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
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
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
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
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.
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