House of Representatives

Corporations Amendment (Crowd-sourced Funding) Bill 2016

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Chapter 3 The role and obligations of a CSF intermediary

Outline of chapter

3.1 This Chapter sets out the role and obligations of a CSF intermediary in facilitating a CSF offer.

3.2 Unless otherwise stated, all references in this Chapter relate to the Corporations Act 2001 and the Corporations Regulations 2001.

Context of amendments

3.3 The CSF intermediary occupies a central role in the CSF regime. Under the regime, all CSF offers must be made via the 'platform' of a CSF intermediary.

Summary of new law

3.4 A person that intends to operate a crowd-funding platform (the intermediary) will be required to hold an Australian Financial Services Licence (AFSL) and may also be required to obtain an Australian Market Licence (AML).

3.5 For intermediaries required to obtain an AFSL, the Bill creates a new type of financial service, being the crowd-funding service.

3.6 The intermediary has a number of obligations under the CSF regime, including:

·
'gatekeeper' obligations (which set out when the intermediary must not publish or continue to publish an issuer's offer document);
·
the obligation to provide a communication facility;
·
the obligation to prominently display on the platform the CSF risk warning, information on cooling-off rights, and fees charged to and interests in an issuer company;
·
the obligation to ensure retail clients receive the benefit of the relevant investor protections (cooling-off rights, the investor cap, the risk acknowledgement) and that the obligation to comply with the prohibition on providing financial assistance is adhered to; and
·
the obligations to close or suspend the offer as required, and handle application monies appropriately.

Comparison of key features of new law and current law

New law Current law
A person that intends to operate a crowd-funding platform (the intermediary) will be required to hold an Australian Financial Services Licence (AFSL) and may also be required to hold an Australian Market Licence (AML). No equivalent.
A new financial service has been created: a crowd-funding service. No equivalent.
A CSF intermediary has a number of obligations under the CSF regime, including:

·
'gatekeeper' obligations;
·
the obligation to provide a communication facility;
·
the obligation to prominently display on the platform the CSF risk warning, information on cooling-off rights, and fees charged to and interests in an issuer company;
·
the obligation to implement systems to ensure retail clients receive certain additional investor protections; and
·
the obligations to close or suspend the offer as required, and handle application monies appropriately.

No equivalent.

Detailed explanation of new law

Overview - the role and obligations of an intermediary

3.7 The amendments define the role of the CSF intermediary, the licensing requirements for an intermediary and the various obligations with which the intermediary must comply. The amendments are explained in detail below.

The CSF intermediary must be licensed

3.8 The Bill creates a new type of financial service: a crowd-funding service. A person that intends to provide a crowd-funding service must hold an AFSL that expressly authorises the provision of a crowd-funding service [Schedule 1, Part 1, items 14 and 25, section 738C and paragraph 766A(1)(ea)]. Depending on the nature of the activities carried out by the person, they could also be considered to be operating a financial market and therefore be required to hold an Australian Market Licence (AML).

3.9 The policy intent is that the provision of the crowd funding service should be subject to the obligations and protections, particularly as they apply to retail clients, of the AFSL regime (refer to paragraphs 3.17 to 3.18). Therefore, a person that holds an AML would not satisfy the definition of CSF intermediary unless they also held an AFSL that expressly authorised the provision of the crowd-funding service. This means that a person that holds an AML cannot rely on the exemption in paragraph 911A(2)(d) for incidental financial services to provide a crowd-funding service (as they would not satisfy the definition of CSF intermediary). Under the CSF regime, a CSF offer can only be made by publishing a CSF offer document on a platform of a CSF intermediary [Schedule 1, Part 1, item 14, section 738L].

3.10 The Minister has a power under section 791C that can be used to exempt operators from the obligation to hold an AML. Schedule 3 to the Bill provides the Minister with additional exemption powers that can be used to exempt certain financial market operators from specified AML obligations, allowing the AML regime to be tailored to particular markets, which could include intermediaries providing crowd-funding services.

