Bills Digest no. 114 2015–16
PDF version [640KB]
WARNING: This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Dr Nitin Gupta
Economics Section
2 May 2016
Contents
Purpose
of the Bill
Structure of the Bill
Committee consideration
Policy position of non-government parties/Independents
Position of major interest groups
Financial implications
Statement of Compatibility with Human Rights
Key issues and provisions
Conclusion
Date introduced: 3 December 2015
House: House of
Representatives
Portfolio: Treasury
Commencement: Schedules
1 and 2 of the Bill will commence on a day to be fixed by Proclamation or six
months after Royal Assent, whichever occurs first. Schedule 3 will commence on
the day after Royal Assent.
Links: The links to the Bill,
its Explanatory Memorandum and second reading speech can be found on the
Bill’s home page, or through the Australian
Parliament website.
When Bills have been passed and have received Royal Assent, they
become Acts, which can be found at the Federal
Register of Legislation website.
Purpose of the Bill
The Corporations Amendment
(Crowd-sourced Funding) Bill 2015 (the Bill) seeks to amend the Corporations Act
2001 (Cth) to:
- establish a framework to facilitate crowd-sourced equity funding
(CSF)[1] offers by small unlisted public companies
- provide new public companies that are eligible to crowd fund with
temporary relief from reporting and corporate governance requirements that
would usually apply, and
- enable the Minister to provide that certain financial market and
clearing and settlement facility operators are exempt from specified parts of
the Australian Market Licence and clearing and settlement facility licensing
regimes.
The Bill seeks to amend the Australian
Securities and Investments Commission Act 2001 (Cth) to
make consequential amendments.
Structure
of the Bill
The Bill has three Schedules. Schedule 1 to the Bill seeks
to amend the Corporations Act to create a framework to facilitate CSF in
Australia. The new framework covers:
- eligibility
requirements for a company to fundraise via CSF, including disclosure
requirements for CSF offers
- obligations
of a CSF intermediary in facilitating CSF offers
- the
process for making CSF offers
- rules
relating to defective disclosure as part of a CSF offer and
- investor
protection provisions.[2]
Schedule 1 to the Bill also seeks to make consequential
amendments to the Australian Securities and Investment Commission Act 2001 (ASIC Act) to include ‘crowd-funding service’, as defined in the Corporations
Act, in a range of financial services covered by the ASIC Act.[3]
Schedule 2 to the Bill seeks to amend the Corporations
Act to provide new public companies that are eligible to crowd fund with
temporary relief from the reporting and corporate governance requirements that
would usually apply.[4]
Schedule 3 amends the Corporations Act to provide
greater flexibility in the Australian Market Licence (AML) and clearing and
settlement facility licencing regimes.[5]
Background
Crowd-sourced equity funding (CSF) is a relatively new concept,
and is enabled by the rise of internet technologies. As the name suggests, it
allows businesses to obtain capital from a large number of investors (that is,
a crowd) through an online platform, where each investor typically contributes
a small amount of money in return for an equity stake in the business. At its
most basic level, CSF allows people to invest in unlisted shares issued
by businesses.
Assessments of Crowd-sourced funding
in Australia
Consultations on the provisions of the Bill began in late
2014, following the release of the Treasury Discussion Paper on Crowd-sourced
Equity Funding.[6] This paper sought to canvass stakeholder opinions of two alternative models for
a CSF framework, and presented the impact analysis of both models as well. The
first of these is the model implemented in New Zealand, while the second is the
model proposed by the Corporations and Markets Advisory Committee (CAMAC) in its Crowd
Sourced Equity Funding Report.[7]
Over 40 submissions were received in response to the
Treasury discussion paper, and two stakeholder roundtables were organised to
discuss the design of the framework. Overall there was broad support for an
integrated model that combined elements from both New Zealand’s and CAMAC’s
models. The proposed framework was outlined in a separate Treasury consultation
paper in August 2015.[8]
In addition to the initial stakeholder submissions and
roundtables, targeted consultations were also undertaken on the draft
legislation, and further public consultation was undertaken by the Senate
Economics Legislation Committee following the introduction of the legislation
into Parliament.[9]
The CAMAC review into CSF in Australia found this form of
funding is currently costly and impractical for businesses, mainly due to
regulatory impediments in the Corporations Act, which imposed high
compliance costs for small and start-up businesses.[10]
According to the CAMAC report Crowd-Sourced
Equity Funding:
There is no legal definition of [crowd-sourced equity
funding]. However, in practice, the concept refers to a form of corporate
fundraising that envisages start‑up or other smaller companies (issuers)
obtaining seed or other capital through small equity investments from
relatively large numbers of investors, with online portals (intermediaries)
publicising and facilitating these equity offers to online users (the crowd).
