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Applications for Crowd Funding Licences Open on 29 September 2017

Posted on September 25th, 2017 by Sophie Gerber in AFSLs

Crowd-sourced funding (“CSF”) is a financial service that start-ups and small businesses use to raise funds, generally from a large number of investors that invest small amounts of money.

Australian companies that meet certain eligibility requirements for obtaining CSF will be able to issue ordinary shares in their company to the general public in order to raise capital of up to $5 million per year.  This must be done through the online platform of a CSF intermediary that holds an Australian Financial Services (“AFS“) licence, acting as a ‘gatekeeper’ between the company and investors.

Contents

  1. Introduction
  2. AFS Licence Application
  3. Single CSF Platform
  4. Information Required for CSF Licence Applications
  5. Responsible Managers
  6. Time Frame
  7. ASF Licensee Obligations
  8. Retail Clients
  9. Contact Us

Introduction

Friday, 29 September 2017, the new CSF regime will come into effect and ASIC will begin accepting AFS licence applications from CSF intermediaries.

AFS Licence Application

Single CSF Platform

The AFS licence application will relate to a single platform on a single website. The authorisation if granted will be tailored to specify the platform assessed. A platform should not be or appear to be made available to anyone other than the CSF intermediary.

Information Required for CSF Licence Applications

In addition to the standard AFS licence application documents, ASIC will require additional information about a CSF intermediary’s policies and processes to comply with its gatekeeper obligations including:

  • How it will conduct required checks including of the CSF company making the offer and offer documents;
  • Technological resources including information technology capacity statement and adequacy of resources;
  • How it will handle client application money;
  • How it will operate the platform and ensures it meets the requirements of the CSF regime.

Responsible Managers

The Responsible Manager nominated on a CSF intermediary AFS licence application must be:

  • Directly responsible for the significant day to day decisions of the company;
  • Have appropriate knowledge and skill for the financial services, including providing the platform and performing all aspects of the role of a CSF intermediary; and
  • Meet one of the five options for demonstrating appropriate knowledge and skills in accordance with ASIC Regulatory Guide 105 Licensing: Organisational Competence.

ASIC has noted it may consider the following as relevant to demonstrating the Responsible Manager’s competence:

  • experience as an investor directed portfolio service (IDPS) platform operator, managed discretionary accounts (MDA) operator or conducting due diligence on investments to be offered to retail clients as part of admission to an approved product list for advisers;
  • experience dealing in securities, for example as a stockbroker;
  • experience as a corporate adviser in mergers and acquisitions, listing, takeovers and rights offers, initial public offers, corporate actions, underwriting and placements of securities;
  • fund management experience (including registered and unregistered managed investment schemes);
  • experience operating a crowd-sourced funding platform, including noninvestment or investment-based, using a wholesale or registered scheme arrangement or small-offers exemption under s708 of the Corporations Act;
  • experience as an operator of an investment-based crowd-sourced funding platform, including overseas (such as in New Zealand);
  • experience as a financial market operator in Australia or overseas; and
  • experience operating a platform-based financial services business, such as marketplace lending.

We anticipate that over time, ASIC’s expectations of appropriate experience will shift in accordance with its monitoring and enforcement experience of those operators to whom it grants the CSF AFS licence.

Time Frame

In their media release on 12 September 2017, ASIC noted that in order to facilitate implementation of this regime as soon as possible, its licensing team will aim to consider applications from CSF intermediaries as a matter of priority from 29 September 2017. Initially, ASIC will consider the CSF applications in batches for applications lodged between 29 September 2017 and 27 October 2017. ASIC will progress the applications within each relevant batch collectively. Applications lodged from 27 October 2017 will be progressed in order of receipt.

For assistance with applying for an AFS licence to operate as a CSF intermediary, please contact us.

AFS Licensee Obligations

In addition to the general obligations as an AFS licensees, CSF intermediaries have additional specific obligations under the CSF regime in Pt 6D.3A of the Corporations Act. These include:

Obligations 
Gatekeeper ObligationsA CSF intermediary acts as a ‘gatekeeper' for its platform and is required to:
• Complete the required checks before publishing the CSF offer document on its platform; and
• Not publish or not continue to publish CSF offer documents under certain circumstances.
DisclosureA CSF intermediary must prominently display on its platform:
• The prescribed general risk warning;
• The platform fees; and
• Cooling off rights.
Application PlatformA CSF intermediary must provide an application facility on their platform to enable investors to make applications in response to CSF offers.
Communication PlatformA CSF intermediary must provide a communication facility that allows potential investors, the company making the CSF and the intermediary to communicate with each other about the CSF offer, including facilities to responds to questions and posts.

