Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)
Chapter 1 Background
Outline of chapter
1.1 This Chapter provides an overview of the Corporations Amendment (Crowd-sourced Funding) Bill 2016.
1.2 Unless otherwise stated, all references in this Chapter relate to the Corporations Act 2001.
Context of amendments
1.3 Productivity growth is a core driver of economic growth. Fostering innovation is an important way of unlocking productivity, both through innovative products and ways of doing things, and through generating knowledge spill-overs from research and development that add to the general level of knowledge in the economy.
1.4 New funding models that flexibly support emerging firms have the potential to facilitate innovation and contribute to productivity growth. A number of recent reviews have identified the potential of CSF to provide new and innovative businesses with access to the finance they need to develop their product or service and grow.
- The Government's Industry Innovation and Competitiveness Agenda, released in October 2014, called for consultation on a regulatory framework for CSF.
- The Murray Inquiry into Australia's financial system, released by the Government in December 2014, specifically recommended reducing regulatory impediments to crowdfunding by introducing graduated fundraising regulation. In its response to the Inquiry, released in October 2015, the Government accepted this recommendation.
- The Productivity Commission's Business Set-up, Transfer and Closure draft report, released in May 2015, also supported the introduction of a CSF framework.
- The Government's National Innovation and Science Agenda, released in December 2015, identified CSF as a reform that would make it easier for small businesses to raise equity funds from the public.
- The Government's FinTech Statement, released in March 2016, included CSF as a FinTech priority.
1.5 CSF is an innovative type of fundraising, typically online, that allows a large number of individual investors to make a small financial contribution towards a company.
1.6 CSF will provide an additional funding option for small businesses and start-ups in particular, that may otherwise struggle to obtain affordable finance.
- Existing legislative arrangements can be a barrier to small businesses and start-ups making securities offers:
- For proprietary companies, a limit of 50 non-employee shareholders and prohibitions on making public offers of securities mean such companies are not able to access the large number of small-scale investors that would typically be targeted under an equity CSF campaign.
- Public companies are not subject to these restrictions, but must comply with substantially higher corporate governance and reporting obligations that may be too expensive to be an option for small business. Public companies making equity or debt offers must generally also use a disclosure document, which can be costly and time consuming to prepare.
1.7 While there are currently a small number of operators of online platforms offering investment in Australian start-ups and small businesses, the current legislative arrangements outlined above significantly limit the type of service they can offer, and do not fulfil the 'crowd' element of CSF.
1.8 Facilitating CSF would also provide additional investment opportunities to retail investors, who are generally unable to gain direct access to early-stage financing activities. However, small businesses and start-ups generally present higher risks for investors compared to larger, more established companies. CSF investments may be largely illiquid, reducing the ability of investors to exit their investment.
1.9 In order for CSF to be sustainable, any regulatory framework needs to balance reducing the current barriers to CSF with ensuring that investors continue to have an adequate level of protection from financial and other risks, including fraud, and sufficient information to allow them to make informed decisions.
1.10 The regulatory regime for operators of financial markets and clearing and settlement facilities was designed to address risks associated with the operation of traditional exchanges such as the Australian Stock Exchange or other significant financial markets and which may not be appropriate for operators of emerging and specialised markets. Amending the Australian Market Licence and clearing and settlement facility licensing frameworks to provide the Minister with the power to exempt certain market operators from some of the obligations under these regimes will ensure that the regulatory requirements can be tailored to particular markets and facilitate their development.
Summary of new law
1.11 The amendments establish a new CSF regime by:
- inserting a new Part into Chapter 6D, which deals with:
- eligibility requirements for a company that wants to make an offer under the CSF regime;
- the process to make a CSF offer, including the role and obligations of the CSF intermediary; and
- the prohibitions, liabilities and investor protections applying to CSF offers, including rules relating to defective disclosure documents and advertising restrictions.
1.12 The amendments generally disapply Part 6D.2, which contains provisions relating to prospectuses and other existing disclosure documents, and Part 6D.3, which deals with prohibitions, liabilities and remedies relating to offers of securities, by stating they do not apply to CSF offers, unless expressly provided for.
1.13 Part 6D.4, which sets out ASIC's powers in relation to offers of securities, has been amended so that it applies as required to CSF offers.
1.14 The amendments set out temporary concessions from certain public company corporate governance and reporting requirements which are available to a new public company limited by shares (including a proprietary company that converts) that is eligible to make a CSF offer and satisfies certain eligibility criteria.
1.15 The exemption powers in Parts 7.2, 7.2A, 7.3 and 7.5 have been amended to provide a streamlined approach to granting some emerging or specialised financial markets and clearing and settlement facilities, and their operators, with exemptions from certain regulatory requirements.