The Government’s Response (Response) to the Financial System Inquiry was announced on 20 October 2015.
The Response demonstrates a strong commitment to crowdfunding legislation.
A legislative framework for crowd-sourced equity funding has been promised by the end of 2015.
The Government has also indicated that regulations will also be extended to crowd-sourced debt financing.
Introduction The Financial System Inquiry Final Report, also referred to as the Murray Report, was released on 7 December 2014 (the Report). Efficiency, resilience and fairness were among the key underlying themes of the report. Of its 44 recommendations was the need to graduate fundraising regulations to facilitate crowdfunding for both debt and equity and, over time, other forms of financing. The Response to the Murray Report was announced on 20 October 2015 by Treasurer, Scott Morrison, and Minister for Small Business and Assistant Treasurer, Kelly O’Dwyer. The Response backed an “overwhelming majority” of the recommendations in the Murray Report including the need to facilitate a crowd sourced equity fundraising (CSEF) market in Australia. As we predicted, the change in leadership to the Turnbull government has resulted in further proposed changes to the CSEF proposed legislative regime, interestingly (and as discussed below), the Response has also indicated a commitment to peer-to-peer lending. It is still not clear however whether the Turnbull government intends to extend the proposed CSEF legislative regime to proprietary companies. What is crowdfunding? By now you should have heard about crowdfunding. It is a rapidly growing form of alternative financing. In a nutshell, crowdfunding facilitates the funding of projects or businesses through raising funds from the ‘crowd’ via an online intermediary. Crowdfunding models include:
securities-based crowdfunding, which involves the crowd investing in the issuer in exchange for either equity or debt securities; and
peer-to-peer lending (P2P) which involves an online intermediary facilitating lending between individuals, often in the form of unsecured personal loans.
The issue in Australia is that currently regulatory settings impede both CSEF and P2P lending. For example the Corporations Act 2001 (Cth) restricts companies from obtaining crowd-sourced investments. What will change? The Response demonstrates a strong commitment to CSEF, stating: “The development of a crowd sourced equity funding market in Australia is an urgent priority for the Government to support the funding needs of early stage innovators”. This is not surprising given that the Government announced a commitment to introducing a legislative framework for CSEF in its consultation paper “Facilitating Crowd-Sourced Equity Funding and Reducing Compliance Costs for Small Business”. However, this was only in relation to public companies. Unfortunately whether the legislative framework will apply exclusively to public companies or also apply to private companies was not made clear in the Response. As we have previously indicated, we are of the view that if Australia wishes to remain competitive and stimulate economic growth in the changing global business landscape, it needs to commit to more progressive means of funding for businesses through allowing CSEF for both public and proprietary companies. Further to this, and according to the Response, the Government will consult the community on crowd-sourced debt financing in parallel with legislation to implement CSEF. This marks a key divergence from the Government’s past position on crowdfunding, which was focused primarily on CSEF. The Government’s changed stance on crowd-sourced debt financing reflects current worldwide trends in crowdfunding. As per the diagram below, the lending model accounts for approximately 68 per cent of all crowdfunding:
What else is new? The Response also highlighted three other key areas for focus:
Technology neutrality will be adopted into development processes for future regulation. Essentially the Government intends to draft all legislation to focus on end-goals, rather than around the specific technologies used to achieve those goals. Given the important role of technology for crowdfunding, it is vital that this principle be embedded in any crowdfunding legislation. We need to avoid technology-specific legislation as this may impede innovation in the area.
An Innovation Collaboration Committee (the Committee) will be established. The Committee will work to give “innovation champions” a way of engaging with governments and a direct voice in policy development.
Increased access to Government data for entrepreneurs. This will allow entrepreneurs to identify new opportunities, develop innovative products and (hopefully) lower costs.
How does this benefit Australian businesses and investors? The Response signifies the most important overhaul of the financial system in two decades and we are excited to see that crowdfunding has been brought into the spotlight. Innovators and small businesses will be happy to hear that the Government is taking their interests into consideration. According to Christopher Pyne, the Minister for Industry, Innovation and Science “driving innovation across the country is a top priority of the Turnbull Government, with crowd-sourced equity funding a vital part of any proposed policy changes.” For these groups, legislation promoting crowdfunding will hopefully mean easier access to capital which in turn can mean increased opportunities for growth. Greater access to capital will assist start-up companies in those crucial early stages of business development. Moreover, small business owners looking to expand also stand to benefit from the facilitation of alternative sources of funds. Further to this, a legislative framework for CSEF will hopefully mean that appropriate protections are put into place to safeguard investor’s interests. Crowdfunding can be perceived as a risky investment given that most businesses using it as a method of financing are small start-ups still finding their feet. The legislation must promote innovation but also offer protection to those looking to invest. Importantly, we hope that Australia is brought up to speed in terms of innovation with other parts of the world where crowdfunding has taken off once the legislation is rolled out. What next? The Government has already consulted widely on the legislative options available to implement CSEF in Australia. The Response does not detail how the Government plans to regulate crowdfunding, but it is likely that the draft legislation will reflect the spirit of these earlier consultations, counterbalancing the relaxing of current regulatory requirements with measures to protect investors from the risks associated with crowdfunding. We should expect to see the draft legislation framework by the end of 2015. The Government will also soon commence consultations from the public on facilitating crowd-sourced debt funding. This will point to how the Government plans to legislate in this area. If you are interested in future developments in this area please contact Elizabeth Moran and ask to be added to our crowdfunding distribution list.  http://fsi.gov.au/publications/final-report/chapter-3/crowdfunding/  For a full copy of the consultation paper see http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2015/Crowd-sourced%20equity%20funding/Key%20Documents/PDF/Crowd-sourced-equity-funding.ashx  https://delimiter.com.au/2014/01/24/technology-neutral-policy-can-dangerous-fallacy/  http://www.minister.industry.gov.au/ministers/pyne-roy/media-releases/crowd-sourced-equity-funding-vital-innovation