Typically, the amount of equity capital to be sought by an
issuer in a particular period through [CSF] would be relatively modest. [CSF]
does not cover large‑scale public offers by larger corporations.[11]
Policy and Economic Rationale
The main policy rationale[12] for CSF is to promote and facilitate innovation in the Australian economy,
particularly by small firms and new start-ups. Innovation is highly dependent
on access to adequate levels of finance. It is a common assertion that it takes
$1 to research an idea or concept, $10 to turn that into a marketable product,
and $100 to successfully commercialise it. The funding needs typically are for
either of the latter two stages, but a given amount will have a proportionally
smaller impact in the commercialisation stage than in the product development
stage.
There is evidence that inadequate access to finance is the
biggest impediment to innovation for small and medium enterprises. As shown in
the recently released report by the Australian Council of Learned Academies, Securing
Australia's Future: Australia’s Comparative Advantage, a 2012 survey by
the Australian Bureau of Statistics (ABS) on constraints to innovation showed
that 43 per cent of small firms and 20 per cent of medium-sized firms
identified funding as the biggest impediment to innovation; this contrasted
with only 12.5 per cent of large firms that noted funding as a constraint.[13] However, for innovation-active firms, the constraints are even more acute.
Relative to the all firms-case[14],
66 per cent of innovating small firms considered financing to be the biggest
impediment to innovation. The corresponding responses for medium and large
firms were 25 per cent and 15 per cent, respectively.[15]
Despite the fact that innovation helps to improve
productivity, competitiveness and growth, this smaller segment of the market
typically finds it extremely difficult, if not impossible, to access the
traditional sources of financing that are available to the more established
firms. The CAMAC report refers to the ‘capital gap’, where an enterprise is in
need of finance to continue to its next stage of development, but cannot
attract further funding from traditional financing sources and is not yet able
to conduct an initial public offer of its securities.[16]
The economic rationale[17] for the Bill arises from the problems associated with imperfect information,
externalities[18] and the regulatory burden inherent in the Corporations Act.
Probably the biggest impediment to finance arises from
information asymmetry problems. Any kind of investment is inherently and
unavoidably risky, in that business failure would result in the total loss of
investment. Traditional sources of finance like banks and stock markets manage
this risk by requiring a ‘track record’ of successful past performance, which,
all else being equal, would indicate the ‘quality’ of the application and
increase the probability of continuing success in the future. In this context,
this means that most small firms or start-ups would not have the track record
to obtain funding. Their inability to indicate their ‘quality’ to banks is a
problem of information asymmetry that was identified by Nobel laureate George
Akerlof as a major cause for market collapse and lost opportunities.[19]
One of the respondents to the CAMAC discussion paper described
this problem as the ‘valley of death’:
The valley of death represents the stage in the growth cycle
of an early stage business at which those early stage businesses have, on
balance, not yet matured in their networks and risk profile to identify and
attract sufficient capital from external sources to enable them to
commercialise their products and services to a level at which the risk profile
is sufficiently improved to enable sophisticated investors and professional
investors to risk their capital in such companies.[20]
Increased innovation would create knowledge spill-over
effects, which is a form of positive externality. According to standard theory,
this would lead to under-provision of innovation by businesses; that is, they
would be less willing to make the necessary investment if they are not able to
appropriate all or most of the benefits associated with this investment. This
is an example of market failure where government intervention to rectify the
failure would be justified.
Finally, as shown in the responses to the CAMAC discussion
paper that preceded its report, the current capital raising provisions of the Corporations
Act were designed for more substantive capital raising activities by large,
established public firms, and the regulatory (corporate governance) and
compliance (reporting) requirements associated with those would be
prohibitively expensive for small, start-up firms.[21]
While CSF is technically legal in Australia and
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.
Thus the Bill is primarily intended to alleviate the
financing constraints facing small and start-up firms, subject to certain
requirements being met.
