Australian Securities & Investments Commission (ASIC) has issued guidance to promoters of ‘crowd funding’ to clarify arrangements which may be regulated by ASIC under the Corporations Act 2001 (Corporations Act) and Australian Securities and Investments Commission Act 2001 (ASIC Act).
ASIC has also highlighted some risks for
operators of crowd funding websites and people considering participating
in crowd funding projects.
‘Crowd funding’ involves the use of the
internet and social media to raise funds in support of a specific
project or business idea. Project sponsors or pledgers typically receive
some reward in return for their funds. In some cases, the reward
expected may be of minor value and is merely incidental rather than the
purpose of the contribution.
ASIC Commissioner, Greg Tanzer, said ASIC
has been monitoring increasing use of crowd funding for investment
purposes to identify any arrangements, or aspects of those arrangements,
that may be regulated by ASIC.
‘Crowd funding, as a discrete activity, is not prohibited in Australia nor is it generally regulated by ASIC’, Mr Tanzer said.
‘However, depending on the particular crowd
funding arrangement, ASIC's view is that some types of crowd funding
could involve offering or advertising a financial product, providing a
financial service or fundraising through securities requiring a
complying disclosure document. These activities are regulated by ASIC
under the Corporations Act and ASIC Act and may impose legal obligations
on operators of crowd funding sites and on people using those sites to
raise funds.
‘We want to make sure anyone involved in
crowd funding is aware of these obligations to ensure they operate
within the law and don’t potentially expose themselves to penalties
under the Corporations Act or ASIC Act’, Mr Tanzer said.
Along with other factors, depending on the
type of ‘reward’ offered by the project creator to those giving funding,
crowd funding could involve a managed investment scheme under Chapter
5C of the Corporations Act, provision of a financial services requiring
an Australian financial services (AFS) licence or a fundraising under
Chapter 6D of the Corporations Act.
There are also advertising and publicity
restrictions that apply to advertising and publicising an offer of
financial products or securities, in certain circumstances.
ASIC has written to a number of
Australian-based operators of crowd funding websites outlining its views
on crowd funding and the circumstances that may impose legal
obligations.
In addition, as a result of its current
monitoring of crowd funding, ASIC has identified some risks in crowd
funding that website operators can help manage. These include:
- a risk of fraud being carried out
through crowd funding websites. Website operators can help manage this
risk by doing background and credentials checks on project creators to
help minimise the opportunity for fraud.
- a risk that funded projects are not
completed and the project sponsors do not receive the rewards promised.
As well as background and credentials checks, the website operators can
manage this risk by assessing the viability of the project before it is
posted on their website, requiring the project creator to provide more
information on how and when they complete the project and consider
requiring the project creator to report periodically through the website
on their progress in implementing the project.
- a risk that the money collected is
lost due to the fraud or bankruptcy of the website operator before the
money is passed on to the project creator. The website operator can
manage this risk by holding all crowd funding money in a trust account
separate from its own assets, avoiding excessive holding periods and
implementing appropriate internal controls to ensure withdrawals are
appropriate.
ASIC also recently published information
on the MoneySmart website about things that people who are thinking of
participating in a crowd funding project should consider before getting
involved. More information is available from www.moneysmart.gov.au.
Background
Ventures funded by a crowd funding site
could be a managed investment scheme if funds contributed are pooled or
used in a common enterprise to produce financial benefits or benefits
consisting of interests in property for the contributors. Interests in a
managed investment scheme are generally financial products and
regulated under the Corporations Act.
If the people providing the funds are making
a donation or are only told they may receive some asset of nominal
value which is not itself a financial product, regulation under the
Corporations Act may not apply. These arrangements are not generally
regulated by ASIC.
In some circumstances, crowd funding may
also be considered as pre-purchase arrangement of a product or a
service. In these circumstances, the activity would be regulated under
the Competition and Consumer Act 2010,
which incorporates the Australian Consumer Law. Amongst other things,
the Australian Consumer Law, like the ASIC Act, prohibits businesses
from making false or misleading representations to consumers. Consumers
concerned that they may have been misled about a crowd funded product or
service that is not financial product or service may wish to contact
the Australian Competition and Consumer Commission or their local office
of fair trading.
In the circumstances that crowd funding
involves an offer that meets the definition of a financial product, the
owner of Australian-based websites that facilitate this crowd funding
may be legally considered as the person making an offer to arrange for
the issue that financial product. In these circumstances, a person must
meet certain requirements under the Corporations Act:
- hold or obtain an AFS licence with the
appropriate licence authorisations or be an authorised representative of
an AFS licence holder
- if offering to arrange for issue of
a financial product to retail investors or inviting them to apply for a
financial product, give a Product Disclosure Statement (PDS) for the
offer to the client.
If there is an offer to issue securities
such as shares or debentures in a company, or an invitation to apply for
securities, then the issuer of those securities or equity may be
required to lodge a prospectus or other complying disclosure document.
If the offer is to issue an interest in a managed investment scheme,
then the issuer of the interest may be required to give a PDS, and may
be required to have the scheme registered by ASIC under Chapter 5C of
the Corporations Act.
Offering a financial product or securities
without meeting the relevant obligations under the Corporations Act may
have a number of consequences, including fines or other penalties. For
example, the maximum penalty for failing to register a managed
investment scheme is 200 penalty units ($22,000), five years
imprisonment or both.
The maximum penalty for carrying on a
financial services business without an AFS licence is 200 penalty units
($22,000), two years imprisonment or both.
There are also advertising and publicity
restrictions that apply to advertising and publicising an offer of
financial products or securities which require a PDS or a prospectus or
other complying disclosure document under the Corporations Act unless
there are appropriate references to the relevant document.
There are various consequences for failing to comply with these requirements under the Corporations Act. In particular:
- a person may be liable to compensate
another person contributing funds for loss or damage resulting from a
contravention of the requirements in the Corporations Act; and
- a publisher (which would include
the operator of a website that provides access to crowd funding
projects) may commit an offence if they contravene the advertising and
publicity restrictions in the Corporations Act.
The maximum penalty for contravening the
restrictions on advertising and publicity for financial products is 25
penalty units ($11,000), two years imprisonment or both.
