Illustration: John Shakespeare.
Illustration: John Shakespeare.


The Corporations and Markets Advisory Committee has been
working quietly and inexpensively for a quarter of a century,
investigating gaps in Australia's corporate and financial markets law
for the Commonwealth government, and recommending ways to close them.



It's one of the agencies that the government is eliminating
as part of its spending crackdown. Its final report, on ways for
Australia to simultaneously regulate and promote internet crowdfunding,
shows why it should have been spared.



The report is not just a blueprint for crowdfunding here, but
a new reference point for regulators around the world. The odds on
Treasury producing similar reports on the same budget when it takes over
CAMAC's job are not good.



Crowdfunding is raising money online, basically. It is used
in non-profit campaigns but, as far as the markets are concerned, its
real potential is as a new way to raise equity investments in corporate
start-ups, through intermediary companies that run crowdfunding
platforms. It is an important extension of the venture capital market
because it is using the most ubiquitous distribution platform in the
world - the internet.




It is still early days. Only about $US231 million of
crowdfunded equity was raised in the United States and the United
Kingdom last year, for example.



In Australia, crowd-sourced equity funding has barely begun,
because the law suppresses it. Crowdfunders can only sell shares to
wholesale investors, and there are only about 200,000 of them. Retail
investors are legally excluded.



CAMAC's report recommends a new regime that it believes will
both protect retail investors and encourage the development of this new
source of risk capital, for companies generally, and for young companies
in particular.



The report was commissioned by the Labor government before
its election defeat last year, but the new government is said to be
taking a keen interest in it, even as it rests the axe on CAMAC's neck.



It knows that the internet is creating a global
venture-capital raising opportunity, and that many countries are moving
to grasp it. Countries including the United Kingdom, New Zealand and
Italy have already created crowdfunding regimes, the United States is
close to doing so, and Canada is closer to doing it than Australia. The
longer Australia waits, the greater the risk that the next good idea in
Australia will be crowdfunded and developed elsewhere.



CAMAC's report compares steps other countries have taken to
encourage crowdfunding. It is the first report anywhere that has done
so, and will be read beyond these shores as a result.



It considers four options for regulating crowd-sourced equity
funding. Adjusting the capital-raising rules governing private
companies, limits on the type of investor crowdfunders can approach,
changes to the rules that govern public company fund-raising, and the
introduction of a new regulatory regime specifically designed for
crowdfunding.



It recommends option 4, a new, custom-made regime: the United
States and New Zealand have opted for the same solution, and Canada is
likely to.



Companies wishing to use crowdfunding to raise equity here
would adopt the status of ''exempt public company''. They could raise up
to $2 million a year through crowdfunding intermediaries, and could
issue separate classes of shares to maintain the control of founder
shareholders.



They would not need to issue prospectuses for issues, and
would be significantly less rule-bound than fully-fledged public
companies.



The intermediaries that run crowdfunding platforms would
function as their back office, running due diligence on issues,
producing statements of risk, and managing communications between the
company and its investors.



CAMAC suggests non-binding limits on how much retail
investors could invest: $2500 a year per company, and $10,000 a year
overall. New Zealand has no limits, but that is risky given the
distributional power of the internet. The caps if adopted can be
fine-tuned later, anyway. The first task is to get equity crowdfunding
up and running as soon as possible.



All up, CAMAC's report is 245 pages long. It has taken
submissions, consulted and produced over 40 similar reports for Canberra
since 1991, most recently on executive pay, directors duties and
derivatives.



The crowdfunding report is its last. Two unfinished reports,
one on the future of annual meetings in a world transformed by
information technology and another on lessons learned from managed
investment scheme meltdowns during the global financial crisis, will be
inherited by Treasury, which the government says will take over CAMAC's
work.



Can Treasury cover CAMAC's beat on CAMAC's budget of less
than $1 million a year? Frankly, I doubt it. Getting external advice
won't be an option: consultants will hoover up $1 million before they
clear their throats. CAMAC was a hidden gem: the government should not
have killed it.



mmaiden@fairfaxmedia.com.au