Meaning of crowd-funding service

3.11 A person will provide a crowd-funding service if:

·
a CSF offer document for a CSF offer of securities of a company is published on a platform operated by the person; and
·
applications may be made to the person for the issue, by the company, of securities pursuant to the offer. [Schedule 1, Part 1, items 22 and 27, section 761A and subsection 766F(1)]

3.12 A crowd-funding service is also taken to include performing all aspects of the role of CSF intermediary as required under the CSF regime [Schedule 1, Part 1, item 27, subsection 766F(2)]. This means, for example, that a CSF intermediary will be taken to provide a crowd-funding service where it performs its gatekeeper obligations, holds application money on trust and operates the communication facility.

3.13 Deeming such activities to be part of the crowd-funding service means that the general obligations in section 912A (such as that the financial service must be provided efficiently, honestly and fairly) will apply to the CSF intermediary in respect of all activities it performs as part of its role of CSF intermediary.

3.14 While there is no explicit carve out from the definition of crowd-funding service applying to agents or employees of a CSF intermediary, agents and employees will not be required to obtain a separate AFSL as they will come within the scope of the exemption in paragraph 911A(2)(a). This paragraph provides that a person who provides a financial service as a representative of an AFSL holder whose licence covers the financial service is exempt from the requirement to hold an AFSL in relation to the financial service. A representative includes: an authorised representative; an employee or director of the licensee; or any other person acting on behalf of the licensee (paragraph 910A(a)). A person who operates a platform for a crowd-funding service, other than an employee or officer of the licensee or a related body corporate of the licensee will not be able to rely on this exemption as a CSF offer can only be made by publishing, on a platform of a CSF intermediary, a CSF offer document that complies with section 738J.

When and to whom is a crowd-funding service provided

3.15 The Bill makes it clear that the crowd-funding service is provided to both the person seeking to apply for the CSF securities and the company making the CSF offer. [Schedule 1, Part 1, item 27, subsections 766F(3) and (4)]

3.16 In the case of a person seeking to apply for CSF securities, the crowd-funding service is provided at the time when the person first uses the application facility to apply for an offer [Schedule 1, Part 1, item 27, subsection 766F(3)]. In the case of an issuer company, the crowd-funding service will be provided at the time the company enters into the hosting arrangement for the offer [Schedule 1, Part 1, item 27, subsection 766F(4)].

3.17 The intermediary must determine, at the relevant time the crowd-funding service is provided, whether the person to whom the service is provided is a 'retail client'. This is important as certain additional protections and obligations under Chapter 7 are applicable to retail clients.

3.18 A person that is provided a crowd-funding service as a retail client will be entitled to certain additional protections under Chapter 7. The intermediary must ensure that they:

·
provide a Financial Services Guide to an applicant or issuer that is a retail client, generally as soon as practicable after it becomes apparent to the intermediary that the financial service is likely to be provided (subsections 941A(1) and 914D(1));
·
have a compliant internal dispute resolution scheme and are a member of an ASIC approved external dispute resolution scheme (paragraph 912A(1)(g) and subsection 912A(2)); and
·
have arrangements for compensating retail clients for loss or damage suffered because the licensee breached its licensing obligations (section 912B).

3.19 An investor considered to be a retail client under Chapter 7 in relation to the crowd-funding service will also be a retail client for the purpose of the CSF offer, which will entitle them to certain additional investor protections such as cooling-off rights, risk acknowledgments and the investor caps [Schedule 1, Part 1, item 23, subsection 761G(8)]. These protections are discussed in further detail in Chapter 6 of the Explanatory Memorandum.

3.20 A person that is not considered to be a retail client will be a wholesale client (and would not, for example, be subject to the investor cap).

