House of Representatives

Corporations Amendment (Crowd-sourced Funding for Proprietary Companies) Bill 2017

Second Reading Speech

Mr MORRISON (Cook-Treasurer)

I move:

That this bill be now read a second time.

This bill sets out amendments to the Corporations Act 2001 to enable to proprietary companies in Australia to access crowdsourced equity funding.

This will be a game changer, once again, for Australian start-ups and new small businesses.

This is yet another example of the Turnbull government getting on with the job and taking action now by backing-in businesses, getting the settings right to create jobs and help our economy transition.

The extension of Australia's crowdsourced equity funding framework to proprietary companies delivers on the announcement made in the 2017-18 budget and demonstrates the government's commitment to fostering a more innovative and creative Australian economy, by ensuring that start-ups and early-stage businesses can access the funding they need.

Facilitating access to crowdsourced equity is part of the government's agenda to develop a strong and vibrant fin-tech industry in Australia.

That is why this government introduced the crowdsourced equity funding for public companies framework late last year. Extending crowdsourced equity funding to private companies through this bill will enable more innovative companies and start-ups to obtain funding from a crowd of investors. In return for being able to have an unlimited number of crowdfunding shareholders, participating proprietary companies will have higher governance reporting obligations to protect the large number of investors they will be able to have.

Many of the features of the existing public company framework which the government introduced last year, such as the obligations of intermediaries and the process of making crowdfunding offers, will be the same for proprietary companies. This will reduce complexity for intermediaries, crowdfunding companies and investors.

We have consulted widely and have listened to entrepreneurs and businesses, who tell us that it can be difficult for innovative, early-stage businesses, who are often proprietary companies to access funding from traditional sources. Proprietary companies wanting to access equity crowdfunding will no longer have to convert to public company type, with its more onerous obligations. Instead, founders will be able to crowdfund while retaining the greater flexibility of the proprietary model.

Increasing the attractiveness of equity crowdfunding will also increase the pool of potential investments, giving investors the opportunity to share in the risks and successes of these growing businesses. Recognising that this extension is a new approach to the proprietary company framework in Australia, the government has balanced the importance of investor protection, transparency and good corporate governance standards with what can be significant costs of compliance.

This bill complements the Turnbull government's financial sector and innovation policies such as tax incentives for angel investors in start-ups and announcements in this year's budget including the open banking review currently underway; the development of an enhanced regulatory sandbox for new and innovative financial services; and changes to the tax treatment of digital currencies.

The government has consulted at length on this extension of this policy to proprietary companies, releasing a consultation paper in 2015 followed by industry roundtables in 2016. The government also released the draft legislation for public consultation in May 2017. Submissions expressed widespread support for the extension of the crowdsourced equity-funding framework to proprietary companies.

I would like to thank all of the stakeholders who participated in these consultations over the past two years. It is important that the regulatory framework for crowdsourced equity funding for proprietary companies operates effectively to maximise the benefits to businesses, intermediaries and investors. Stakeholder feedback has assisted with the development of a framework that achieves this. I would particularly like to thank the fin-tech Advisory Group that has been working closely with me on all of these issues, lead by Craig Dunn and his very willing and enthusiastic team, and who are making an enormous difference through their engagement with the Turnbull government.

I would now like to turn to the provisions of the bill.

This bill removes the regulatory barriers preventing eligible proprietary companies from accessing the crowdsourced equity-funding framework.

To ensure proprietary companies can effectively access the framework without breaching the 50 shareholder cap that currently applies to proprietary companies, investors who acquire shares through crowdfunding offers will not be counted towards the cap. Subsequent transfers by crowdfunding investors who on sell their shares will also be exempt if the company is not listed on a financial market. This will give crowdfunding investors flexibility to exit their investment without causing the company to inadvertently breach the shareholder cap and forcing it to convert to public company type.

Further, the government is very proud of the flexibility it has built into the regime. Proprietary companies with shareholders who acquire shares through a crowdfunding offer will not be subject to the takeovers rules. For founders contemplating crowdsourced equity funding, this will give them certainty that they can crowdfund and still seek further funding to grow the business without contravening the costly and complex takeover provisions. To ensure investors are protected, the bill includes a regulation making power to allow the government to respond quickly by imposing additional conditions on this exemption if required.

Acknowledging that proprietary companies that access crowdsourced equity funding will no longer be closely held, these companies will be required to comply with additional obligations to protect investors.

Proprietary companies with crowdfunding shareholders will be required to prepare financial reports in accordance with accounting standards, with financial statements to be audited once the company raises at least $3 million from crowdfunding offers. Financial transparency will allow investors to monitor progress of companies and make informed decisions about their investment.

Crowdfunding proprietary companies will be required to have a minimum of two directors, rather than the usual one director. This will provide greater transparency and certainty around succession planning. As proprietary companies that use crowdfunding will rely on public funding, the restrictions on related party transactions under part 2E of the Corporations Act 2001 will be extended to crowdfunding proprietary companies to ensure that individual investors have appropriate protections against the risk of fraud and bias from the transactions with related parties.

As the bill enables proprietary companies to access crowdsourced equity funding, the bill also removes the temporary concessions from certain public company reporting and governance obligations that were included in the Corporations Amendment (Crowd-sourced Funding) Act 2017. These concessions will be grandfathered for companies that register as or convert to public company status prior to the commencement of the extension of the framework to proprietary companies. However, to ensure consistency for those public companies eligible for the grandfathered concessions, the bill increases the audit threshold for eligible public companies from $1 million to $3 million.

The bill further improves the overall crowdsourced equity funding framework by reducing the withdrawal period after a company issues a supplementary or replacement offer document from one month to 14 days. A 14-day withdrawal period still gives investors adequate time to reconsider their investment, while providing greater certainty about the outcome of the offer for other potential investors and the company.

The extension of the crowdsourced equity funding framework to proprietary companies will take effect six months from the date the bill receives royal assent. The changes to the crowdsourced equity funding framework for public companies, excluding the removal of the corporate governance concessions, will commence on royal assent.

The 2017-18 budget provided the Australian Securities and Investments Commission with $4.5 million over four years to implement and monitor the extension of the framework. This funding will be recovered from regulated entities.

The government proposes to make regulations to support the operation of the measures in this bill.

Introducing this bill today delivers on the government's commitment to extend equity crowdfunding to proprietary companies. Unlocking a new source of funding delivers on our commitment to foster innovative economic activity and support the development of the Australian fin-tech sector.

Once again, I want to thank all of those who participated in this consultation to ensure that we are getting these measures right. I also particularly want to thank the Treasury officials, who have worked very hard on this over a long period of time, and have worked very constructively with industry, demonstrating, I think, an excellent relationship between Treasury and the corporate sector in getting these measures right.

Full details of the measure are contained in the explanatory memorandum.

Debate adjourned.