Committee consideration
Senate Economics Committee
On 3 December 2015 the Bill was referred by the Senate to
the Senate Standing Committee on Economics Legislation Committee for inquiry
and report by 29 February 2016.[22] The main reason for referral was to thoroughly consider the issues surrounding
the impact of this legislation on the start-up sector. The Economics Committee
reported on 1 March 2016.[23]
The Committee report reviewed and summarised several
preceding reports that considered the issue on its own, or as part of a broader
agenda dealing with productivity and innovation. A key point recognised by the
report was the importance of balancing the financing needs of businesses with
appropriate investor protections.[24]
The need for striking a balance was also recognised by all the
submitters to the Committee; however there was a divergence of views on the
correct balance. Some respondents felt that the entry barriers for companies
were too high, and that the proposed CSF regime would prevent deserving
companies from raising much-needed finance. On the other hand, others
considered the responsibilities and obligations imposed on intermediaries as
too onerous, which would discourage people from providing this service.[25] (The views of some submitters are considered under ‘Position of major
interest groups’, below.)
The Committee noted the Government’s extensive
consultation process undertaken prior to the introduction of this Bill, and
also alluded to the fact that given this is a new policy issue around the
world, and therefore without robust results and lessons, a predominantly
cautious approach taken in this early stage is prudent. The crux of the
question, according to the Committee, is whether it would provide a good starting
point to build the necessary legislative framework. The Committee Report
responded in the affirmative. The Committee also noted that the legislative
framework would benefit from subsequent review and ‘fine-tuning’.[26]
The two main recommendations of the Report were:
- that
the government monitor carefully the implementation of the legislation and
undertake a review two years after its enactment with special attention to the
matters detailed in the report and
- that
the Senate pass the Bill.[27]
The Labor Senators on the Committee issued a Dissenting
Report that focused on the perceived costs and complexities of the Bill. According
to this Report, the Committee had failed to take account of concerns expressed
in several submissions that the requirement to take a company public in order
to access CSF would place an onerous financial burden, often running into
thousands of dollars. There was concern that many small companies would not
have the resources or the capabilities to implement such a change, despite the
proposed exemption period from some of the obligations usually imposed on
public companies.[28]
A key recommendation of the Dissenting Report was that the
Bill should be amended to remove the restriction that limits CSF to unlisted
public companies. It further stated:
In its place, the Bill should merely allow small firms to
access the Bill’s Corporations Law exemptions from the point at which they
enter into a legally enforceable agreement with an intermediary (crowdfunding
platform) to hold an equity crowdfunding campaign.[29]
A second recommendation was that the asset and turnover cap
should be raised from $5 million to $10 million, in order to increase the
number of firms that can access CSF.[30]
Senate Standing Committee for the
Scrutiny of Bills
The Committee dealt with the Bill in the Alert Digest No.
1 of 2016 and sought advice from the Assistant Treasurer on a number of
issues.[31] The Assistant Treasurer responded to the Committee’s comments in a letter
received on 18 February 2016. The relevant extracts from the Alert Digest,
and the Assistant Treasurer’s responses to those, are contained in the Second
Report of 2016 of the Committee.[32]
The Senate Scrutiny of Bills Committee raised concerns that
provisions in the Bill inappropriately delegate legislative power and reverse
the burden of proof.
Proposed section 738F provides for certain rules in Chapter 7 of the Corporations
Act (which regulates financial services and markets) to apply in a modified
way to new Part 6D.3A of the Corporations Act (which will regulate CSF). Proposed subsection 738F(3) then allows regulations to be made to
further modify the application of the relevant Chapter 7 rules in specified
situations. In short, regulations may be made to modify the application of the
primary legislation. This is an example of a ‘Henry VIII clause’, which enables
delegated or subordinate legislation to override the operation of legislation that
has been passed by the Parliament. The Scrutiny of Bills Committee raises
concerns in regards to such clauses when the rationale for their use is not
provided or is insufficient as ‘such clauses may subvert the appropriate
relationship between the Parliament and the Executive branch of government’.[33] In this instance the Committee noted that the Explanatory Memorandum to the
Bill did not provide any justification of the provision and sought advice on
the matter from the Assistant Treasurer.[34] The Assistant Treasurer advised that an equivalent regulation-making power was
provided in Chapter 7 of the Corporations Act and therefore was required
in the Bill to ensure consistency. The Committee asked for this information to
be included in the Explanatory Memorandum to the Bill.[35]
The Committee also requested further information from the Assistant
Treasurer on provisions that would place an evidential burden of proof on a
defendant seeking to rely on certain defences. The relevant provisions are proposed
section 738Z (which sets out exceptions to the offences relating to
defective offer documents) and proposed section 738ZG (which relates to
prohibited advertising of a CSF offer).[36] The Minister advised the Committee that the approach was consistent with that
taken in Chapter 6D of the Corporations Act and ‘fully consistent with the
principle in the Guide to Framing Commonwealth Offences, Infringement
Notices and Enforcement Powers which establishes the general rule that a
defendant should only bear an evidential burden of proof for an
offence-specific defence’.[37] The Committee asked for this information to be included in the Explanatory
Memorandum to the Bill.[38]
Policy
position of non-government parties/Independents
The Labor Senators on the Economics Committee offered
qualified support for the Bill. Their Dissenting Report, while noting that they
did not intend to block the Bill, nevertheless called for a ‘lighter regulatory
touch’, and the ‘need to remove a major barrier to small firms accessing equity
crowdfunding platforms’.[39] Their position was based on concerns raised in several submissions and
testimonies that the demand for small firms to convert into unlisted public
companies in order to access CSF would potentially add regulatory and financial
impost on start‑ups and crowdfunding platforms.
