Charmian Holmes

Equity based crowdfunding platforms may look to existing Australian Financial Services Licensees (AFSLs) for a ‘temporary home’ until they can get their own licence or expected regulatory changes become law, according to Charmian Holmes, Solicitor Director at The Fold Legal (The Fold).

Crowdfunding platforms through which the funder receives shares in the funded company currently need an Australian Financial Services (AFS) licence (or authorisation) to deal in securities. Offering other types of interests in a company or units in a trust is also likely to require an AFS licence and possibly a responsible entity and/or registration of a managed investment scheme.

“ASIC views crowdfunding as a financial service if the offer has a financial product purpose and it involves fundraising through a corporate structure and/or other facility that pools investor contributions,” Ms Holmes says. “In other words, if it involves issuing shares in a company or interests in a managed investment scheme, it’s definitely on their radar.”

The recently released CAMAC report proposes to simplify the regulation of crowdfunding, including how promoters and intermediaries are licensed. “The development of a simplified licence for crowdfunding facilities is definitely on the Australian Securities and Investments Commission (ASIC)’s agenda, however it may take some time,” Ms Holmes says. “In the meantime, crowdfunding platforms may need to look to AFS licensees for a temporary home.”

Before agreeing, Ms Holmes urges licensees to be aware of the risks and responsibilities of appointing a crowdfunding platform, including ensuring their authorised representative agreement and management systems address each of the following areas and conducting a thorough risk-based assessment on the following issues:

• Limiting users to those who are legitimate promoters – Non-legitimate offers could damage your reputation as an AFS licensee and attract ASIC scrutiny. Ensure the crowdfunding platform has effective processes for preventing the platform being used by scammers or ‘conmen’.
• Licence authorisations – Check that you have the necessary licence authorisations for the product and client types of crowd funding activities – e.g. retail clients, securities, unregistered or registered managed investment schemes. It’s illegal to provide services that you’re not authorised to provide.
• Legally compliant offer documentation – Investment disclosure documents for small scale offers should be signed off by a reputable and experienced lawyer to ensure compliance with the Corporations Act and correction of potentially false, misleading or deceptive statements.
• Payment collection facilities – The capital raised must either be paid into a section 981B trust account or be collected by a licensed custody service provider.
• Advertising restrictions may apply – Advertising restrictions can apply to small scale offers – for example, certain investor warnings have to be given in advertising or promotional statements if the disclosure document for the offer has to be lodged with ASIC and this hasn’t yet occurred.
• Assess the level of investment advice that can be given – If the platform will provide investment advice, its operator will need to have the required experience and qualifications to provide the advice.
• Remuneration disclosure for retail client offers – Remuneration earned by the platform will need to be disclosed to retail clients in the FSG and elsewhere on the website.
• Cross-border crowdfunding – As overseas offers could be risky and trigger overseas regulation; consider whether to restrict offers to Australian investors.
• Monitoring and supervision – Do you have the capacity to monitor the platform’s  compliance and outsourcing arrangements – you will be as responsible for their financial services activities as you would be if you were providing them.
• Professional indemnity insurance and EDR arrangements – If offers will be made to retail clients, PI insurance and EDR membership is necessary. This may involve additional cost.

“Licensees may also need to seek legal advice on any areas they are not sure about,” Ms Holmes says.

Crowdfunding is an innovative avenue for entrepreneurs to raise capital without going down the path of venture capital or public offer funding, but Australian regulation of crowdfunding is still in its infancy. “It’s taken off overseas, especially in the US where a considerable number of crowdfunding websites provide platforms for investors to fund corporate, creative and philanthropic projects,” Ms Holmes says.

Crowdfunding sites in Australia include venturecrowd, ozfund, pozible, thinkable, thunderfunds, jumpstartz and stagelabel.

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