Warning to Crowd Funding Websites from Australian Securities & Investments Commission
; published on August 15, 2012 at 8:21 am
The Australian Securities & Investments Commission has issued a warning to operators of crowd funding websites to check whether the nature of business ideas on their sites amounts to “advertising a financial product, providing a financial service or fundraising through securities”.
Crowd funding websites typically use the wide reach of the internet to gather interest in a new business idea, product or service and raise funding. The funding is only released once a target investment amount is reached.
Typically used by artists to fund creative projects, the best-known sites operating in this way include Crowdfunder.co.uk & Kickstarter.com.
The ASIC Commissioner, Greg Tanzer, explained Australia’s position on the arrangements:
“Crowd funding, as a discrete activity, is not prohibited in Australia nor is it generally regulated by ASIC.
“However, depending on the particular crowd funding arrangement, ASIC’s view is that some types of crowd funding could involve offering or advertising a financial product, providing a financial service or fundraising through securities requiring a complying disclosure document. These activities are regulated by ASIC under the Corporations Act and ASIC Act and may impose legal obligations on operators of crowd funding sites and on people using those sites to raise funds.
“We want to make sure anyone involved in crowd funding is aware of these obligations to ensure they operate within the law and don’t potentially expose themselves to penalties under the Corporations Act or ASIC Act.”
Crowdfunding activities could fall under the terms of managed investment scheme law if “funds contributed are pooled or used in a common enterprise to produce financial benefits or benefits consisting of interests in property for the contributors.”
If the project offer is defined as an offer of a financial product, the crowdfunding website could be defined as the entity “making an offer to arrange for the issue of that financial product”. In these circumstances, the website operator would need an AFS licence and offer a Product Disclosure Statement. Failing to register a managed investment scheme in Australia carries a penalty of a $22,000 fine, up to five years imprisonment or both.
Furthermore, the ASIC states:
“If there is an offer to issue securities such as shares or debentures in a company, or an invitation to apply for securities, then the issuer of those securities or equity may be required to lodge a prospectus or other complying disclosure document. If the offer is to issue an interest in a managed investment scheme, then the issuer of the interest may be required to give a PDS, and may be required to have the scheme registered by ASIC under Chapter 5C of the Corporations Act.”
Many projects operating on crowdfunding websites simply offer a t-shirt, free tickets to a performance or other gift of nominal value in return for a donation. The only warning from the ASIC in these circumstances is when the arrangement comes close to being a pre-purchase agreement.