[Crowd sourced equity funding] refers to schemes through
which a business seeks to raise funding, particularly early-stage
funding, through offering debt or equity interests in the business
to investors online. Businesses seeking to raise capital through
CSEF typically advertise online through a crowd funding platform
website, which serves as an intermediary between investors and the
CAMAC's inquiry into crowd sourced equity funding reflects
the Government's desire to facilitate this kind of investment
while providing appropriate protection for investors.
If you are looking at setting yourself up as an intermediary in
this space, consider the following key issues:
possible conflicts of interest.
the need for an Australian financial services licence
whether you are operating a managed investment scheme which
requires registration under the Corporations Act
If you intend to invest in projects as well as recruiting
investors for such projects, you probably face a situation where
you intend to act on your own behalf as well as on behalf of
investors. This may give rise to a conflict of interest –
which poses problems from a number of legal perspectives. It may be
possible to manage any such conflict by setting up two distinct
corporate entities but you would need to consider this in detail
with a lawyer.
If you are locating investors for particular business ventures
and facilitating their investment in the ventures, you may be
engaging in the business of providing financial services. You may
be providing any of the following services, for which an AFSL is
providing financial product advice
dealing in financial products on behalf of another person
operating a registered managed investment scheme
providing a custodial or depository service.
Whether or not your activities will amount to the provision of
one or more of these services turns on complex statutory
definitions and should be the subject of detailed legal
consideration. If you are in the business of providing financial
services, you will need an AFSL with appropriate authorisations.
Applying for a licence can take up to six months. You will need to
put in place multiple systems and engage people with appropriate
qualifications and experience. Once you have your licence, you will
then have ongoing obligations to meet. Meeting all of these
requirements can be costly.
It may be that when investors enter into an arrangement with
you, you are effectively operating a managed investment scheme.
Again, this hinges on a detailed statutory definition of what
constitutes a managed investment scheme. If you are operating such
a scheme, it is likely to require registration with the Australian
Securities and Investments Commission. This obligation is
additional to the need to hold an AFSL and brings with it further
requirements which must be met – for example, putting in
place a constitution for the scheme which meets a raft of
It is possible to operate a managed investment scheme that does
not need to be registered. This is the case where a Product
Disclosure Statement ("PDS") is not required for the
scheme. A PDS is typically required where the investor is a
"retail client" but not where the investor is a
"wholesale client". The nature of crowd funding is such
that investors will almost always be retail clients.
Aside from these three key issues, there are a host of other
considerations that may be relevant to you, the following being
If you wish to raise equity in the corporation acting as the
intermediary, that may require a prospectus.
Any fundraising agreements in place between the intermediary,
entities conducting business ventures and/or investors will need to
fit in with legal and regulatory requirements.
As you can see, the issues are wide ranging and complex. Setting
yourself up in this space requires financial capital, careful
consideration and reliable legal advice.
Look out for results of CAMAC's review, in April. It may
recommend a modified regulatory regime which simplifies life for
those wanting to get involved in crowd funding.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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