When a crowd-funding service is provided to a person as a retail client

3.21 Subsection 761G(7) contains the tests for determining when a person will be a retail client in relation to the crowd-funding service. The person to whom the crowd-funding service is provided will be a retail client unless one or more of the following tests are satisfied:

·
the product-value test: the price of the financial product (the securities on offer) or the value of the financial product to which the financial service relates, equals or exceeds $500,000 (paragraph 761G(7)(a) and Regulations 7.1.18 and 7.1.19); or
·
the securities or crowd-funding service is provided for use in a business other than a small business (paragraph 761G(7)(b)). A small business is defined as a business employing less than 20 people, unless the business includes the manufacture of goods, where the business must employ less than 100 people (subsection 761G(12)); or
·
where the securities or the crowd-funding service is not provided for use in connection with a business, the person acquiring the securities or crowd-funding service gives the intermediary a certificate prepared by a qualified accountant (defined in section 9) within the preceding six months that states that the person has net assets of $2.5 million, or gross income in the last 2 financial years of at least $250,000 (paragraph 761G(7)(c) and Regulation 7.1.28); or
·
the person to whom the crowd-funding service is provided is a professional investor as defined in section 9 (paragraph 761G(7)(d)). A professional investor includes an Australian financial services licensee, a listed entity, a bank, or a person that has or controls gross assets of at least $10 million.

3.22 Subsection 761G(8) provides that, in the case of a prosecution for any offence based on a provision in Chapter 7, if the defendant (in this case the intermediary) alleges that the financial service was provided to the person as a wholesale client, the defendant will be required to raise evidence that the person to whom the crowd-funding service was provided was not a retail client. Imposing the evidential burden on the defendant is appropriate given the policy intent is to ensure that persons that acquire financial products and financial services as retail clients have the benefit of the additional protections in the CSF regime and Chapter 7 more generally.

3.23 In the case of non-criminal proceedings, subsection 761G(9) provides that the presumption is that the financial product or crowd-funding service is provided to a person as a retail client unless the contrary is established.

3.24 The Bill provides that section 761GA, which would otherwise provide a mechanism whereby a financial services licensee could certify that a client has sufficient expertise to be treated as wholesale, does not apply to the provision of a crowd-funding service [Schedule 1, Part 1, item 24, section 761GA].

'Dealing' does not include providing a crowd-funding service

3.25 Certain activities of a CSF intermediary, which relate to arranging for the issue of securities, would also fall within the definition of the 'dealing' financial service in section 766C. To address the overlap, the Bill carves out a crowd-funding service from the dealing financial service [Schedule 1, Part 1, item 26, subsection 766C(2A)]. The result is that a CSF intermediary will need only one AFSL authorisation to operate a crowd-funding platform and will only need to consider when and to whom the crowd-funding service is provided for the purposes of their obligations under the CSF regime and Chapter 7 more generally.

Carve out from the definition of managed investment scheme

3.26 The amendments exclude the provision of a crowd-funding service from the definition of a managed investment scheme (MIS). This is to ensure the CSF intermediary is not subject to obligations under both the CSF regime and the MIS rules. [Schedule 1, Part 1, item 2, section 9]

Obligations of a CSF intermediary

3.27 The legislation imposes a number of obligations on the CSF intermediary, referred to as a 'responsible intermediary' in relation to a particular CSF offer [Schedule 1, Part 1, item 14, subsection 738L(5)]. The intermediary must comply with:

·
the 'gatekeeper' obligations (which set out when an intermediary must not publish, or continue to publish, the offer document of an issuer company on its platform);
·
the obligation to provide a communication facility;
·
the obligation to display the CSF risk warning, display cooling-off rights and appropriately disclose fees and interests in an issuer company on the platform;
·
the obligation to implement systems and procedures so that retail clients receive the additional investor protections in the CSF regime (cooling-off rights, investor cap, the risk acknowledgement and the prohibition on providing financial assistance); and
·
the obligations to close or suspend the offer as required, and handle application money appropriately.

