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Project creators and crowd funding websites must be
mindful that their activities could be regulated by the
Corporations Act and the ASIC Act, and are on notice that ASIC is
interested in their activities.
ASIC has issued guidance to promoters of crowd funding to
clarify arrangements which may be subject to regulation by ASIC
under the Corporations Act and the Australian Securities and
Investments Commission Act (ASIC Act).
What is crowd funding?
Crowd funding is an increasingly popular method employed by
artists and entrepreneurs to raise money to fund specific projects
and business ideas. The projects are promoted via social media and
money is usually raised through crowd funding websites, which
detail the aim, objective and funding target of the project.
Contributors can pledge an amount to the project and, generally,
funds are returned if the funding target is not reached.
Contributors are often offered a reward of nominal value in return
for a pledge of funds, such as free products and discounts.
However, the issues are more complex if funded projects wish to
offer a more substantial reward to contributors, and ASIC has
stated that it has been monitoring the increasing use of crowd
funding for investment purposes to identify any arrangements which
may be regulated by ASIC.
Which aspects of crowd funding could attract ASIC
regulation?
ASIC has confirmed that crowd funding, as a discrete activity,
is not prohibited in Australia nor is it generally regulated by
ASIC.
There are aspects of crowd funding, however, that may be
regulated by the Corporations Act and the ASIC Act. This will be
largely dependant on the type of reward being offered by the
project creator. Both the project creator and the operator of the
crowd funding website could be impacted. Specifically:
ventures funded by crowd funding could be characterised as a
managed investment scheme if funds contributed are pooled or used
in a common enterprise to produce financial benefits or interests
in property for the contributors. Managed investment schemes are
heavily regulated and may require, amongst other things, the
operator of the scheme to hold an Australian Financial Services
Licence (AFSL);
if there is an offer of securities or a financial product
(including an interest in a managed investment scheme), the project
creator may be required to issue a complying disclosure document (a
prospectus or PDS);
the operator of a website that facilitates crowd funding may be
considered to be making an offer to arrange for the issue of a
financial product, which may also require the operator to hold an
AFSL and provide a PDS; and
the advertisement and promotion of financial products
(including securities and interests in managed investment schemes)
may also in itself give rise to licensing and disclosure
obligations for both the project creator and the operator of the
crowd funding website.
Failure to comply with relevant obligations under the
Corporations Act may have a number of different consequences
depending on the nature of the breach. These consequences could
include payment of compensation for loss or damage caused to a
contributor, payment of fines or imprisonment.
In addition, in some circumstances, crowd funding arrangements
may be considered a pre-purchase of a product or service and come
under the regulation of the Competition and Consumer Act. The Act,
amongst other things, prohibits businesses from making false or
misleading misrepresentations to consumers and contains statutory
warranties and indemnities in favour of the consumer.
And finally...
Project creators and crowd funding websites must be mindful that
their activities could be regulated by the Corporations Act and the
ASIC Act, and are on notice that ASIC is interested in their
activities.
And for those that wish to join the crowd? Obviously you need to
check that the project you are supporting is legitimate and that
funds are only contributed through reputable websites.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
Persons listed may not be admitted in all states and
territories.
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