An additional concern was that the Bill would not meet the
capital needs of start-ups and small firms, and while the various exemptions from
obligations usually imposed on public companies would provide some relief,
these would be hardly enough to overcome the costs associated with becoming a
public company.[40]
The Dissenting report made two main recommendations to
improve access by start-ups and small firms to CSF. The first related to the
requirement that limits eligibility to unlisted public companies. Specifically,
the Dissenting report recommended:
Section 738H(1)(a) should be amended to remove the
restriction that limits CSF to unlisted public companies. In its place, the
Bill should merely allow small firms to access the Bill’s Corporation Law
exemptions from the point at which they enter into a legally enforceable
agreement with an intermediary (crowdfunding platform) to hold an equity crowdfunding
campaign.[41]
The second major change called for in the Dissenting report
was that the current cap on assets and turnover should be increased from $5 million
to $10 million. This would increase the number of firms that can access CSF.
Senator Wong has proposed amendments to the Bill to action
the Dissenting report’s recommendations.[42]
In his second reading speech on the Bill, Adam Bandt of
the Australian Greens echoed the concerns about the regulatory burdens
associated with a company going public, and was appreciative of the exemptions
offered to small firms and the protections offered to retail investors. [43] Overall, he was supportive of the Bill but emphasised the importance of
striking a good balance between the need for innovation and appropriate
investor protections.
Position of
major interest groups
The Economics Legislation Committee received 22
submissions, which generally favoured the idea of introducing a CSF regime.[44] The Australian Stock Exchange (ASX) was generally very supportive of the Bill,
and considered that the final regulatory settings in the Bill struck a
reasonable balance between making CSF an attractive and feasible option for
companies seeking to raise funds, and maintaining appropriate protections for
investors.[45]
However, some submitters expressed concerns relating to
the compliance burden and costs that this Bill would impose.[46]
The first of these concerns related to the requirement
that companies wishing to access CSF convert to a public company. According to
VentureCrowd, an equity crowd-funding business, this would impose a significant
regulatory, administrative and compliance burden on the companies.[47] It also noted:
The Corporations Act requires a proprietary company
with 50 or more shareholders to become a public company. In the expectation
that a start-up who accesses ECF [equity crowd funding] will gain 50 or more
shareholders, the Bill requires that start-up to convert to become a public
company (whether or not it ever exceeds the 50 shareholder limit).
The public company regime was introduced to regulate large,
well-funded and well-resourced companies that were either listed on a stock
exchange or of equivalent private stature. Start-up businesses, without revenue
and resources, could not have been further from the minds of those who wrote
the legislation.[48]
The Australian Small Scale Offerings Board (ASSOB) took a
contrary view, and insisted that ‘issuer companies convert to public companies
prior to listing … to learn to be compliant and accountable to investors from
the start’.[49] However, ASSOB expressed concern about the compliance and regulatory burden on
intermediaries, especially for fundraising efforts below $500,000.[50]
ASSOB’s position regarding public companies was echoed by
Chartered Accountants Australia and New Zealand, which expressed a view that CSF
framework concessions may have a negative impact on investor rights and may
also not achieve the desired result of reducing the regulatory burden.[51]
The Australian Private Equity and Venture Capital
Association Ltd (AVCAL), while generally supporting the Bill, raised concerns
about some specific provisions relating to the exclusion of investment
companies from CSF.[52] Additionally, restrictions on the revenue and assets limits (of $5 million
each), and the prohibition of eligible CSF companies and related parties having
more than one concurrent offer were also objected to. The underlying argument
was that these restrictions would potentially hinder promising start-up
companies and exclude them from the crowd-funding pool.[53]
Financial
implications
The proposed measures were included as part of the 2015-16
Budget. According to the Explanatory Memorandum, the measure has the following
financial impact on the Budget (see Table 1):[54]
Table 1: Financial impact
2015-16 |
2016-17 |
2017-18 |
2018-19 |
-$2.6m |
-$1.8m |
-$1.7m |
-$1.6m |
Source: Explanatory
Memorandum, Corporations Amendment (Crowd-sourced Funding)
Bill 2015, p. 4.
