Why You Need an AFSL for Crowd-Sourced Funding Services in Australia

Introduction

In Australia, crowd-sourced funding (CSF) has emerged as a financial service that enables start-ups and small businesses to raise capital from a large number of investors. To legally provide crowd-sourced funding services as a CSF intermediary, it is mandated to hold an Australian Financial Services Licence (AFSL).

For entities looking to operate as CSF intermediaries in Australia, understanding the regulatory landscape is crucial. This guide provides essential information on why holding an AFSL is a fundamental requirement for providing crowd-sourced funding services, outlining the key regulatory obligations under the Corporations Act 2001 (Cth) and the role of ASIC in overseeing CSF intermediaries.

Understanding “Providing Crowd-Source Funding Services”

Defining Crowd-Sourced Funding (CSF)

Crowd-sourced funding, or crowdfunding, is classified as a financial service in Australia. It provides start-ups and small businesses with an opportunity to raise capital by collecting small investments from a large number of individuals. This approach has emerged as a popular alternative funding method for new businesses and ventures.

To illustrate, imagine a start-up developing an innovative tech product or service. Instead of pursuing traditional venture capital routes, they opt to use crowdfunding to secure funding. By launching a campaign on social media and crowdfunding platforms, they invite a broad audience to invest small amounts of money into their business. This specific type of crowdfunding—known as equity crowdfunding—enables the company to raise funds directly from the public while offering investors a stake in the business.

Key Components of Providing CSF Services

CSF intermediaries are pivotal to the crowd-sourced funding ecosystem. To provide crowd-sourced funding services, an organisation must operate a CSF platform, which serves as the foundation for facilitating CSF offers. These platforms can take the form of crowdfunding websites or other electronic facilities and are responsible for critical aspects of the process:

• Hosting CSF Offers: The platform displays listings for companies seeking to raise capital.
• Publishing the CSF Offer Document: This document is essential for making a CSF offer public and helps potential investors understand the terms and risks involved.
• Handling Investor Applications: The platform collects and processes applications from investors interested in participating in the fundraising offers.

For example, consider a business aspiring to act as a CSF intermediary. This company would need to create and operate a CSF platform where eligible companies seeking to raise funds can list their CSF offers. The CSF intermediary would then ensure that the CSF offer document is published accurately on the platform and that investors can seamlessly submit applications to participate in these funding opportunities. This intermediary’s role is fundamental to connecting businesses with investors and ensuring the process runs in compliance with the relevant regulations.

CSF Intermediaries Need an AFSL

To function as a CSF intermediary in Australia, it is mandatory to secure an AFSL. This requirement arises because crowd-funding services are classified as financial services under Australian law. Specifically, a CSF intermediary provides a financial service by operating a platform that facilitates CSF offers of fully-paid ordinary shares for eligible CSF companies. This role serves both companies raising capital and investors participating through the platform.

Building on the earlier example, consider a technology startup that has chosen to raise capital via crowdfunding. To host their campaign, the startup collaborates with a CSF intermediary authorised under an AFSL. The intermediary’s platform provides a space to list the equity crowdfunding offer, complete with the required CSF offer document.

The platform allows potential investors to view the offer and submit applications to participate. The AFSL confirms that the intermediary complies with regulatory standards, ensuring a secure and transparent environment for both the business and its investors. This regulatory accountability reinforces trust, strengthening confidence in the intermediary’s operations.

Obligations of AFSL Holders Providing CSF Services

General AFS Licensee Obligations for CSF Intermediaries

As an AFSL holder, CSF intermediaries are subject to a range of general obligations under the Corporations Act 2001 (Cth). These obligations are designed to ensure that financial services are provided efficiently, honestly, and fairly, thereby protecting both investors and the integrity of the financial market.

These general obligations include:

• Acting Efficiently, Honestly and Fairly: Licensees must conduct their financial services business with integrity and in a manner that is both efficient and fair. This encompasses adhering to the conditions of their AFS licence and complying with all financial services laws.
• Compliance with Financial Services Laws and Licence Conditions: AFS licensees are required to establish and maintain robust compliance measures. This includes implementing procedures to ensure ongoing adherence to financial services laws and the specific conditions outlined in their AFS licence.
• Reporting Obligations: Licensees are obligated to notify ASIC of any reportable situations. This ensures transparency and allows ASIC to monitor compliance and take appropriate action when necessary.
• Financial Reporting and Audit: Licensees are required to lodge annual financial statements and an auditor’s report with ASIC. This promotes financial transparency and accountability.
• Managing Conflicts of Interest: AFS licensees must have adequate arrangements in place to manage conflicts of interest. This is crucial to ensure that the interests of clients are prioritised and that any potential conflicts are handled appropriately.
• Maintaining Adequate Resources: Licensees, unless regulated by APRA, must maintain sufficient financial, human, and technological resources. This ensures they can effectively operate their business and meet their obligations.
• Organisational Competence: Licensees must maintain the necessary competence to provide the financial services they are authorised to offer. This includes ensuring that responsible managers possess the required skills and expertise.
• Risk Management Systems: Licensees, unless regulated by APRA, are required to establish and maintain adequate risk management systems. These systems are essential for identifying, assessing, and mitigating risks associated with their business operations.
• Compensation Arrangements: Licensees must have adequate compensation arrangements in place for retail clients. This ensures that clients have recourse to compensation for losses incurred due to breaches of licensee obligations.
• Dispute Resolution: For financial services provided to retail clients, licensees must have both internal and external dispute resolution systems. These systems must comply with ASIC standards and provide accessible avenues for clients to resolve disputes.

Specific Obligations for CSF Intermediaries under the Corporations Act

In addition to the general obligations that apply to all AFSL holders, CSF intermediaries have specific obligations under the Corporations Act 2001 that are tailored to the unique nature of crowd-sourced funding services. These specific obligations are critical for maintaining investor protection and the integrity of the CSF regime.

These specific obligations include:

• Gatekeeper Obligations: CSF intermediaries act as gatekeepers, performing essential checks to ensure the eligibility of companies and the compliance of CSF offer documents. These checks include verifying the identity of the offering company and its directors, and ensuring that the CSF offer document contains all required information and is not misleading.
• Platform Operation Requirements: CSF intermediaries must operate a platform that meets specific regulatory requirements. This includes prominently displaying prescribed risk warnings, fee disclosures, and information about investor cooling-off rights.
• Providing an Application Facility: Intermediaries must provide an application facility on their platform, ensuring that all applications for CSF offers are made through this facility to maintain regulatory oversight and investor protection.
• Communication Facility: A communication facility must be provided on the platform to enable transparent communication between potential investors, the offering company, and the intermediary. This facility allows for questions, discussions, and information sharing related to the CSF offer.
• Handling Application Money: CSF intermediaries are responsible for handling application money in accordance with the Corporations Act. This includes holding client funds in a trust account and adhering to strict protocols for disbursing funds to the offering company or refunding investors as required.

Conclusion

In summary, operating as a crowd-sourced funding intermediary in Australia necessitates holding an AFSL. This regulatory requirement is in place because providing crowd-sourced funding services is classified as a financial service under the Corporations Act 2001. The legislative framework for crowd-sourced funding aims to facilitate capital raising for start-ups and small businesses while ensuring appropriate investor protection measures are maintained within the CSF regime.

Navigating the complexities of obtaining an AFSL for providing crowd-sourced funding services can be challenging. For expert guidance and support through the application process, contact AFSL House today. Our team offers unparalleled expertise in Australian Financial Services licensing and is ready to assist you in securing the necessary authorisation to operate your CSF intermediary business efficiently and compliantly.

Frequently Asked Questions