Financial Services Alert

Amendments to the Corporations Act 2001 (Cth) (Corporations Act), introducing a crowd-sourced funding (CSF) regime, will take effect on 29 September 2017. From this date, CSF operators (intermediaries) will be able to apply for an Australian financial services (AFS) licence to provide CSF services.

Background

The Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) amends the Corporation Act, and makes minor amendments to the Australian Securities and Investments Commission Act 2001 (Cth), to provide a legislative framework for the CSF regime.

The CSF regime allows people to invest up to $10,000 per year in small and medium companies, to help them grow their business. In exchange, the investors will receive shares in the company. Eligible companies must use a CSF platform (typically a website) to make their investment offers and the platform will be run by an intermediary.

The intermediary must have an AFS licence expressly authorising them to provide a crowd funding service. This means that an intermediary will not only be required to comply with the new Part 6D.3A of the Corporations Act, but also the existing Chapter 7 provisions that apply to AFS licensees. For example, it will be required to provide retail clients with a Financial Services Guide as soon as practicable after it becomes apparent that a financial service will, or is likely to be, provided to the client. Depending on the activities the intermediary will conduct, it may also need an Australian Market Licence (for example, if it is operating a secondary market).

This update focuses on the AFS licence requirements and specific obligations on an intermediary under Part 6D.3A.

AFS licence for intermediaries

The Australian Securities and Investments Commission (ASIC) has released draft guidance for intermediaries. It is expected this guidance will be finalised ahead of the introduction of the CSF regime on 29 September 2017.

The draft guidance sets out the requirements that will apply for intermediaries seeking an AFS licence.

Requirement Details
Single CSF Platform ASIC will issue a tailored AFS licence for a single platform for a particular website. Intermediaries will not be authorised to operate multiple platforms. It is likely the AFS licence authorisation will refer to a particular URL. The platform must belong to the intermediary and cannot be made available by anyone else. This means the intermediary cannot appoint an authorised representative to operate its platform.
Conflicts of interests Existing ASIC policy will apply, meaning the intermediary must have adequate arrangements for managing conflicts of interest. For instance, potential conflicts may arise in respect to fee arrangements (e.g. if fees are based on the amount of funds raised or if the intermediary takes an interest in the company making the offer).
Financial resources requirements Specific minimum financial resources requirements will be set out in a legislative instrument. This has yet to be finalised, but the draft has been released and indicates that an intermediary should have, at all times, cash flow projections, based on a reasonable estimate of what is most likely, that:
  • Cover at least 12 months ahead
  • Have been approved by directors within the previous three months
  • Demonstrate that the intermediary would hold, at all times covered by the projection, a cash buffer of at least 5% of the projected 12 month cash outflows or, if higher, the cash outflows in a previous full financial year

Audit reporting requirements will apply. Other financial requirements which apply to other AFS licensees generally (except adequacy of cash) will also apply to intermediaries.

Adequacy of other resources The intermediary will need to demonstrate it has adequate human and technological resources to carry on the financial services business. This will include having at least one person with sufficient understanding of the platform and the underlying technology and people who will meet the intermediary's gatekeeper obligations under the new Part 6D.3A of the Corporations Act.
Organisational competence Existing ASIC policy will apply. ASIC has indicated it will consider certain experience in assessing organisational competence, for example experience dealing in securities and fund management experience.
Dispute resolution Existing ASIC policy will apply. This means the intermediary's dispute resolution system must consist of internal dispute resolution procedures and membership with an ASIC-approved external dispute resolution scheme.
Risk management The intermediary must have adequate risk management systems. The intermediary should consider their specific obligations under the CSF regime and identify key risks, including risks connected to gatekeeper obligations.
Compensation arrangements If the intermediary provides a CSF service to a retail client, it must have adequate arrangements for compensating them in the event of loss or damage suffered due to breaches of Chapter 7 obligations.
Client money handling Particular money handling provisions must be complied with. Money received from investor clients must be held in an account of the intermediary that is kept under section 981B of the Corporations Act and operated as a trust account in accordance with regulations 7.8.01 to 7.8.03. The client money provisions in Div 2 of Part 7.8 of the Corporations Act also apply.

