Private Capital Raising — Australia and Equity Crowdfunding
On Monday, 18 July, 2016, the Hon, Malcolm Turnbull, PM, appointed the Hon Greg Hunt MP, Minister for Industry, Innovation and Science, the Hon Craig Laundy MP, Assistant Minister for Industry, Innovation and Science and the Hon Michael McCormack MP, Minister for Small Business, in the Treasury portfolio. These three persons who have the oversight of innovation incentives, are as a result of the election, entirely new to this position. There is however continuity in Treasury and Finance, as the Hon Malcolm Turnbull, Scott Morrison and Mathias Cormann, have maintained their positions.
The options for the equity crowdfunding legislation described below include, resurrecting that legislation with such changes as reflect criticisms made of the proposed legislation before it lapsed when Parliament was prorogued, making changes which reflect the Ministers’ personal views of the risks to retail investors from this regulatory relaxation of the investment regime in the Corporations Act 2001 and changes which reflect in part the recent criticisms of completion of Title III of the JOBS legislation in the USA.
The new legislation is likely, because of the Government’s mandate in this area, to surface early in the new Parliament. Its passage should be relatively uncomplicated in both Houses, given the need for Australia to progress in this area to be able to compete internationally, Australia’s standing in innovation parameters in OECD surveys and a measure of bipartisan support for this legislation.
The equity crowdfunding bill entitled Corporations Amendment (Crowd-sourced Funding) Bill 2015 on 3 December 2015 was referred by the Senate to the Senate Standing Committee on Economics Legislation for inquiry and report by 29 February 2016.[22]. The Economics Committee reported on 1 March 2016.[23] The text and passage of the Bill is to be found here:
http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/bd/bd1516a/16bd114
The Bill was described on 9/05/2016, as “Lapsed at dissolution.” The elections held 2 July 2016, may not change the content or intent of the Bill which had bipartisan elements to it. A seminar was held on the evening of Tuesday, 26 July, 2016 timed to occur shortly following the above appointments being made, considered aspects of Australia’s direction with equity crowdfunding.
This legislation is in addition to the current regime for capital raisings exempt from (or rather with its own) disclosure requirements. It facilitates wholesale and retail investment in seed and later capital startup companies.
The evening’s proceedings were chaired by His Honour Justice McDougall, a Judge in the Equity Division of the Supreme Court of New South Wales. His Honour is well versed in commercial law and has experience which is appropriate to the rationale of ECF and innovation.
Maan Beydoun, a Senior Specialist in the Investment Managers and Superannuation Division of ASIC, is now the policy lead within ASIC on the CSEF implementation project. Maan gave an overview of ASIC’s plans in this area, particularly with regard to the requirements of the Australian Finance Securities Licence, AFSL, which must be held by the intermediary.
Marina Nehme, a Senior Lecturer, and Director of Learning and Teaching at the University of New South Wales also spoke. Marina is a specialist in ECF and was able to provide enlightened comment on changes and direction which should be made and taken in this area of law.
Ingrid King, a specialist in commercial law at the Sydney Bar, was able to provide relevant comment, given her role as advisor when located in Hong Kong, to a large hedge fund with investments in the Asian region. This plus her teaching at the University of Technology, Sydney, meant that she is knowledgeable in the intricacies of Section 708 of the Corporations Act 2001.
Andrew Macpherson, who also presented, had considered closely the dichotomy between products and services under the Corporations Act 2001 and variations with respect to issuer and prospectus requirements. Andrew is a director of the Crowd Funding Institute of Australia, and has made submissions on the existing and proposed ECF implementation and taxation changes. He highlighted the difficulty of reconciling the Government’s fostering of gambling, with controls made of investors’ ability to invest in start-ups and the relatively laissez-faire approach of the New Zealand government to investor protection.
Some of the issues discussed at Equity Crowdfunding Australia’s Meetup at UTS yesterday evening included:
1 the Corporations Amendment (Crowd-sourced Funding) Bill 2015 should be redrawn as in its current form it provides too little facility for issuers, intermediaries and investors, alike;
2 based on a redrawing of the legislation and ASIC’s plan for implementation and the licensing procedure which would follow, no intermediary would be operational before 2018;
3 continuation of the current Section 708 exemptions and Class Order 02/273 are vitally important to raising private capital in Australia and operate and should continue to operate independently of equity crowdfunding legislation;
4 even though Class Order 02/273 was in its most important aspect relatively unintelligible (see the Second (Issuer) Exemption), it had operated successfully and ASIC had managed well with its non-regulatory approach in this area;
5 this class order would sunset in 2017 and some preparation should be given now to its continuing operation;
6 private capital raising without a disclosure document rested largely on restrictions on advertising, which now made little sense given that anything on the Web was “advertised” in the sense of publicly available;
7 government policy in respect of support for gambling which causes more cost than revenue gained, is at odds with investor protection for risks posed from investment in seed capital offerings;
8 disclosure documents, whether formal under the Corporations Act 2001 or informal for the purposes of Section 708 (ie Information Memorandums) are not an effective means of measuring investment opportunity and decision making by unsophisticated (retail) and sophisticated investors is not well understood;
9 an offer may not be “received in this jurisdiction” (see Section 700(4) Corporations Act 2001) simply because an Australian investor accesses a New Zealand website for the purposes of investing in a New Zealand company holding Australian assets or an Australian company holding Australian assets; and
10 care needs to be taken in selling to nationals in foreign countries lest one becomes subject to their capital raising laws and their revenue raising (taxation) laws.
The equity crowdfunding legislation and aligned innovation eco-system is both multifaceted and important in Australia’ future. It deserves continuing focus and planning and strong implementation.
Andrew Macpherson
28 July 2016