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12-196MR ASIC guidance on crowd funding

Tuesday 14 August 2012


ASIC has today 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.

More information about the circumstances in which crowd funding arrangements may impose legal obligations is provided in the background to this media release.

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: We have 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:
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:
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.

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