The Australian Securities and Investment Commission issued a warning about the risks of crowdfunding today and said enforcement included fines of up to $22,000 and up to five years’ imprisonment.
The corporate regulator has been monitoring the increasing use of crowdfunding for investment purposes, which involves using the internet and social media to raise funds in support of a specific project or business idea.
Australian companies, including Pozible and StartSomeGood.com, have enthusiastically embraced crowdfunding where project sponsors or pledgers typically receive some reward in return for their funds. But, in some cases, the reward expected may be of minor value and is merely incidental rather that the purposes of the contribution.
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ASIC Commissioner Greg Tanzer said in a statement published by ASIC today that crowdfunding was not prohibited in Australia and is not generally regulated by ASIC.
“However, depending on the particular crowdfunding arrangement, ASIC’s view is that some types of crowdfunding could involve offering or advertising a financial product, providing a financial service or fundraising through securities requiring a complying disclosure document,” he said.
“These activities are regulated by ASIC under the Corporations Act and ASIC Act and may impose legal obligations on operators of crowdfunding sites and on people using those sites to raise funds.”
ASIC warned ventures funded by a crowdfunding site could be a managed investment scheme if funds contributed are pooled or used in a common enterprise to produce financial benefits or benefits consisting of interests in property for the contributors.
However, if the people providing the funds are making a donation or are only told they may receive some asset of nominal value, which is not itself a financial product, the arrangement is not generally regulated by ASIC.
ASIC said in some circumstances, crowdfunding may also be considered a pre-purchase arrangement of a product or a service and so would be regulated by Australian Consumer Law, which prohibits businesses from making false or misleading representations to consumers.
“Consumers concerned that they may have been misled about a crowdfunded product or service that is not a financial product or service may wish to contact the Australian Competition and Consumer Commission or their local office of fair trading,” ASIC said in today’s statement.
If crowdfunding involves an offer that meets the definition of a financial product then the owner of Australian-based websites that facilitate this crowdfunding may need to hold or obtain an Australian Financial Services Licence with the appropriate licence authorisations or be an authorised representative of an AFS licence holder.
Website owners may also need to give product disclosure statements for the offer to clients.
If the crowdfunding includes an offer to issue securities such as shares or debentures in a company, or an invitation to apply for securities, then the issuer of those securities or equity may be required to lodge a prospectus or other complying disclosure document.
ASIC said it has already written to a number of Australian-based operators of crowdfunding websites outlining its views on crowdfunding and the circumstances that may impose legal obligations.
The regulator said some risks in crowdfunding could be managed by website operators.
It said the risk of fraud being carried out through crowdfunding websites can be managed by operators conducting background and credentials checks on project.
Similarly, the risk that funded projects are not completed and the project sponsors do not receive the rewards promised can be managed by operators assessing the viability of the project before it is posted on their website, requiring the project creator to provide more information on how and when they complete the project and considering requiring the project creator to report periodically through the website on their progress in implementing the project.
ASIC said the risk that the money collected is lost due to the fraud or bankruptcy of the website operator before the money is passed on to the project creator can be managed by operator’s holding all crowdfunding money in a trust account separate from its own assets, avoiding excessive holding periods and implementing appropriate internal controls to ensure withdrawals are appropriate.
ASIC warned there are serious penalties for offering financial products or securities, advertising and publicising financial products or securities without meeting relevant obligations and with the maximum penalty being a fine of $22,000 and five years’ imprisonment.