According to the Explanatory Memorandum, the compliance
costs associated with this Bill are $54.0 million for the CSF model, and a
further $0.6 million for the changes to the Australian Market Licence (AML)
regime. This has been fully offset from within the Treasury portfolio.[55]
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the
Bill’s compatibility with the human rights and freedoms recognised or declared
in the international instruments listed in section 3 of that Act. The
Government considers that the Bill is compatible.[56]
The Government identifies only one potential impact on
human rights, which arises from the provisions in the Bill that seek to protect
retail clients from advertisements that could induce them to make investment
decisions without having all the necessary information.[57] The Government considers that, to the extent that the Bill thereby restricts
the freedom of expression, this is justified because it is a reasonable,
necessary and proportionate consequence of protecting investors by ensuring
that they can access sufficient information about the CSF offer.[58]
Parliamentary Joint Committee on
Human Rights
The Parliamentary Joint Committee on Human Rights considers
that the Bill does not raise human rights concerns.[59]
Key issues
and provisions
The legislative and regulatory frameworks for crowdfunding in
Australia are quite new, while several other advanced countries have had a lead
time of several years in this area. While this means that Australia has some
catching up to do, it gives Australia the chance to cherry-pick the best
aspects of different plans and introduce additional modifications/features.
Item 14 of Schedule 1 to the Bill inserts a new Part 6D.3A into the Corporations Act to create a framework to
facilitate CSF in Australia. Very basically, without new Part 6D.3A,
companies seeking to raise funds by issuing securities would need to comply
with the more stringent information disclosure requirements set out at Part 6D.2
of the Corporations Act and the prohibitions, liabilities and remedies relating
to offers of securities, set out at Part 6D.3 of that Act.
The Bill includes provisions governing:
- the
eligibility of companies to crowd-fund (item 14 of Schedule 1, proposed
section 738H)
- the
role and eligibility of a CSF intermediary, defined at proposed section 738C (item 14 of Schedule 1) as a financial services licensee who is
authorised to provide a crowd funding service
- investor
protections (Division 6 of proposed Part 6D.3A of the Corporations
Act, at item 14 of Schedule 1 to the Bill ) and
- regulatory
obligations for issuers and intermediaries.
Eligible CSF company
One of the requirements that must be fulfilled before an offer
of securities may be made under proposed Part 6D.3A of the Corporations
Act (referred to as a ‘CSF offer’—proposed section 738B) is that the
company seeking to issue the securities is an ‘eligible CSF company’. ‘Eligible
CSF company’ is defined at proposed section 738H as a company that:
- is
an unlisted public company limited by shares
- has
its principal place of business and majority of directors in Australia
- satisfies
gross asset and turnover caps.
Proprietary companies cannot come within this definition,
as they are explicitly excluded from the definition of ‘public company’ at
section 9 of the Corporations Act.
CSF intermediary
Under the proposed CSF regime, all CSF offers must be made
through a ‘CSF intermediary’ (proposed section 738L). As a result,
CSF intermediaries occupy ‘a central role in the CSF regime’ and are required
to comply with a number of obligations, including a requirement to ensure that
a prominent risk warning appears on all CSF offer platforms (proposed
section 738ZA).[60]
A person or company wanting to act as a CSF intermediary must
acquire an appropriate Australian Financial Services Licence (AFSL) (proposed
section 738C).
Overview of features of the
proposed CSF regime
As explored in the ‘Background’ section of this Digest, the New
Zealand CSF law[61] has been cited as a justification and model for possible emulation in
Australia.[62] While the New Zealand law offers a readymade model, the CAMAC report proposed an
alternative framework for CSF in Australia. During consultations regarding the
Bill, concerns were raised that the New Zealand model would increase
flexibility but would not provide enough protections for investors, while the
CAMAC model would increase the overall complexity of crowdfunding.[63]
The current Bill amalgamates aspects of both the New Zealand
and CAMAC approaches. Unlike the New Zealand case, the Bill imposes a $10,000
limit on investment by individuals over a 12-month period (proposed section 738ZC).