Specific CSF obligations on intermediaries

Intermediaries will be subject to specific requirements under the new Part 6D.3A of the Corporations Act. If an intermediary fails to meet its obligations it will be in breach of its obligation, as an AFS licensee, to comply with financial services law. This may result in potential ASIC action, including additional conditions being imposed under the AFS licence or the suspending or revoking of the licence. Failure to comply can also amount to an offence under Part 6D.3A.

Requirement Details
Undertaking checks required by the Corporations Regulations and not publishing a CSF offer document in certain circumstances The intermediary will be required to complete checks on the identity of the company making the offer, the eligibility of the company to make a CSF offer, the CSF offer document and information about key personnel. This may require the intermediary to request information from the company making the offer and require the company to provide the information in accordance with a reasonable process developed by the intermediary. The intermediary must also not publish a CSF offer document when:
  • It is not satisfied as to the identity of the offering company or of its directors or other officers
  • It has reason to believe that any of the directors or other officers are not of good fame or character
  • It has reason to believe the offering company, or its directors or officers, have, in relation to the CSF offer, knowingly engaged in misleading or deceptive conduct
  • It has reason to believe the offer is not an eligible CSF offer
There are also specific requirements around what information an intermediary must display on its platform (such as a prescribed general risk warning).
Providing an application facility and a communication facility The intermediary must provide a facility on its platform to enable people to make applications in response to CSF offers (available only while the offer is open). The intermediary must also provide a communication facility in relation to each CSF offer (available while the offer is open or suspended). The communication facility must allow persons accessing the CSF offer document to make and see posts relating to the offer and ask the company making the offer, or the intermediary, questions (and must enable the company or intermediary to respond).
Dealing with application money As set out above, specific sections and regulations will apply to the money held by intermediaries. There is also specific obligations as to when the intermediary must pay money to the company or refund money to the applicant.
Offer timing rules A CSF offer is open from when it is first published on the intermediary's platform and can only be closed by the intermediary giving written notice on its platform that the offer is closed. There are also specific timing requirements around when the offer must be closed. The intermediary must suspend a CSF offer (if it does not close it) if it becomes aware that the offer document is defective.
Additional obligations when dealing with retail clients The following additional obligations apply when providing a CSF service to a retail client:
  • Unconditional cooling-off rights: All retail clients who make an application in response to a CSF offer have an unconditional right to withdraw their application within five business days of making the application. The intermediary must prominently display statements on the platform about these cooling-off right and the method for exercising this right
  • Risk acknowledgements: The intermediary must ensure the retail client is not able to make an application unless they complete an applicant risk acknowledgement containing the exact wording in the Corporations Regulations
  • Investor cap: The intermediary must reject an application from a retail client which would breach the $10,000 cap on the maximum amount that that a retail client can pay for applications for CSF offers made by a particular company via the same intermediary over a 12-month period
  • Restrictions on financial assistance: The intermediary must not financially assist a retail client in relation to a CSF offer, or arrange financial assistance for a retail client to acquire shares under a CSF offer, that it is hosting or intending to host

So you want to be an intermediary - what next?

Any business wishing to act as an intermediary will need to obtain an AFS licence authorising it to provide a CSF service. To facilitate implementation of the new CSF regime as soon as possible, ASIC's licensing team is aiming to consider applications from intermediaries as a matter of priority.

Applications lodged between 29 September 2017 and 27 October 2017 will be processed in batches (applications will be grouped if they have similar prospects of being positively assessed). Each application in each batch will be assessed within a similar timeframe.

Any applications lodged after 27 October 2017 will be progressed as soon as possible.

Businesses intending to apply should start gathering supporting material now, to ensure that their application can be processed as quickly as possible.

Further information can be found here.