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.


Where to invest $1,000 right now

When the experts at Next Investors have a stock pick, it may pay to listen.

The Next Investors have been investing in ASX small cap stocks for years, with their best small cap picks yielding returns of 1,200%, 1,120%, 900% and 678%.

They have just revealed their hand-picked, FY2021 stock portfolio of high conviction long-term investments.

Click the link below to see what they are currently investing in.


SEE THE PORTFOLIO

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

Conflict of Interest Notice

S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this article. Investors should consider this article as only a single factor in making any investment decision. The publishers of this article also wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article.

Publishers Notice

The information contained in this article is current at the finalised date. The information contained in this article is based on sources reasonably considered to be reliable by S3 Consortium Pty Ltd, and available in the public domain. No “insider information” is ever sourced, disclosed or used by S3 Consortium.

Australian ASX Small Cap stocks | Why Finfeed.com is Australia’s leading small cap publication

Founded seven years ago, Finfeed.com is Australia’s leading and longest standing website for investor and finance news, education and expert opinion.

Published by StocksDigital, Finfeed was created to report daily on the comings and goings of ASX listed stocks in the small cap market.

As the first digital publication dedicated specifically to this space, Finfeed soon became the most trusted publication in the market, quickly garnering over two million page views – a number that continues to rise.

Finfeed.com provides its readers with informative articles that tackle the latest in market moving #ASX small cap news, plus exclusive content you won’t find anywhere else. It is aimed at those with an interest in investing, market education, company performance, start-ups and much more.

Finfeed.com is the only media organisation operating under the strength of a Financial Services License and is backed by leading journalists and analysts all with brands of their own.

The website aims to inform, educate and entertain with content that drills down into the heart of financial matters.

Finfeed is a leading source of investor and market information, with everything investors need to know about how to invest written in a way that anyone can understand. 

Over the years, the website has expanded beyond exclusively reporting on small caps, to profile Australia’s leading ASX listed small, mid and large caps as well as some of the country’s most successful CEOs and business leaders to find out what makes them tick.

Every day you will find fresh content covering:

Fast Facts

Over 4,000 articles published

Over 2.3 Million Page Views and counting

Over 10,000 followers on social media

Subscriber list growing by 2% monthly

Thanks for subscribing!

X