However, unlike the CAMAC model (which placed the onus on issuing companies),
the Bill follows the New Zealand approach of mandating the licencing and
gatekeeper obligations for intermediaries, who would bear the bulk of the responsibility
for ensuring compliance with the relevant rules, as well as providing the
appropriate risk information to retail investors. Some asset‑testing
requirements for various exemptions and reduced disclosure requirements (for example, proposed subsection 738H(2)) also follow the New Zealand model.
Unlike both the New Zealand and CAMAC models (which impose
an annual cap of $2 million per year), the current model will allow up to $5
million per year to be raised through CSF (proposed section 738G). While businesses wishing to access CSF must be public
companies, transitioning to a public company structure and complying with the
corporate governance and reporting obligations can be onerous. As such, the
Bill provides a holiday of up to five years from these key requirements (proposed
section 738ZI at item 14 of Schedule 1, and Schedule 2 of the Bill).
Conclusion
The Bill can be reasonably expected to meet its intended
goals. However, there are other, broader issues and problems that may be
regarded as inadequately dealt with:
1. The limited information that is available from other countries indicates
that equity crowd-funding has been successful, if measured in terms of the
total amounts raised. In fact, most of the published information focusses
only on how many fund raising campaigns take place, the money actually raised
per year through this, and the growth in this. The absence of alternative data,
for example on successful outcomes, prevents a more thorough analysis.
However, the available
information does not indicate what the success rate is: that is, how many
companies would like to raise funds and how many are actually achieving their
fund-raising goals, and how beneficial these ventures are for their investors.
Related to this, it is difficult to ascertain what other constraints may exist
for other firms.
2. In addition to the performance in raising money, there is also the issue
of the sustained operational success of the firm. Unlike the former, this would
require effective management, marketing, and governance capabilities, which are
quite independent of the initial need for funds.
It is also too early to
determine the overall, long-term success or profitability of firms, how many of
these would actually survive over a five year period, or how effectively the
interests of individual investors can be safeguarded against fraud or poor
governance. This in turn would make it difficult to determine the average rate
of return for investors or how this would compare with the returns from
traditional stock-market indices like ASX, FTSE or the Dow. Another unresolved
issue appears to be the level of representation or feedback that individual investors
can expect from the companies that they invest in.
A more significant problem
appears to be the role played by crowdsourcing intermediaries. As illustrated
by a UK example[64] of a company purporting to manufacture palm-sized
drones, this can lead to problems when crowdfunding platforms fail to do
proper due diligence on the companies seeking to raise funds, or inadvertently
give an impression to retail investors that they are involved in the development
of the project/product itself. In this case, the company raised 20 times the
amount that was initially targeted, but failed to manufacture the advertised
product. It eventually went into voluntary liquidation, and investors effectively
lost their entire investment.[65]
The Bill seeks to impose certain
obligations and restrictions on intermediaries. This would seem appropriate,
since in more traditional areas like bank lending or stock markets, the banks
and stock exchanges would be expected to conduct due diligence and act with an
appropriate duty of care towards those whose funds they administer.
3. Finally, as alluded to by Australian Private Equity and Venture Capital
Association Limited (AVCAL) in its submission to the Financial Services Inquiry, [66] the funds raised by CSF are likely to be limited to small amounts only. This is
consistent with the pattern observed internationally. What this effectively
means is that the funds raised through CSF are only a small part of what would
otherwise be needed over the longer term for the growth of firms. In other
words, it would help them ‘get off the ground but not fly’. It is to be
expected that the small firms or start-ups would use these funds to get to a
point where they could approach venture capital firms, stock markets or banks
for more substantial equity or debt-based funding. The position of CSF as
simply a step in a larger process is something that must be borne in mind when
contemplating the likely effects of the Bill.
While Australia, like many other countries, will have a high
failure rate for start-ups, it is not possible to say which of these failed due
to lack of financing (even though they deserved financing) and which failed due
to poor management and operations. It is also likely, as seen in the UK example
mentioned above, that firms may fail despite getting impressive levels of
funding through crowdsourcing.
So while the Bill would address some of the information
asymmetry problems that preclude the more established sources of finance, it will
not be addressing these broader and longer-term problems associated with
start-up ventures, including the financial constraints they face.
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