In our recent crowd-sourced funding (CSF) series, we outlined the implications of the Corporations Amendment (Crowd-sourced Funding) Act 2017 (CSF Act) for 3 types of CSF participants – fundraisers, intermediaries (i.e. crowdfunding platforms) and investors.
In this paper, we discuss the Australian Security & Investment Commission’s (ASIC’s) recent proposal to implement a new “two-tiered” market licensing regime to complement the CSF Act, and how it may impact some CSF intermediaries.
This proposal is set out in detail in ASIC Consultation Paper 293 (Revising the market licence regime for domestic and overseas operators) and the accompanying draft Regulatory Guide 172 (Financial markets: Domestic and overseas operators).
Will you need a market licence?
As we noted in Part 2, CSF intermediaries will need to hold an Australian Financial Services Licence to operate a crowdfunding platform. Depending on your activities, you may also need to hold a market licence.
If you plan to operate a crowdfunding platform which facilitates secondary trading of CSF shares (i.e. trading between investors who have already subscribed for CSF shares), then you will need a market licence.
At this stage, however, it’s not entirely clear whether all CSF intermediaries will need to hold a market licence. For example, if your crowdfunding platform is limited to facilitating primary share issues to CSF investors, then you may not require one.
Either you’re in or you’re out
As ASIC’s Consultation Paper points out, the Corporations Act 2001 (Corporations Act) currently only allows for inflexible exemptions from the market licensing regime. If your activities involve operating a financial market, you essentially have two options:
- obtain a market licence, in which case you must comply with all of the market licensing obligations; or
- if eligible, obtain an exemption from ASIC, in which case you don’t need a market licence and don’t need to comply with any of the market licensing obligations (subject to any specific conditions imposed by ASIC).
Changing the status quo
By contrast, once the main provisions of the CSF Act come into force, there will be scope for tailored exemptions to the market licensing regime – that is, a particular market venue or class of market venue may be exempted from specific market licensing obligations (but not others).
Given the current inflexibility of the regime, up until now ASIC has generally been prepared to grant blanket exemptions to market venues where it assessed that the costs of complying with the full range of market licensing obligations outweighed the benefits.
However, given the changes introduced by the CSF Act, ASIC has indicated a move to a policy of granting complete exemptions from the market licensing provisions only in “rare and exceptional circumstances”. Instead, ASIC proposes to use the new tailored exemption power to create a two-tiered market licensing regime:
- Tier 1 market venues will include those that are significant to the Australian economy and/or investor confidence in the financial system. Tier 1 venues will be subject to the full range of market licensing obligations, and will include major recognised securities exchanges and other important professional trading venues (e.g. ASX, ASX 24, Chi-X, and certain major futures markets).
- Tier 2 market venues will include most other financial markets which, after a risk-assessment by ASIC, are deemed not to meet the Tier 1 criteria. Tier 2 venues will generally only be subject to a subset of the Tier 1 licensing obligations. ASIC proposes that the Tier 2 category may include “specialised and emerging market venues”, including CSF intermediaries who conduct financial markets by, for example, facilitating secondary CSF share trading.
ASIC says it will consider a number of regulatory factors when undertaking risk assessments, including whether the market venue’s failure could severely disrupt the financial system, whether the same financial products are traded on other market venues, and whether the particular nature of the market venue creates risks for the financial system or investor confidence.
Tier 2 obligations
Under the proposed two-tier regime, Tier 2 market venues will still need to hold a market licence, but they will generally be subject to fewer and less stringent obligations.
For example, under ASIC’s current proposal:
- Tier 2 venues will still be required to have acceptable operating rules to support the interaction of users on their platform, but those rules may be exempt from certain content requirements.
- Tier 2 venues will be exempt from various Tier 1 obligations, such as:
- the obligation to maintain ‘exchange-like’ operating procedures;
- the obligation to notify ASIC of changes to operating rules after they occur (which may be subject to ASIC disallowance), although they will have to notify ASIC a reasonable time before making rule changes; and
- a number of other ASIC notification obligations, such as the requirement to notify ASIC when providing a new class of financial service incidental to operating the market venue.
Secondary trading in CSF shares
ASIC’s Consultation Paper also seeks stakeholder views about two potential aspects of secondary trading in CSF shares. Again, these may be relevant to you if you’re planning to operate a crowdfunding platform which allows the on-selling of CSF shares.
- On-sale restrictions: Under the Corporations Act, an investor who has subscribed for CSF shares may in some circumstances be prevented from on-selling those shares within 12 months of their issue to another person, unless a formal disclosure document (e.g. a prospectus) is provided. ASIC is seeking comments on whether there are circumstances where on-sales of CSF shares should be permitted within 12 months of a CSF offer.
- On-sale disclosure: Most CSF fundraisers will not be subject to the continuous disclosure obligations in the Corporations Act (as these generally apply to listed entities and certain larger unlisted entities). Accordingly, ASIC is seeking comments on what disclosure requirements and other investor protection obligations should apply to facilitate informed secondary trading of CSF shares.