201509.11

Transcript- Crowdfunding Australia Summit

E&OE………………………………………………

Subjects: Crowd source equity funding; importance of enterprise; ageing population.

MINISTER BILLSON:

Thank you Lee for that introduction and thank you Simon for all of your efforts in collaborating with Deakin today.

It is a special day and it is a really important time in this journey of crowd source equity funding and I would like to brief you on where we are at but also invite you to stay very much engaged in the next stages.

We are accelerating and I have managed to upset the Parliamentary Council that drafts legislation, so we are not on great terms at the moment because there was not quite agreement on what the priorities should be for the spring session of Parliament. I think we have prevailed there but let’s watch this space.

To Deb, thank you and congratulations, maximum respect for your entrepreneurial spirit as well. I keep saying that enterprise is not just in the private sector. Your enterprise in your field of endeavour is very much valued and we congratulate you – It is almost a Sonny and Cher that you have done here.

I am just really the warm up act for Dan. Dan is really the Bon Jovi of today, I am the unknown Nebraskan country and western singer that warms up for Dan.

It is a great partnership and to Pozible as well. I also want to particularly thank Matthew Pinter and Chris Gilbert. Matthew and Chris have been incredibly invaluable in this journey. Again they have traumatized many of the Treasury officials. My job is to give them a hug and put them back together again; and the Tax Office, we have sought to make sure we have the backend right as well.

Getting some of those valuation rules and the like that has been very useful for even our employee share scheme work as well. I want to really thank you for that, it has been a really treat to have your insights as a part of that.

There is a simple driver for me. I get out of bed every day I do represent that great southern hemisphere capital you probably know of, not Santiago or Buenos Ayres but Frankston, it is the Riviera of Melbourne if you are wondering.

My task is basically to create the right entrepreneurial ecosystem for enterprising men and women so we are the best country and the best economy to start and grow a business. Now we are not there yet but we are making some great gains. Perhaps later when its question time someone can ask me a Dorothy Dixer about that, but I won’t go through all that detail. But that is broadly the frame that I bring.

There is a simple reason for that. We really need to get better at this. There is a risk that we are the first generation to let down the great promise of our country; that our next generation has it better than we have had it.

At the moment, just for the economists amongst us, generally year on year we have seen national revenue grow at about 2.3% and that has been really crucial for lifting living standards and quality of life. But there are a few things happening now, the mining boom is coming off.

Just to give you a number, 18 months’ time, compared to the peak of cap ex, on mining construction it is $40 billion different. Even the price of commodities like iron ore, for every $10 that comes off, that is about $10 billion of lost revenue to the Commonwealth over the forward estimates.

That is a real shifting feast. It is an industry not unlike others around the world; where it shone so brightly. I fear it has shone so brightly we have missed seeing what else has been going on in the economy and what has and has not been going on around it.

I see this as a really important time for a renaissance in enterprise. Commodity price gains and natures blessings of what is in our soil and around our coast is not going to be enough. So we have all got to step up. So if that change in the economy that shift from mining to non-mining sector investment and growth.

There is something else going on too. In the 70’s when I was a very young lad there were seven people for every one retiree. Today it is about five. By the middle of this century, when Matthew is about my age, it will be 2.7 people in the economy for every retiree by the middle of this century.

Now what does that mean?  A changing economy, a changing demography, greater contestability in the international economy as well as ours. We are going to need to make the economy hum; we are going need to find new ways to generate wealth and opportunity to drive prosperity and to re-nourish the promise of your country, that the next generation will have it better than we have had it and we will build the foundations for that very purpose.

That is where this whole entrepreneurial renaissance needs to sit in.

The research says there are lots of Australians with great entrepreneurial ideas and we are right up there. But actually operationalizing them, we are not so flash at that.

One of the real choke points is access to finance. Finance is the oxygen of enterprise, you starve it off, you then compromise your opportunity and capacity to achieve the economic benefits and goals you set for yourself.

That is where this comes in. The GFC (Global Financial Crisis) has done lots of things that consolidated the banking sector around the big banks and there is a very strong conservative bias in their judgments. They are not that interested in something that is fresh and brand new. They want a couple of years of BAS (Business Activity Statement) returns (for our visitors that is the tax reporting tool we use); they want your home and your first born.

