Crowd-sourced funding (“CSF”) is a financial service where start-ups and small businesses raise funds, generally from a large number of investors that invest small amounts of money.
It is emerging as a popular way to fund innovative business ideas.
Australian companies that meet certain eligibility requirements for 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 licensed CSF intermediaries who acts as a ‘gatekeeper’ between the company and investors.
How is crowd-sourced funding regulated?
The Corporations Amendment (Crowd-sourced Funding) Act 2017 and Corporations Amendment (Crowd‑sourced Funding) Regulations 2017 that came into effect on 29 September 2017 provide the legislative framework for crowd-sourced funding.
The main features of the CSF regime under the Act are:
- reduced disclosure in the form of an offer document which contains prescribed minimum information and is to be published on a CSF intermediary’s platform;
- CSF intermediaries will be required to hold an Australian Financial Services (AFS) Licence with the required authorisation to provide a CSF service;
- the gatekeeper role of the CSF intermediary, including obligations to perform checks on companies and its directors, and the offer document;
- retail investor protections including an investment cap of $10,000 per company in any 12-month period and a cooling-off period of 5 days to allow withdrawal from offers; and
- temporary concessions for newly registered or converted public companies, for up to five years, from certain reporting, audit and corporate governance obligations.
What businesses are eligible for crowd-sourced funding?
Companies wishing to make a CSF offer:
- must be an unlisted public company limited by shares with Australia as its principal place of business;
- have a consolidated annual turnover and gross assets of less than $25 million;
- can only raise $5 million through CSF per year and can only have one offer open at a time;
- can only issue fully-paid ordinary shares. Importantly, a CSF offeror cannot intend to use funds raised to make a loan to a related party.
What is a CSF intermediary?
A CSF intermediary is a licensed entity that operates an internet-based platform facilitating CSF offerings.
A CSF intermediary’s role will involve:
- making all CSF offers on behalf of a company on the CSF intermediary’s platform;
- prior to publishing an offer conducting a range of checks in relation to the company and its officers to ensure they are of ‘good fame and character’ and ensuring the CSF offer document is not misleading or deceptive or likely to mislead or deceive; and
- handling all applications received in response to the CSF offer and all applications monies as part of the hosting arrangements.
A CSF intermediary must hold an AFS licence with an authorisation to provide a CSF service and will be subject to the AFSL obligations under the Corporations Act 2001 (Cth). ASIC has released Regulatory Guide 262: Crowd-sourced funding: Guide for intermediaries which provide further details in relation to the licensing requirements and ongoing obligations of CSF intermediaries. Further information can also be found on ASIC’s website.
For assistance with applying for an AFS licence to operate as a CSF intermediary, please contact us.
Does the AML/CTF regime apply?
Yes, the AML/CTF regime will apply to CSF intermediaries as they are financial service providers that are considered reporting entities under the AML/CTF Act and Rules. This means that CSF intermediaries will be required to identify their clients and verify their identity. The information required to be collected from clients is detailed in the AML/CTF Rules. In addition, CSF intermediaries are required to report all suspicious matters to AUSTRAC, along with an annual compliance report which provides AUSTRAC with a self-assessment of the CSF intermediary’s AML/CTF compliance throughout the year.
Depending on the business model and the nature of financial services to be provided, the transaction reporting obligations may vary. It is crucial for CSF intermediaries to understand its AML/CTF obligations, establish appropriate AML/CTF compliance program, which usually include an AML/CTF Policy and Risk Matrix, carry out staff training and conduct regular compliance review of its implementation of the AML/CTF compliance program.
Other Things You Need to Consider
There are various aspects to operating as a CSF intermediary including:
- Preparation of the appropriate disclosure documents – the Corporations Amendment (Crowd‑sourced Funding) Regulations 2017 sets out the minimum requirements of a CSF offer document;
- Putting in place the appropriate processes to conduct checks on the offer documents, the CSF company and its officers prior to an offer being published;
- Developing and operating a CSF platform in line with the regulatory requirements including the prominent display of the prescribed CSF risk warnings and the provision of a communication platform; and
- Compliance with the strict advertising rules.
Sophie Grace provides effective and practical guidance to CSF intermediaries to assist you in establishing and operating your CSF Intermediary business. Please contact us to discuss further.