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.