I know that, my wife and I shut our business; we shut that ten years ago. But each month when I pay my mortgage I know half of that is for my housing and the other half was for my enterprise. I am reminded of my journey every month.

In this picture we see some things changing: peer to peer lending, very exciting and a new avenue for finance.

Fin tech revolution. The whole fin tech thing is a very exciting thing. The idea that a deep dive algorithm can have a look at your banking transactions and can work out what you are good for. Looking at other ways that the dating service of people with funds to invest and someone looking. This is a very exciting time.

In the crowd source space we have seen the rewards based infrastructure work quite well.

Have a university enterprise newsletter produced weekly and Lee and I go into the market place inspired by Deb, cracking the whip. We might get early pledges and the prize the reward is two years free subscription. Well that is ok; it is an alive market place and a very vibrant platform of achieving that.

Take an equity stake and you run into rules. You run into corporations’ laws, you run into ASIC being interested in what you are doing. You go into a whole new world. Where it is not a prize it is a stake in the business. That is where the crowd sourced equity funding framework is so important.

About a year ago we said we have got to get this right. Other jurisdictions have done so.

We have learnt from what has been happening in New Zealand, we have seen what the UK has been doing. There is also work going on in Singapore, in Malaysia, in the Provence of Ontario. We can pull those ideas together and we have sought to do that with the discussion paper I released back in early August.

In that discussion paper we were coming off the back of CAMAC (Corporations and Market Advisory Committee). They did some earlier work and came up with a really nanny kind of model. Frankly in my travels have not met anybody who liked it.

That was a clear starting point, but what was put on the table really was not going to work.  It was a 2,500 cap on investors.

The idea that you would have to create a new entity, just to play in this event, if I could put it that way, in the machination of an enterprise. It did not make a whole lot of sense and the transaction costs looked like they would spectacularly high for the sums of money that were being involved.

We embarked on a fairly extensive consultative process. That discussion paper captured what we are on about. We put $7.8 million in the budget to give ASIC the money over the next four years to implement and monitor the regime. We reiterated that this is a real priority for us.

I have got some gripping speech notes here and for the team from Treasury I would like to thank you for all for that work and I will use them. But if anyone asks you I am notorious for being a free ranged hen.

In that consultation paper the parameters we have put out there that we are now tasking the office of parliamentary council to turn into legislation, essentially has some key elements to it that I would like to share with you.

The raise up to $5 million for a 12 month period, exclusive of funds that you might be able to attract from wholesale investors. We were told don’t put a disincentive for someone to put a major stake in – that was one of your points Simon, if I remember correctly from the submissions. Don’t put a disincentive in place for someone who wants to come in a put a serious lick of cash into the business.

Business will have a reduced disclosure requirement. They won’t need to go through the full IPO process, because that was essentially where one of the concerns were. But there still is a need for disclosure documents, but we wanted to make that an agile less onerous process so that there will be mandated discourses tailored to ensure investors have access to key facts; the key facts about the company, its structure, the fundraising itself and who is involved.

And we know in the venture world it is often less about the specifics of the enterprise ambition and more about the entrepreneurs involved, because their track record counts for something and these are the key areas.

The intermediaries, the platforms will need to be licensed and they will have to do some important background checks on it, the business and the individuals involved as well as providing a risk warning to investors.

One of the beautiful things about crowd source equity funding is you are tapping into a new concept of value. If Lee and I are absolutely pumped about trying to put in a better, let us call it a dating service, between universities, researchers and entrepreneurs- we might be inspired by that and the value for us is bringing about change and nurturing a broader alumni. We might see that as the value proposition.

That is a different concept than if you are looking for your share portfolio and it may well bring in different investors who are not quite as skilled and experienced in evaluating investment propositions.

Many of them might not realise this is largely in the liquid investment. You might have to find someone within the offering to lay off your share or your prospects of success might be a little bit less than the Richmond tigers winning the flag this year.

These are reality checks that we need to put out there and that is an important part of what we see the intermediaries doing.

