Why the government must assume you’re an idiot – COMMENT

Published at Feb 17, 2016, in Features

Well, it’s not that dramatic to be fair. The latest discussion point from the government on start-up investment, however, shows that it hasn’t quite caught the lassaiz-faire start-up fever yet.

As previously chronicled by Finfeed, the federal government, seemingly as part of Malcolm Turnbull’s obsession with agility, has decided to re-arrange the tax arrangements surrounding start-up and small companies.

It’s partly aimed at solving a key plank of frustration felt by start-ups here—namely the inability to secure capital.

One of the ways the government was looking to do this was by offering investors a 20% tax offset for their investment in a start-up, or what the government calls an ‘Innovation Company’.

It was also thinking about providing a 10-year capital gains tax exemption on the initial investment, should the investor hold onto their investment for three or more years.

The government is now getting around to formulating the actual policy and legislation of the thing, and it has distributed an initial discussion paper about the potential changes.

It asks things like ‘What even is an innovation company?’ and those sorts of juicy questions, but the issues paper also revealed the government’s default position.

“Investment in innovation companies is inherently risky,” the paper’s authors noted. “Many investments will lose money while others have the potential to make large gains.”

“It’s important to consider whether direct investment should be restricted to certain investors or open to anyone with the available funds.”

Its suggested solution (as it stands) is to restrict investment in Innovation Companies to those who qualify as a sophisticated investor under the Corporations Act 2001.

The question here is whether the government thinks we’re not aware of the boom-or-bust nature of start-up investing.

After all, if you’re in a position where you’re thinking of investing in a start-up, you’ve probably got some wits about you and you’re aware of what you’re doing.

Upon first glance, it smacks of a government trying to protect its citizens by forcing them to use helmets when they go for a walk.

You can’t protect people from bad decisions, after all.

The government’s fears, however, can be valid.

The point the government makes in its discussion paper is that start-ups aren’t required to put together the disclosure documents required of say, a small-cap ASX company.

These documents are put together in order to best advise people on the risks of the investment. It’s the kind of document you’d like your mum or dad to consider carefully before betting the family farm on a punt.

However, putting together such documents for a garage-star start-up may be considered simply too onerous.

If that is the way the government is thinking, however, why not move to regulate Kickstarter and other crowdfunding platforms?

While equity crowdfunding platforms are at least somewhat regulated, there’s little to protect the investor from a bad Pozible play.

After all, I can go ahead and put in $10,000 into Ant Simulator if I were so inclined.

For those of you not caught up on the great ant scandal, this is a virtual-reality game which a plethora of people gave money to get off the ground only for business partners to abscond with the cash and allegedly spend it on booze and strippers.

Outrageously, there’s nothing the partners did that was technically illegal so it’s going to be difficult to get the money back for people who understandably want a refund.

As an Australian citizen, I was quite able to put in whatever amount of money I wanted into the venture and there’s nothing Australian regulations on investments could have done about it.

To be fair crowdfunding for a game and investment in a company, which implies a monetary return instead of just a game, are different ventures.

However, as crowdfunding platforms become more popular there are very few geographical limitations which inhibit me from being an idiot.

In this sense, is seeking to apply rules normally reserved for equity investment to start-up investment somewhat anachronistic in nature?

Well, I suspect it’s what the government is seeking to find out.

It needs to have a default position of protecting its citizens, but does cutting off unsophisticated investors (for want of a better term) simply unfairly cut those investors out of a potential wealth-creating opportunity?

Does it cut off a pool of capital for start-ups?

After all, many start-ups begin life as a loan from a family member. What of, instead of a loan, the family member makes an investment in the company?

Under the government’s proposal – that wouldn’t be possible.

We’re at a very early stage of the game here, but the next drafting paper will tell if the government is seeking to apply old-world thinking to new investment opportunities or whether it will be able to move with the times.

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