ASIC has recently established a new regime governing the process and methodology for equity-based Crowd-Sourced Funding (“CSF”). Only eligible companies which satisfy the specific requirements may participate. These companies are required to use intermediaries who host the CSF Offer on an online platform and manage the overall CSF process. These CSF Intermediaries must in turn, hold an Australian Financial Services (“AFS”) Licence with the appropriate authorisations to provide a crowd-funding service, as these activities now constitute a financial product and service.
CSF Intermediaries may only issue securities to those investors who have successfully participated in the CSF Offer process. Any entity seeking to operate a secondary market in securities of eligible CSF companies will need to hold an Australian Market Licence (or be exempt from this requirement).
It is important to note that the CSF licensing regime does not include non-investment CSF - that is, instances where an individual or entity is seeking funds by way of donations or gifts.
AFS Licensee Obligations
The principal requirement for any CSF Intermediary is to hold an AFS Licence that specifically authorises the ability to provide a crowd-funding service.
It is important to note that even though the CSF Intermediary will facilitate the issuing of securities, it is not required to be authorised to deal in securities, as Section 766C(2A) of the Corporations Act 2001 (Cth) specifically excludes this service.
The CSF Intermediary must operate the online platform - preferably on its own website.
Other general obligations relate to:
- Managing conflicts of interest.
- Maintaining adequate financial resources. If the licensee holds application monies (that is, clients’ funds) of at least $100,000, then it will need to maintain surplus liquid funds of $50,000. Other requirements include maintaining a statement of cash flow projections for a 12 month period, having net positive assets at all times and appointing an auditor.
- Demonstrating sufficient human and technology resources.
- Maintaining organisational competence. This refers to the appointed Responsible Managers who are responsible for the provision of financial services under the AFS Licence.
- Maintaining an internal dispute resolution system and belonging to an external disputes resolution scheme (for example, the Financial Ombudsman Service).
- Maintaining adequate risk management systems.
- Maintaining adequate compensation arrangements, including appropriate indemnity insurance.
- Maintaining arrangements to hold application monies, unless the funds are outsourced to an external custodian.
- Providing retail clients with a Financial Services Guide.
- Ensuring all advertising and marketing is balanced and not misleading or deceptive, and if it contains financial product advice, ensuring that the advertising and marketing material is limited to the specific provisions in its AFS Licence.
Specific Obligations Under the CSF Regime
There are a number of specific obligations that a CSF Intermediary must comply with in regard to their role as a “gatekeeper” for its platform. In particular, the CSF Intermediary must:
- Publish a CSF Offer document on its platform, including undertaking the required checks beforehand.
- Ensure that certain information is prominently displayed on its platform - including a general risk warning to potential investors, fees paid to it to host the CSF Offer, interests in regard to the offering company and information about cooling-off rights for retail clients.
- Ensure that all retail clients complete a risk acknowledgment.
- Ensure that retail clients do not breach the $10,000 cap during any 12 month period.
- Not provide any financial assistance to a retail client in regard to a CSF Offer.
- Provide ASIC with any data information it may request.
For further details, refer to ASIC Regulatory Guide 262 by clicking here.
Should you have any queries about ASIC or other issues involving the CSF regime, compliance, licensing, or corporate governance, please contact Jeremy Danon, director of Ariel & Associates Pty Ltd on (02) 8223 3355 or at jeremy@ariel.associates.