Expanding the Funding Pool for Innovation – CSEF is Not Just for Start-ups

NB This post is an expanded version of that which was posted at LinkedIn today. Apologies to those who didn’t want to double-dip, however for better or worse I try to limit my personal opinions on the merits of policy content to this blog.

There’s just one week left in the second consultation process on the introduction of a legislative framework to facilitate crowd-sourced equity funding (CSEF) and, regardless of what you may think about the proposed model, you have to admire the earnest efficiency with which the Government continues to progress this issue.

Of course, not everyone is happy with progress. Several senior figures within the start-up community bemoaned the release of another Discussion Paper in conversations with the Australian Financial Review when the latest paper was released.  One expressed surprise that Treasury would need to still explore how to resolve a specific barrier created from years of the Corporations Law, given as “they’ve had so long.” Bless. 

Granted, Tim Heasley makes his living in an industry that has adrenaline for breakfast and where, if you’re not quick, you truly may well be dead at least professionally, but that still seems a little harsh.  Particularly when the original Discussion Paper, released last December, foreshadowed, “further targeted consultation… to clarify any issues or questions which arise from the initial consultation period”.

In the more sedate world of policy development, the 14 months that have elapsed between the Corporations and Markets Advisory Committee (CAMAC) delivering its CSEF advisory report and this second round of consultation opening is bordering on break-neck speed*. Consultation on the December paper closed in the first week of February and, despite a small-business-heavy focus in the Budget released on 12 May, the current paper was ready and released on 4 August. With the first outline of the key elements of the Government’s CSEF framework for public companies. And a promise of consultation on draft legislation later in the year. And an explicit expectation that said legislation can be introduced to Parliament in the Spring sittings. And yes, they specified the 2015 Spring sittings.

Personally, I fully expect there are some Treasury staff feeling like The Loony Tunes‘ Taz has been running their office.  Come to think of it, there is something of Taz the Tasmanian Devil about the Hon. Bruce Billson, Minister for Small Business and unofficial champion of this issue. And not just the smile.

Usually small businesses are too busy staying in business to make a significant impact on the policy process through professional associations or lobbying organisations, so they tend to try and work within and around laws and regulations as passed, rather than shape them as they’re written.  But this Minister is a little driven, and in a good way for anyone who is keen to see the funding pool for innovation and innovators not just increase in size but in resilience.

In a recent interview with the Australian Financial Review, the Minister revealed his fellow feeling with those of us trying, and sometimes failing, to make a living from our ideas:

“To this day, I know when I pay our mortgage each month, probably only half of it relates to our housing and the other half is the legacy of our business…Our mortgage would be substantially smaller had we not put a lot of savings [into the business] and extended our mortgage as a way of funding our business. [But] we were dealing with big businesses offering us contracts with take-it-or-leave-it terms, and the banks wanted our house if we wanted any money.”

Which raises an important point. Given I’m frequently found to be found banging on about commerce being more than commercialisation and that the solution to our relatively low return on investment in innovation as a nation is not just about start-ups, some of you may be wondering why I’m also banging on about CSEF. Simple: CSEF is not just about commercialisation, or start-ups.

For both your and my sake, I’m not going to rehash my context post from the launch of the first CSEF paper**.  I am, however, going to repeat two observations made by the Organisation for Economic Co-operation and Development in its Science, Technology and Industry Outlook 2014:

Untapped private wealth is an abundant and growing source of funding for innovation globally.

This alternative funding mechanism has far-reaching potential, for instance to accelerate technology transfer from universities

Don’t see it? Consider this, particularly if you are a university with a commercialisation vehicle or alumni giving program: what if you could ask for less from more people, or even more radically, what if you could also offer them something in return other than a mention in an annual report or a warm fuzzy feeling?

So What’s It Look Like?

The model set out in this new Discussion Paper is closer to that put forward by CAMAC than that implemented in New Zealand, which will please some and annoy others.  The key element, if you ask the accompanying media release, is a proposal to extend CSEF to proprietary companies, a company structure that was specifically precluded from CSEF under the CAMAC model outlined in Paper 1, but one that is frequently used in small business wanting the advantages of incorporation but without the paperwork and compliance requirements that come with a public company structure (public companies are usually large enough that these requirements are already duplicated in someone’s existing job responsibilities).