We have heard, and again, may I thank Matthew and Chris and others about not restricting the fee structure that the intermediaries could put in place so that, as long as it is disclosed, and people know what the go is. There the issue was, is the platform looking like a spruiker for one particular offer over another. We wanted to get that right, but CAMAC wanted to really limit the fee options and if it was just cash: Isn’t cash the reason why we are going into the market, might not be the most reasonable and mutually beneficial way of remunerating the intermediaries.

The investment caps will remain for retail investors but they will be much higher than what CAMAC proposed. We are proposing $10,000 per company per 12 month period and an aggregate of investment over 12 months of $25,000.

We are not trying to get too heavy on that, but again we do not want to see this fail. We do not want to see the whole infrastructure and the idea of crowd source equity funding getting a bad rap because some people thought this was the fastest way to financial nirvana and a set-back.

You have seen what has happened in other segments of the investment community where people’s ambitions are not met. There is a real possie sent out to go after the regulators and to blame somebody and to really try to clamp down on those decisions. I think that is pretty reasonable.

I will raise the point that others will no doubt raise. Yes you can go down to the racecourse and invest ten grand on a piece of moving equine. Yes I understand that and that is often put to me as the comparison. Why have these caps when people can blow their money in so many other ways?

We do not want them to blow their money and this is a serious avenue for finance for start-ups and growth businesses. And we want to get it right, and let us get it succeeding and get some winds and build confidence and competence and then if we have found that I have been too circumspect, tell me about it.

The consultation has gone both ways. Right from people channelling John McEnroe after a bad line call. Ten grand you cannot be serious Minister? I go ‘well I am’ and then I find after that statement is made they are arguing both ways.

They are arguing it should be higher and a number of submissions have argued it should be lower. So I reckon I am about right and tried to navigate that through the political process and some of the investment disappointments that have attracted much media attention.

I cannot be too ambitious, it just will not get through the Parliament. So I think this, I can sell and we will work hard at doing so.

These higher caps will better accommodate some of the typical CSEF investments we have seen in New Zealand and the United Kingdom. So we have had a bit of a look at what they are doing there and also try and manage the risk that investors commit in case their life savings are thrown into one of these proposals. A bit of diversification does not hurt either and that is part of the thinking behind where we have settled that.

As that becomes more sustainable and that framework is proven to be fit for purpose, let us have a look at it down the track but we think that is a good place to start.

Finally, it is my melancholy duty to announce to you today I cannot get the proprietary stuff done before Christmas. Now, for those that are not fully invested in this, the public stuff that is not that complicated because there is disclosure governance, information to the market and investor AGM infrastructure – all of that machinery is there, we are just dialling it back a bit, right sizing it. We can hit the road with that.

On proprietary limited companies, that is a whole new world. There, essentially, you have got to make sure your business partners do not think you are a crook, keep the tax office happy then to whoever has kicked in cash, make sure they are in the loop. To then go out into the market. We are just trying to look at what is needed to be done there and we have had quite a range of views about that.

No consensus emerging so there is really not the solid ground on which I could push that through before the end of this year. We will keep working on it and I invite you to stay engaged in that process, because I think it is an important part, but remembering that proprietary companies are very much in house.

We have got ASIC rules about 50 non-employee investors. I would like to see that cap lifted, and if we could push that up, even to 100, most of the concerns could be overcome. But I have got to convince the regulators – and I will be honest with you, the regulators are a little bit reluctant. More keen on this than they are.

That is a tough road and that is a new area of calibrating those risk parameters and the disclosure and the decision making governance arrangements, but we will keep working at that because it is an important next stage – but it will be a next stage. I am just going to have to do the public stuff before Christmas.

Finally, just on the feedback more generally, we have had some saying I am being too restrictive and others saying I am not being restrictive enough. The consultation has been interesting and it has flushed out quite a diverse range of views. Some on the general framework, but some on very specific aspects.

We will get the legislation drafted. I will put it out to you all. Do not hold back. I am from Frankston I can cope. Give us your frank and fearless feedback and we can get on with making sure that crowd source equity funding is another tool.

Not displacing others – but another tool – that enhances the range of funding avenues available to enterprising men and women of our country. Why? We need to energise enterprise.

There is no one single step we can do that. There is many. This is an important one and I am grateful for a few minutes of your time this morning.

[ends]