I spent a lot of space in my last post essentially justifying my excitement at the release of a Discussion Paper on a potential regulatory framework for crowd-sourced equity funding (CSEF) in Australia, in the name of giving it a context. So much so that I didn’t actually get into the content of it at all. For some people, that is actually not an impediment to enthusiastic support or advocacy of a policy – for some, it’s a distinct advantage – but as one who gets all soapbox-y at lazy policy development, I feel I should at least make a token effort.
For those who’ve been asleep since the last post, I’ll let the relevant Minsters – Senator the Hon. Mathias Cormann, Minister for Finance, and The Hon. Bruce Billson, Minister for Small Business – bring you up to speed from the paper’s forward:
“Crowd-sourced equity funding (CSEF) is an emerging form of funding that allows entrepreneurs to raise funds online from a large number of small investors. Along with other innovative finance options, including peer-to-peer lending, angel investing and venture capital, CSEF has the potential to increase small businesses and start-ups’ access to funds to develop and implement their ideas and products. However, current regulatory requirements present a barrier to the widespread use of CSEF in Australia.”
It was actually the previous Government that referred CSEF to the Corporations and Markets Advisory Committee (CAMAC), less than two months before it was scheduled to go to the polls*. CAMAC, which exists to provide a source of independent advice to the Australian Government on issues that arise in corporations and financial markets law and practice, provided a detailed report in May 2014 that, in its own words “sets out a detailed regulatory blueprint for the stimulation of the innovative start-up and other small-scale enterprise sector of the Australian economy through internet-based funding.”**
The CAMAC report encompasses not only the multifaceted aspects to introducing any new financial class of products, but also drawing on the experience of those overseas jurisdictions that have already charted a path across at some if not always all of this territory. In this, it provides a solid foundation for the debate to come, regardless of whether one agrees with their conclusions, a significant achievement in itself in today’s policy environment. Which, given one of my heroes, Teresa Handicott, was on the sub-committee, should not come as a surprise.
CAMAC’s model is one of three options set out in the Discussion Paper for stakeholder consideration. In setting out the options – effectively two, as one is maintaining the status quo which the paper implicitly concedes would not be its preference given the multiplicity of barriers – Treasury is explicit in noting that the Government is not limiting itself to implementing either models in full, having chosen them for consultation as they “represent a spectrum of approaches to CSEF.”
The paper does a good job not only of outlining all three models but, somewhat refreshingly for a Discussion Paper, in comparing the primary features of options 1 and 2 as they apply to those wishing to access, deal with or invest in CSEF. The options presented are:
- option 1: a regulatory framework based on the CAMAC model – amongst its features is a requirement that the entity seeking to CSEF to raise funding use a public company structure whether that sort of structure fits any of its other plans and preferences (albeit with some work-arounds to make that structure more attractive), a restriction on use of CSEF that limits it to only ‘small enterprises’, and caps on investors including a $10,000 per investor per 12-month period in total CSEF investment;
- option 2: a regulatory framework based on the New Zealand model, which makes CSEF available to any form or size of company incorporated in the jurisdiction, and has caps on investors that are only voluntary; and
- option 3: the status quo, which the paper itself admits has ” barriers… not easily able to be addressed by potential CSEF participants”.
Interestingly, the paper is explicit that the status quo model is being included as a baseline for comparison, as is required to comply with policy and legislation development processes. Which, to me at least, sounds like they have definitely decided to do something, and possibly something somewhere between the first two options rather than wholesale adoption of one or the other.
In what may be seen by some policy specialists as a bit of a cheeky move, the paper does not attempt to model the potential uptake under each model, or the likely costs. Instead, both these issues are raised as consultation questions which, if nothing else, would seem to suggest a high priority on keeping this process moving – one can only imagine how disappointed some of the internal economists and analysts are at losing an opportunity to run their scenarios over such a wide range of variables.
That said, analysing the responses to this questions should prove a very interesting exercise in identifying the priorities and driving values of those supplying them and in turn, their commitment to and true interests in progressing what may prove a vital solution to a long-bemoaned failing of Australia’s innovation system.
Some will no doubt be disappointed that models deliberately limit themselves to equity based funding. Which might sound like a stupid observation, given its title specifies “crowd-sourced equity funding.” However many jurisdictions, including the United States of America and United Kingdom, are using a combination of both debt and equity to address concerns regarding issues of security in cyberspace and in monetary transactions.
The Discussion Paper addresses this with the classic “softly, softly” response. It notes that there may be an opportunity to consider whether to extend whatever model they choose for CSEF to debt crowdfunding. Which, again perhaps only to me, gives another strong indication of both the likelihood that some model of CSEF will be implemented and that whatever it is, it will be implemented sooner rather than later. Creating a model that address debt as well as equity raises the complexity of what is, given the existing barriers to be overcome, quite sufficiently complex to a country as fiscally conservative as Australia. And complexity takes time, time that it would seem is better spent building a series of wins instead of waiting for a “perfect” model.
What’s also interesting is how this issue is addressed in the Discussion Paper. One might have expected it to have been specifically excluded, end of story. However there are specific consultation questions that actively explore this potential extension of the model as well as probing some of the assumptions made in other jurisdictions regarding hybrid products.
Again this might seem a bit cheeky, especially given the breadth of the questions – for example, to what extent would the frameworks for equity proposed in this discussion paper be consistent with debt products? Knowing both the financial and consulting sector, there’s years worth of papers and fora on this question alone.
But actually there is an argument to be made (and one I freely admit I like) for this sort of policy development – it’s almost the crowdsourced or lean approach to policy development. To my mind, it not only enhances the dynamism of the process but also minimises the risk of the assumptions of the department with respect to these most uncertain elements permeating the document and unconsciously limiting what is a new and evolving concept.
Not unlike the quandary faced by the businesses the discussion paper is trying to assist, there isn’t a track record of performance or lack thereof on which to base a CSEF model, and the costs of investigating its merits through consultants would be prohibitive, both in terms of public money and time. But the one thing that policy development always seems to have an abundance of, if not public money, is generally time. My conclusion? Fasten your seatbelts, all faithful-but-measured Treasury Public Servants; it’s going to be a bumpy ride….
*sounds odd, I know, but remember that the then Prime Minister announced in January 2013 that her government would be dissolved in August for an election in September. By which time she was no longer Prime Minister. As CAMAC is an independent source of advice, this information is only provided to indicate that, at least in principle, this is an issue that would seem to have bipartisan support. As much as anything conceived in 2013 can have.
More information on the consultation process, which closed on 6 February 2015, including a pdf download of the Discussion Paper is available from the Treasury website