Gatekeeper obligations

3.28 An intermediary must comply with certain 'gatekeeper' obligations [Schedule 1, Part 1, item 14, section 738Q].

Intermediary must conduct prescribed checks

3.29 Prior to publishing an offer document on its platform, an intermediary must conduct certain checks, which will be specified in the regulations ('prescribed checks'). [Schedule 1, Part 1, item 14, subsection 738Q(1)]

3.30 The intermediary must conduct the checks to a 'reasonable standard' [Schedule 1, Part 1, item 14, subsection 738Q(1)]. The amendments include a regulation-making power that could be used to prescribe what would be considered a reasonable standard for some or all of the checks, thereby providing certainty to intermediaries conducting the checks [Schedule 1, Part 1, item 14, subsection 738Q(2)].

3.31 An intermediary that fails to conduct the checks, or fails to conduct the checks to a reasonable standard, will commit a strict liability offence, punishable by a maximum penalty of 50 penalty units [Schedule 1, Part 1, item 14 and 34, subsection 738Q(3) and item 245E in the table to Schedule 3].

3.32 Strict liability, and the level of penalty, is appropriate, because:

·
the intermediary has a central role in the CSF regime and the obligation to conduct the prescribed checks to a reasonable standard is necessary to maintain the integrity of the CSF regime;
·
conducting the checks and the standard to which the checks are conducted is entirely dependent on the conduct of the intermediary who is liable for the offence;
·
the proposed penalty for the offence is consistent with the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers which specifies that a strict liability offence should be punishable by a maximum penalty of 60 penalty units with no term of imprisonment.

3.33 Where an intermediary fails to conduct a check, or fails to conduct a check to a reasonable standard, the intermediary is taken to have knowledge of any matter that they would have had knowledge of had they conducted the check to a reasonable standard [Schedule 1, Part 1, item 14, subsection 738Q(4)]. This deemed knowledge is relevant in determining whether the intermediary has complied with its obligations to not publish, or not continue to publish, the CSF offer document (discussed below).

3.34 While the regulations will prescribe the checks that must be conducted by an intermediary prior to publishing a CSF offer document, they are not intended to limit the checks or information that may be sought by an intermediary from the issuer company or its officers.

3.35 The amendments make it an offence for an officer or employee of a company to provide information that they know to be false or misleading in a material particular, or that omits a matter or thing which renders the information misleading in a material particular. [Schedule 1, Part 1, item 32, paragraph 2(1)(c)]

Intermediary must not publish or continue to publish offer document if not satisfied as to certain matters

3.36 A CSF intermediary must not publish, or continue to publish, an offer document if it:

·
is not satisfied as to the identity of the company making the offer or of its directors or other officers;
·
has reason to believe that any of the directors or other officers of the company are not of good fame or character;
·
has reason to believe that the company or directors or other officers of the company have, in relation to the offer, knowingly engaged in conduct that is misleading or deceptive or likely to mislead or deceive;
·
has reason to believe that the particular offer is not eligible to be made as a CSF offer [Schedule 1, Part 1, item 14, subsection 738Q(5)].

3.37 The purpose of the gatekeeper obligations is not to require the intermediary to conduct exhaustive due diligence on the company, its directors or other officers, or the company's business. Such an obligation would impose a relatively high burden on an intermediary, with potential flow-on costs for issuers seeking to access the intermediary's platform.

3.38 Rather, the gatekeeper obligations are intended to ensure that an intermediary does not publish, or continue to publish, the offer document in four specific circumstances. The basis for not publishing or continuing to publish the offer document is dependent on the actual knowledge of the intermediary (that is, whether they were satisfied as to certain matters or had reason to believe certain things) and what the intermediary should have become aware of from conducting the prescribed checks to a reasonable standard. Aspects of each situation where an intermediary must not publish or continue to publish an offer document are discussed below.

