a crowdsourced equity funding arrangement. But maybe not now.
At the moment, under the government's previous legislation, the only way around this is for them to become a publicly listed company or a public company that can access the previous regime that the government brought forward. But, of course, if you want to become a listed company, you've got increased disclosure; the cost of an initial public offering—and I can tell you as a former corporate lawyer, that's not cheap; the potential loss of control of the business; separation of ownership from management; and the risk of focusing on short-term gains instead of the long-term interests of the business—what the start-up entrepreneur got into the business for in the first place—and trying to meet the expectations of investors that may be quite disparate. Starting a business is challenging enough; we shouldn't be imposing additional burdens on the Australian start-up community.
The 2017 legislation established a regime that allowed for unlisted public companies to raise funds via crowdsourced funding equity offers. Through this previous botched attempt to introduce equity crowdfunding, we—by which primarily I mean the member for Chifley and I—called out the government and asked for them to pull down the self-imposed regulatory hurdles that would effectively lock out over 90 per cent of the businesses that were actually interested in using crowdsourced equity funding. Like so much of this government's legislation, I find myself in this chamber constantly pointing this out. We pointed out the deficiencies and that we were happy to help the government fix them so that Australian start-ups really could access crowdsourced equity. But the government refused. Instead, they pushed through floorless legislation last year that they knew that they would eventually have to come back here and amend, simply so that they could claim that they had finally introduced equity crowdfunding. Well, I'm sure the media release made somebody warm in bed that night. What an incredible example of publicity triumphing over policy.
Labor has long recognised the importance of early stage innovation to drive economic growth. As we have often said, it is important to have policies in place that help grow as many innovative firms as possible—policies that remove barriers to growth, like a lack of access to capital. While traditional sources of funding for early stage innovation and start-ups have traditionally come from venture capital and angel investors, equity crowdfunding has emerged as a viable alternative for raising capital around the globe. So it is a shame that opening this up for Australian start-ups has taken so long.
These changes to open up crowdsourced equity funding to proprietary companies, while still ensuring appropriate consumer and investor protections, are vitally important. Ensuring that those protections are there is also important—protections such as having at least two directors, having to provide financial and directors' reports to shareholders and being required to comply with related third-party transition restrictions. Labor supports all these changes but we, like the Australian start-up community, are left wondering why the government has taken so long to get to this point. And, of course, the point we are at now is merely starting to introduce the legislation that will fix the changes that the government had previously made, so that we can now have the sort of regulatory regime that we actually need so that we can make sure that Australian start-ups can get access to crowdfunding.
But then we look at the detail and we also see that, despite the delays that were in the previous legislation and despite the hold-ups—having to wait three months for royal assent, having to wait six months for the law to even kick in and having to wait for the regulator to go through its processes of regulation and approving the facilities to be able to do this—we have another delay built into this legislation. I don't know what ASIC and the regulatory regime have been sitting around doing this whole time, if we need to create such a long pause again to be able to get to a situation where we have this new amended regime—one that might actually be accessible to Australian start-ups, one that people were asking for in the first place, and one that Labor said we were happy to make the changes to to allow for this to occur the first time the government brought in this legislation a year ago. It is unclear to me why we now have to have a further delay.
As I said before, I fear that this is becoming a bit of a habit for this government, that I often find myself in this chamber speaking on legislation that this government is introducing to amend legislation that it had introduced only months or maybe a year ago, when Labor had offered to fix those problems as it went through parliament the first time. When I'm out at my 'coffees with Keogh' at various coffee shops around the great electorate of Burt, people often ask: 'Why does the opposition have to be so oppositionist? Why does it have to be so adversarial in our parliament? Why can't you all just get together and agree?' Do you know what I say to them? I say: 'Well, it's funny that you mention that, because, for this opposition, despite having grave opposition to some of the priorities of this government, which are so incredibly wrong for this country, there are some things where we come into this chamber and we say: "We want to help you. We want to help you make that legislation better."'
I tell my constituents, the great people of the electorate of Burt, that the Labor Party is a constructive party. We come into this parliament wanting to make Australia better. So, when the government are doing things—even if it takes a long time for them to do them, such as with this legislation, which was recommended in 2014, dealt with for the first time at the beginning of 2017, and is now being fixed at the beginning of 2018—we say to them that we will be happy to work with them on making them better.
The thing was, the crowdsourced funding legislation that they had before was fine. It would allow some people to access crowdsourced funding for equity, but it wasn't actually going to be that accessible for the people who needed to have access to it. So we said to the government: 'You should change this. You should make this work better.' But, instead of doing that, they decided that a media release was more important, as was being able to go out to the sector and say: 'Look! We've introduced this legislation and we've sent it through the parliament. Aren't we an excellent government? We're the government of small business.' That's what they said, but no-one could actually use the legislation.
So, now we find ourselves here, again, on this area of law, saying, 'Okay, we're going to change it again so that the start-up community in Australia can actually use it.' It is so vitally important. It is vitally important in two ways. One is that they must have access to the equity. It is really important that we make access to equity easier for our small business and our start-up community. As a nation, we need to have that equity input and growth into our businesses—businesses that go on not only to create great economic value in themselves but also, as they get larger, to employ people in our country.
It is also important that we have an effective consumer protection regime, because when you make it easier for consumers to invest it is also paramount that they are protected from the risks. The government has put forward some useful changes here: when a company wants to access these provisions there are some additional consumer protections. But it has been concerning, as the member for Chifley outlined just moments ago, that some of the disclosure requirements that have been put forward seem to exceed even those that would be required if a company wanted to go through a full IPO process. Quite frankly, that is ridiculous. One of the issues that we constantly deal with in the Parliamentary Joint Committee on Corporations and Financial Services—of which you are the chair, Mr Deputy Speaker Irons—is this issue that overdisclosure can quite often complicate matters even further and make potential investments even more risky for investors. That is because investors tend to take the view—this is a bit of behavioural economics for everybody—that because there is a nice glossy document that has so much fine print and that has been submitted to the regulator—not approved by the regulator—that it must all be fine. So, it's important that we get the disclosure regime right and that any risks are properly identified and consumers know what it is that they're getting into and understand the risks of investing through this method. This isn't going to be for everyone. This probably isn't where you'd put your superannuation savings. But it is important that companies and start-ups have access to this equity, it is important that there is proper disclosure, and it's important that there are consumer protections, which this legislation introduces.
But, critically, like with so many things, we're here fixing something that could have been fixed up a year ago. The start-up community of Australia could have been already accessing this legislation at the end of last year. We could have had a huge influx of equity into the smallest businesses in Australia, helping them reach that next step of development in their business. But, this government—a government that talks about supporting small business, talks about trying to help small business and talks about growing our economy and making it innovative and agile—has actually strangled that off for another 12 months. This is already many years after those original recommendations were made. That's why we not only support the bill—and I am supportive of the bill—but also support the amendment put forward by the member for Chifley, which, critically, calls on the government to bring forward the start date for this legislation so that we can unlock the potential of equity crowdfunding for this nation, as we should have done many years ago.