Crowd funding on ASIC’s radar

Website operators and others involved in promoting a novel form of fundraising known as ‘crowd funding’ are being warned by the Australian Investment and Securities Commission (ASIC) that they may not be complying with Australian law relating to capital raisings.

Generally speaking, crowd funding is an online fundraising tool used by artists and entrepreneurs which allows the general public to contribute money to support a creative, social or business project which they believe has merit. These financial contributors will often receive some form of reward or recognition for their sponsorship, for example a contributor to an independent film may have their name listed in the credits.

Crowd funding websites in the US such as Rockethub, Kickstarter, InvestedIn and GoFundMe to name a few, have proven hugely popular with over USD$328 million being raised by Kickstarter alone for various projects since its inception in 2009.

This new form of fundraising is now catching on in Australia, with websites like Pozible and iPledg gaining popularity. These websites and others involved in similar activities have now been told by ASIC that their activities may be regulated by both the Corporations Act 2001 and Australian Securities and Investments Commission Act 2001.

The focus on crowd funding by ASIC follows the identification of risks associated with contributing money to crowd funding projects. In particular, there is a risk of fraud being carried out through crowd funding websites, and that money may be lost due to the fraud or bankruptcy of the website operator.

ASIC Commissioner Greg Tanzer has warned that any crowd funding venture involved in offering or advertising a financial product or service, or fundraising through securities (that is the selling of shares or similar instruments), may require a disclosure document that complies with Australian corporations law, and must comply with restrictions on financial product advertising. In some cases, they may also require an Australian Financial Services licence if they are holding themselves out to be the person making an offer to arrange for the issue of a financial product.

The consequences of crowd funding organisations failing to comply with the legal obligations include liability to compensate for loss of funds, and penalties of up to $11,000 and two years imprisonment for contravening restrictions on advertising of financial products.

While many crowd surfing website operators do not believe they fall within the definition of an advertiser or provider of financial products or services, this warning by ASIC should nonetheless serve as a reminder to ensure all legal obligations are complied with.

For more information or advice about the circumstances in which crowd funding arrangements may impose legal obligations above and beyond the mere terms and conditions of the website, please contact Certus Legal Group.