Not satisfied as to the identity of the company or its directors or other officers

3.39 The first situation where an intermediary must not publish or continue to publish the offer document is where the intermediary is not satisfied as to the identity of the company, its directors or other officers. [Schedule 1, Part 1, item 14, paragraph 738Q(5)(a)]

3.40 For the purpose of this requirement, the relevant definition of 'officer' is the definition 'officer of a corporation' (section 9) which is broad enough to also include a person who is not a director of the company but who exerts significant influence over the company or its directors.

Has reason to believe that any of the officers are not of good fame or character

3.41 The second situation where an intermediary must not publish or continue to publish the offer document is where the intermediary has reason to believe that any of the officers of the issuer company are not of good fame or character. [Schedule 1, Part 1, item 14, paragraph 738Q(5)(b)].

3.42 The amendments do not define good fame or character. However, the term is used in the licensing process as one of the preconditions prior to ASIC granting an AFSL. Specifically, subsection 913B(4) states that ASIC must be satisfied that there is no reason to believe: the person applying for the AFSL (where a natural person); or the responsible officers (where the applicant is a body corporate); or any of the partners or trustees (where the applicant is a partnership or trust) are not of good fame or character.

3.43 Subsection 913B(4) provides that ASIC must, in assessing whether there is reason to believe a person is not of good fame or character, have regard to certain matters including certain criminal convictions a person may have had, whether the person held an AFSL that was cancelled or suspended, whether a banning or disqualification order under Division 8 was previously made, or any other matter ASIC considers to be relevant.

Has reason to believe that the company or its officers have, in relation to the CSF offer, knowingly engaged in conduct that is misleading or deceptive or likely to mislead or deceive

3.44 Where an intermediary has reason to believe that an issuer has knowingly engaged in conduct that is misleading or deceptive, or conduct that is likely to mislead or deceive, the intermediary must not publish or continue to publish the offer document [Schedule 1, Part 1, item 14, paragraph 738Q(5)(c)]. For example, if an intermediary in considering whether to host an offer of a company has, in its dealings with the directors, reason to believe that the directors' representations in relation to the CSF offer are dishonest, the intermediary must not publish the offer document.

3.45 In the case of an offer that is already open, if the intermediary has reason to believe that the directors have, for example, knowingly provided misleading information in response to a post on the communications facility, the intermediary must not continue to publish the offer document and must close the offer.

3.46 The obligation to close the offer will only arise where the intermediary has reason to believe the issuer knowingly engaged in misleading or deceptive conduct. The inclusion of 'knowingly' recognises that there may be cases where an issuer may have, for example, unintentionally provided information that is misleading. In such circumstances, it would be inappropriate if the intermediary's only course of action was to remove the offer document from the platform and close the CSF offer.

3.47 If the intermediary has reason to believe that the issuer company knowingly engaged in conduct that was misleading or deceptive, or that was likely to mislead or deceive, the intermediary must remove the offer document from the platform and close the offer.

Interaction with provisions relating to defective offer documents

3.48 Where the conduct that is misleading or deceptive, or that is likely to mislead or deceive, is in relation to a defective offer document that contains a misleading or deceptive statement, an omission, or where there has been a new circumstance that has arisen since the document was published that would have been required to have been included in the document had it arisen before publication, the specific rules covering defective offer documents will take priority over the gatekeeper obligations. [Schedule 1, Part 1, item 14, subsection 738Q(6)]

3.49 The provisions relating to defective offer documents are discussed in Chapter 4 and require an intermediary to either close or suspend an offer when it is aware that the offer document is defective. Where it suspends the offer, the company will have the opportunity to prepare a supplementary or replacement offer document to correct the defect. In effect, the rules regarding defective disclosure documents will take priority over the gatekeeper obligations.

3.50 However, where an offer document is defective, for example, because it contains a misleading statement, but the company also knowingly makes another misleading statement on the communication facility, the intermediary will be required to close the offer as the gatekeeper obligations will apply in relation to the company's conduct relating to the communication facility, even if they do not apply in relation to the offer document.

