Significant reforms to the Foreign Investment Review Board (FIRB) process has resulted in long approval delays for Australian startups raising capital from foreign investors. Many Australian startups raising Series A & B rounds often have to rely on foreign investors to complete their rounds as they are often larger than what local investors can allocate. These delays are putting the rounds in jeopardy.
On 29 March 2020 Federal Treasurer Josh Frydenberg announced major changes to Australia’s foreign investment approval regime. This was done to address national security risks arising from the COVID-19 pandemic. The temporary changes have widened the range of businesses who require FIRB approval in acquiring foreign investment. This, in turn, lengthens the FIRB review period for applications.
Chief Executive of the Australian Investment Council, Yasser El-Ansary, has stated that the changes have caused difficulty for startups to acquire foreign investment.
“The temporary changes the government has announced have certainly had an impact on Australia’s ability to attract inbound investment from offshore,” says Mr El-Ansary. “It is important for our industry and the broader Australian economy that we do everything we can to support inbound investment for Australian startup businesses.”
Prior to the reform coming into effect, it was unlikely for startup companies to consider application for FIRB approval. However, under the temporary changes made to the process, the monetary screening threshold has dropped to $0, and all foreign investment involving a minimum 20% interest is subject to the approval of the FIRB.
“The reduction in the threshold has resulted in a much wider range of transactions needing to come within FIRB review process,” says Mr El-Ansary. “This has slowed down the review process, and created a sort of bottleneck in our capacity to source inbound investment. This slows the flow of inbound investment and impacts the ability for businesses to remain viable and pivot in the current circumstances.”
The changes have been put into place to strengthen Australia’s national security in the midst of the COVID-19 pandemic. However, while Mr El-Ansary understands the need for increased national security during the pandemic, he states that Australia has been put in an “uncompetitive position” with the temporary reform.
“The pandemic has forced us to do things we otherwise wouldn’t be doing, ” he says. “Every country is grappling with the same challenges. For now we need to focus on how we calibrate the more permanent reform, in a way which delivers a long-term competitive outcome.”
Permanent changes to the FIRB review process could cause further issues
On Friday 31 July The Morrison Government released for consultation the temporary exposure draft legislation amending the Foreign Acquisitions and Takeovers Act 1975.
The Federal Treasury outlines in the reform that “The Government will introduce a new national security test to ensure that it can act to address national security concerns arising from individual investment proposals which would otherwise be below the screening thresholds when the temporary $0 screening arrangements lapse.”
These are the most significant permanent reforms to the act made since its introduction. The act places greater restrictions on business’ access to foreign capital by widening the scope of what a ‘National Security Company’ is. The changes to the act have been met with apprehension from those in the investment space.
“70% of Australian investment capital is sourced off shore” says Mr El-Ansary, stating the importance of inbound investment. “We need this capital create an ongoing pipeline of support into small businesses. This will grow to be the large corporations of the future and provide tens of thousands of jobs to Australians.”
The permanent reforms to the Foreign Acquisitions and Takeovers Act 1975 are scheduled to commence on 1 January 2021.