The Australian government has published draft legislation aimed at incentivising investors to support early-stage fintech startups with "high-growth potential".
The government is proposing amendments to the Tax Incentive for Early Stage (Angel) Investors, as well as the Venture Capital Limited Partnership (VCLP) and Early Stage Venture Capital Limited Partnership (ESVCLP) regimes, that will allow eligible investors to invest in early-stage companies with finance or insurance activities as their predominant activities.
The tax incentives that came into effect on July 1, 2016 as part of the federal government's AU$1.1 billion National Innovation and Science Agenda do not presently allow for certain investments, such as investments in unit trusts that have finance activities as their predominant activities.
Under the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016, eligible investors who purchase new shares in an early-stage innovation company (ESIC) are provided with a non-refundable carry forward tax offset equal to 20 percent of the amount of money or non-cash benefits provided to the ESIC. Non-cash benefits include property or services that are provided or required to be provided.
The tax offset amount, however, is capped at AU$200,000 for the investor and their affiliates combined in each income year. Technical amendments are being proposed to clarify that the AU$200,000 limit applies to both direct and indirect investments that have been made and will be made in each income year.
Investors who do not meet the requirements of the sophisticated investor test under the Corporations Act 2001 -- i.e. sophisticated investors must earn at least AU$250,000 a year or have AU$2.5 million in assets -- will be limited to investing amounts of up to AU$50,000 per income year.
Under the Bill, eligible investors are additionally provided with a modified capital gains tax (CGT) treatment, allowing them a 10-year exemption from capital gains tax for qualifying investments held for at least 12 months. However, capital losses on shares held for less than 10 years must be disregarded.
To be eligible for investment, ESICs must not be listed on any stock exchange locally or internationally.
Additionally, it must have either been incorporated in Australia or registered in the Australian Business Register (ABR) within the last three income years; incurred total expenses of no more than AU$1 million in the previous income year; and derived assessable income of no more than AU$200,000 in the previous income year, excluding any Accelerating Commercialisation Grant that has been administered under the Entrepreneurs' Program.
If the ESIC has not been registered in the ABR in the last three income years, then it must have been incorporated in Australia within the last six income years, and it must have incurred expenses of no more than AU$1 million over the last three income years.
Amendments to the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 are expected to come into effect no sooner than the 2018-19 financial year.
Submissions on the draft legislation are due by December 10, 2017.
Earlier this month, the Australian government had published draft legislation and regulations that will enable fintech businesses to test certain products and services for a limited period of time with retail and wholesale clients without having to obtain a financial services or credit licence.
Both the Corporations Act and the Credit Act will be amended to enable eligible businesses to test, for a maximum period of 24 months, a wider range of fintech products and services, provided they meet certain consumer protection and disclosure conditions under the National Consumer Credit Protection (FinTech Sandbox Australian Credit Licence Exemption) Regulations 2017 and Corporations (FinTech Sandbox Australian Financial Services Licence Exemption) Regulations 2017.
Eligible businesses will be able to commence testing new products and services with a maximum of 100 clients 14 days after the ASIC receives written notice that the business intends to use the exemption.
Businesses that will benefit from the licensing exemption include those looking to provide "holistic" financial advice in relation to superannuation, life insurance, and domestic and international securities; issue and facilitate consumer credit; issue non-cash payment products; and provide a crowdfunding service.
A month prior, ASIC released guidance for unlisted public companies and crowdfunding platform operators (intermediaries) on how to comply with the new crowdsourced funding (CSF) regime that came into effect on September 29, 2017.
Under the Corporations Amendment (Crowd-Sourced Funding) Act 2017, unlisted public companies with less than AU$25 million in assets and annual revenue can make offers of ordinary shares to retail investors through an intermediary's platform using a CSF offer document containing a reduced level of disclosure compared to a prospectus.
Eligible companies can raise up to AU$5 million in any 12-month period through licensed crowdfunding platforms under the new CSF regime.
Where previous legislation limited the scope of equity crowdfunding to wholesale or sophisticated investors, under the new CSF regime, retail investors are able invest up to AU$10,000 per company per year once they have completed the prescribed risk acknowledgement, and will have a five-day cooling-off period.
To raise capital via CSF, companies must enter into a hosting arrangement with a licensed CSF intermediary, prepare a CSF offer document, obtain consents required for the CSF offer document such as from all company directors, publish the CSF offer document on the intermediary's platform, close the offer as soon as possible, declare the offer complete, and issue shares to retail investors.
A CSF intermediary, on the other hand, is required to play a "gatekeeper" role to ensure investors are only offered investments in public companies that are eligible to raise funds and are seeking to do so "for legitimate purposes", according to ASIC.
In order to sustain investor confidence, intermediaries must ensure that it provides an "application facility" that enables people to make applications in response to open CSF offers; prescribed checks are carried out regarding the identity of the offering company and its eligibility under the new CSF regime, as well as information on the company's directors, including whether they have "knowingly engaged in misleading or deceptive conduct"; and adequate arrangements are in place for the management of conflicts of interest.
The intermediary must also ensure a communication facility is available for investors to communicate in relation to the CSF offer and make inquiries of the offering company and the intermediary, and that they deal with client money in accordance with the Corporations Act.
The Australian government in September announced it would be extending the CSF regime to proprietary companies, after the regime was criticised for locking out startups and small businesses. The extension means proprietary companies will no longer have to convert to a public entity to take advantage of the new CSF regime.
However, proprietary companies will have to comply with additional obligations to protect investors, including: A minimum of two directors; financial reporting in accordance with accounting standards; audited financial statements once the company raises more than AU$3 million from crowdfunding offers; and restrictions on related party transactions.
PREVIOUS AND RELATED COVERAGE
New tax incentives aimed at making investments in Australian startups more attractive took effect on July 1, 2016.
The draft legislation and regulations states that eligible Australian fintech businesses will be able to test their products and services with up to 100 customers for a maximum period of 24 months.
The Australian financial regulator has finalised its guidance for crowdfunding platform operators and unlisted public companies looking to raise capital under the new CSF regime.
Proprietary companies will be able to take advantage of the new crowdsourced funding regime that recently came into effect without having to convert to a pubic entity.