Reading between the lines of the Discussion Paper and media reports since the first consultation period closed in February, the response was overwhelmingly in favour of the regime extending to both forms of companies which, together, represent the vast majority of companies incorporated in Australia. One can see why – after all, it’s called crowd-sourced funding for a reason.  Excluding the structure most commonly used by small and micro businesses would seem to defeat the overall objective of the legislation, although I freely admit including them presents some reconciliation issues within the Corporations Act. One can almost envision the Treasury staffers, particularly the lawyers: “Seriously? You really want that? So how are you going to make it work without re-writing large chunks of the Corporations Act? You’re not suggesting we rewrite…AAUUUGGGHHHH” Or maybe that’s just me.

Each piece of legislation exists for a reason – often very many reasons – but none of the reasons for the Corporations Act are to preclude small corporations from accessing the funding they need to become big ones. Let’s be clear – I’m not underestimating the challenge inherent in enabling a structure whose very creation is defined by reference to the limited number of investors it can have and NOT raising funds from the public, to now participate in this new scheme to do both of those things, nor am I ignoring the fact that many of the benefits that this structure bestows are given specifically because they are limited by size and ability to raise funds. I will always be, at heart, a lawyer first and foremost, but I am/was a commercial lawyer: the law is supposed to serve and protect society’s interests, not dictate them.

The other somewhat contentious issue, at least to my eyes, is the cap on investors. The current model sets an investment cap for retail investors in two parts, both over a 12-month period: AU$10,000 per offer, and $25,000 in total CSEF investments. The cap is to be self-certified by investors, with intermediaries responsible for monitoring compliance made on their CSEF platform. I’m not a fan of caps – as one start-up founder remarked to the Australian Financial Review when the paper was released,

At the end of the day I could remortgage my house and go to the casino tonight and no one would stop me doing that.

While my heart may be with Oscar de Vries, my head was hoping for an approach closer to the Productivity Commission’s recommendation, given the Government had made clear in the first Discussion Paper one of the core factors to be balanced in developing a model was “maintaining an appropriate level of investor protection and confidence in CSEF.” The Commission’s proposal, made in May in its draft Business Set-up Transfer and Closure report, involves two classes of investor, membership of which turns on whether they amount to investors who would be considered ‘sophisticated’ and ‘professional’ under the Corporations Act. Those that don’t would be subject to an investment cap; those that do, won’t. To my mind, this is an eminently sensible solution that is not only simple but achieves the desired policy objectives regarding investor protection and confidence. It has the added advantage of being consistent with the broad approach to investment and personal responsibility that is implicit in the ideas of democracy and a market economy, but now I’m starting to sound like Jeremy Clarkson.

Need a final reason for the innovation industry to take an interest in the development and consultation of Australia’s CSEF regime? At an event held at the same time as the launch of this Discussion Paper, Minister Billson indicated the parameters of his portfolio weren’t necessarily cast in stone:

“I think I’m going to get a tasking from the PM to fix innovation… I’ve been running the argument that all the moving parts are all over the shop and they’re siloed… Agility in the economy needs to be handled in a way that’s not quite as buttoned down.”


PS don’t let the number of consultation questions, or the fact quite a lot of them don’t relate directly to crowd-sourcing, put you off.  It isn’t an exam – you don’t have to answer all the questions if you don’t want to, in fact you can answer none of them and still make a perfectly valid and useful submission. The only submission that won’t count is the one you don’t make.


*If you’re interested an overview of the first consultation document/process which effectively put three models including that developed by CAMAC at the Government’s request (not this Government, the last Government… never mind) – without having to read the documents, my post So What Will This Crowd-Sourced Equity Thing Look Like? is still on-line.

**Fine, yes the first draft did rehash parts of that post, but the important thing is that I eventually restrained myself. You’re welcome.

Information on the consultation process, including a downloadable form of the current discussion paper, is available online, where you’ll also find the December 2014 Discussion Paper. Submissions close on 31 August 2015.

The Organisation for Economic Co-operation and Development is a forum of 34 countries representing all of the developed as well as the leading emerging economies of the world. Their publications can be found online through their iLibrary.

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