The CSF intermediary must have processes in place to monitor the communication facility.
Dealing with Application MoneyIn addition to the client money provisions in Div 2 of Pt 7.8 of the Corporations Act, a CSF intermediary must deal with application money in certain ways in different circumstances as prescribed in s 738ZB of the Corporations Act.
Timing RulesA CSF intermediary must have processes in place to close a CSF offer when required under the CSF regime. These include instances where the offer is fully subscribed or a date specified by the offer.
Data ReportingA CSF intermediary must on an annual basis report to ASIC about the following:
• The total amount raised by all eligible CSF companies;
• Successful and unsuccessful CSF offers made;
• Investors in the CSF offers;
• Operation of the platform; and
• Any other information ASIC requests.
Financial ResourcesA CSF intermediary must
• Maintain $50,000 in surplus liquid funds if it holds client assets of at least $100,000; and
• Meet the tailored cash needs requirement and prepare a cash flow projection which covers a period of at least 12 months;
• Lodge a tailored audit annually.
Human ResourcesA CSF intermediary must ensure it has people in its business who:
• sufficiently understand the platform and underlying technology;
• can ensure the CSF gatekeeper obligations are adequately discharged including performing required checks, adequately deal with application monies and comply with restrictions on publication; and
• have sufficient skill in providing and maintaining application and communication facilities.
Technological ResourcesA CSF intermediary must have sufficient technological resources to:
• provide and maintain the platform technology and ensure appropriate level of system availability to comply with the day-to-day gatekeeper obligations;
• maintain client records and data integrity;
• meet reporting requirements; and
• monitor and mitigate cyber risks.
Internal Dispute Resolution ProceduresA CSF intermediary must have implement internal dispute resolution procedures that cover complaints from both the investor making an application for the CSF offer and the company making the CSF offer.
External Dispute ResolutionA CSF intermediary must be a member of an external dispute resolution scheme.
Risk ManagementA CSF intermediary’s risk management system must also address specific risks for CSF intermediaries including:
• Gatekeeping obligations;
• Technological risks;
• Cyber risks;
• Employee misconduct; and
• Fraud.
Professional Indemnity InsuranceProfessional indemnity insurance must specifically cover CSF activities and satisfy the requirements of the Corporations Regulations.

For further information please see ASIC Regulatory Guide 262 Crowd-sourced funding: Guide for intermediaries.

Retail Clients

A CSF intermediary has the following additional requirements when dealing with retail clients:

  • Unconditional Cooling- off rights

    All retail clients have the unconditional right to withdraw their application for a CSF offer within 5 business days of making the application.
    CSF intermediaries must provide a simple to use mechanism on their platform allowing the retail client to exercise their cooling off right.
    CSF intermediaries must also prominently display a statement about the rights of the client with applicants and the method by which this can be done.

  • Risk Acknowledgements

    CSF intermediaries must ensure all clients complete a risk acknowledgement containing the prescribed wording in the Corporations Act prior to making an application under a CSF offer.

  • Investor Cap

    CSF intermediaries must ensure it has procedures in place to ensure a retail client does not invest more than $10,000.00 over a 12-month period.

  • Restriction on financial assistance

    A CSF intermediary must not financially assist or arrange for financial assistance for a retail client to acquire shares in a CSF offer.

Please contact us for further information on how we can assist you with all compliance and licensing aspects of operating your business as a CSF intermediary.

Quynh Truong

Quynh Truong works with Sophie Grace Pty Ltd with a focus on compliance. Quynh specialises in obtaining ACL and AFSL applications and variations for clients as well as providing ongoing compliance support in the form of compliance program implementation and reviews. Prior to joining Sophie Grace Pty Ltd, Quynh worked as a solicitor in the areas of compliance, banking and finance, debt recovery and commercial litigation. Quynh has a Bachelor of Medical Science from the University of New South Wales, a Master of Law and Legal Practice from the University of Technology, Sydney and a Graduate Diploma in Corporate, Securities and Finance Law at the University of Sydney. She has been admitted as a solicitor in NSW.