In the Business Matters newsletter of September 2012 we identified that crowd funding was a popular practice where people could use the internet to fundraise tapping into extensive contacts "known" via the internet. We then commented that ASIC had, until then, tolerated that practice but had warned that there may be some breaches of regulatory laws if the model strayed beyond a simple exchange of a reward or a product for money donated for example, a CD or the object of the fundraising exercise.
Crowd funding could potentially breach the following:
- The financial services licensing and disclosure requirements;
- Advertising for financial products requirements;
- Fundraising disclosure regimes; and
- Management investment schemes laws.
Further to issues raised in our earlier article, we report comments in an article by Daniel Goldberg and Ryan Doherty, Law Society Journal, Volume 50, October, 2012. They expanded upon the discussion by noting foreign fundraising platforms should become particularly alerted to crossing the jurisdictional boundary and creating or rather delivering a financial service to Australian residents. If a reward is of a financial character, for example, a share in a new business or a chance to receive royalties from a musical or film offering, then that return may be classified as a financial product.
Disclosure requirements for any type of fundraising within Australia require extensive information about the nature of a venture, its start up time, the amount of money being borrowed, the delay in any returns being generated and the nature of any security that the donor has for participating in the scheme. This type of arrangement could also constitute a managed investment scheme which again is highly regulated and needs to be registered and approved.
Any promise on a crowd funding website should not mislead or deceive potential donors.
Another aspect of the crowd funding model of note to be determined in this new economy is the role of the platform operator in terms of the perceived level of participation of such a platform operator and its compliance obligations. The platform promoter takes no role in the activity.
Law reform will be needed if more sophisticated financial returns are guaranteed to contributors but for the time being, the social media community has adopted the model to fund projects with non-financial rewards on a relatively small scale and are relying on previous reports from other members to identify any unacceptable promoter who might be attempting fraud.
The crowd funding system has moved on and regulation has been imposed in some jurisdictions to require some disclosure by promoters. In Australia, for small not-for-profit organisations, the concept is ideal but we alert them to watch for regulatory development to ensure compliance. The US model provides a good example of what we might expect to see here.
Where you do not keep abreast of developments in the law, it is very easy to inadvertently breach regulations and attract the attention of the ASIC watchdog. Charities can run a fundraising appeal provided they hold a fundraising licence, in NSW, under the Charitable Fundraising Act, 1991(exceptions apply for religious organisations).
Where a charity, without a licence, collects funds from members, this activity may represent delivery of financial services: again requiring a licence, this time a financial services licence.
There is an exemption for charitable organisations which seek to raise funds from donors or members who are willing to deposit funds with the organisation to advance the objects of that organisation, but even securing such an exemption requires the preparation of a document which acts to disclose to donors how their money will be used and the terms upon which it will be repaid if at all.
We would be happy to discuss with you further your fundraising models and the applicable disclosure requirements.
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.
