When it comes to financial services regulatory requirements, there are a number of issues you need to consider.
In its current review of one particular variety of crowd funding, the Federal Government's Corporations and Markets Advisory Committee says:
[Crowd sourced equity funding] refers to schemes through which a business seeks to raise funding, particularly early-stage funding, through offering debt or equity interests in the business to investors online. Businesses seeking to raise capital through CSEF typically advertise online through a crowd funding platform website, which serves as an intermediary between investors and the business.
CAMAC's inquiry into crowd sourced equity funding reflects the Government's desire to facilitate this kind of investment while providing appropriate protection for investors.
If you are looking at setting yourself up as an intermediary in this space, consider the following key issues:
- possible conflicts of interest.
- the need for an Australian financial services licence ("AFSL").
- whether you are operating a managed investment scheme which requires registration under the Corporations Act 2001.
If you intend to invest in projects as well as recruiting investors for such projects, you probably face a situation where you intend to act on your own behalf as well as on behalf of investors. This may give rise to a conflict of interest – which poses problems from a number of legal perspectives. It may be possible to manage any such conflict by setting up two distinct corporate entities but you would need to consider this in detail with a lawyer.
If you are locating investors for particular business ventures and facilitating their investment in the ventures, you may be engaging in the business of providing financial services. You may be providing any of the following services, for which an AFSL is required:
- providing financial product advice
- dealing in financial products on behalf of another person
- operating a registered managed investment scheme
- providing a custodial or depository service.
Whether or not your activities will amount to the provision of one or more of these services turns on complex statutory definitions and should be the subject of detailed legal consideration. If you are in the business of providing financial services, you will need an AFSL with appropriate authorisations. Applying for a licence can take up to six months. You will need to put in place multiple systems and engage people with appropriate qualifications and experience. Once you have your licence, you will then have ongoing obligations to meet. Meeting all of these requirements can be costly.
It may be that when investors enter into an arrangement with you, you are effectively operating a managed investment scheme. Again, this hinges on a detailed statutory definition of what constitutes a managed investment scheme. If you are operating such a scheme, it is likely to require registration with the Australian Securities and Investments Commission. This obligation is additional to the need to hold an AFSL and brings with it further requirements which must be met – for example, putting in place a constitution for the scheme which meets a raft of legislative requirements.
It is possible to operate a managed investment scheme that does not need to be registered. This is the case where a Product Disclosure Statement ("PDS") is not required for the scheme. A PDS is typically required where the investor is a "retail client" but not where the investor is a "wholesale client". The nature of crowd funding is such that investors will almost always be retail clients.
Aside from these three key issues, there are a host of other considerations that may be relevant to you, the following being some examples:
- If you wish to raise equity in the corporation acting as the intermediary, that may require a prospectus.
- Any fundraising agreements in place between the intermediary, entities conducting business ventures and/or investors will need to fit in with legal and regulatory requirements.
As you can see, the issues are wide ranging and complex. Setting yourself up in this space requires financial capital, careful consideration and reliable legal advice.
Look out for results of CAMAC's review, in April. It may recommend a modified regulatory regime which simplifies life for those wanting to get involved in crowd funding.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