Has reason to believe that the offer is not eligible to be made as a CSF offer

3.51 An intermediary must not publish or continue to publish an offer document where it has reason to believe that the offer is not eligible to be made as a CSF offer. [Schedule 1, Part 1, item 14, paragraph 738Q(5)(d)]

3.52 This obligation is intended to ensure that issuers that purport to be eligible for the CSF regime, but are not in fact eligible, are excluded from making a CSF offer. For example, if the intermediary has reason to believe that the proposed offer does not comply with the issuer cap, the intermediary must not publish the issuer's offer document.

Offences

3.53 An intermediary that fails to comply with its gatekeeper obligations will commit an offence, punishable by a maximum penalty of 60 penalty units, or imprisonment for one year, or both [Schedule 1, Part 1, item 34, item 245F in the table to Schedule 3].

3.54 A related obligation is that an intermediary must have in place 'adequate arrangements' to ensure that it complies with its gatekeeper obligations [Schedule 1, Part 1, item 14, subsection 738Q(7)]. This means that an intermediary must have in place policies, systems and procedures to ensure that it complies with its gatekeeper obligations, and must ensure that those policies, systems and procedures are adhered to. This must be documented in writing. Failure to do so is an offence, punishable by a maximum penalty of 30 penalty units or imprisonment for 6 months or both [Schedule 1, Part 1, item 34, item 245G in the table to Schedule 3)].

Other obligations of CSF intermediaries relating to their platform

3.55 The CSF regime sets out a number of other obligations that a CSF intermediary must comply with. These are that the intermediary:

·
must ensure the CSF risk warning appears prominently on the platform at all times while the offer is open or suspended [Schedule 1, Part 1, item 14, subsection 738ZA(1)];
·
must provide an application facility, reject any applications made other than via the application facility and not allow an application to be made while an offer is suspended or closed [Schedule 1, Part 1, item 14, subsections 738ZA(3) and (4)];
·
must provide a communication facility for each CSF offer [Schedule 1, Part 1, item 14, subsection 738ZA(5)];
·
must ensure that information relating to a retail investor's cooling-off rights appears prominently on the offer platform while an offer is open or suspended [Schedule 1, Part 1, item 14, subsection 738ZA(8)]; and
·
must disclose fees paid to it by the issuer and any interest that the intermediary has or intends to take in the issuer company prominently on the platform [Schedule 1, Part 1, item 14, subsection 738ZA(9)].

3.56 Failure to comply with any of the obligations set out above will mean the intermediary will commit an offence, punishable by a maximum penalty of 60 penalty units, one year's imprisonment, or both [Schedule 1, Part 1, item 34, item 245N in the table to Schedule 3]. The penalty of 60 penalty units and one year's imprisonment is in accordance with the fine/imprisonment ratio of 5:1 specified in the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers (section 3.1.3 of the Guide refers).

Risk warning

3.57 The intermediary must ensure that the CSF risk warning is displayed prominently on the offer platform. The purpose of the risk warning is to alert potential investors, particularly retail investors of the potential risks associated with, and high failure rates of, start-ups and emerging companies, which are most likely to be making CSF offers.

3.58 The required wording of the general CSF risk warning will be specified in the regulations [Schedule 1, Part 1, item 14, subsection 738ZA(2)]. The intermediary must ensure that the risk warning appears prominently on its platform at all times, including while an offer is suspended [Schedule 1, Part 1, item 14, subsection 738ZA(1)].

3.59 The word 'prominently' is not defined and whether the risk warning is prominently displayed will depend on the particular facts and circumstances, including the design of the offer platform.

Applications to only be made via an application facility

3.60 The intermediary must provide a facility - the application facility - on its platform to enable a person to apply for securities that are the subject of a CSF offer. All applications in response to a CSF offer must be made via the intermediary's application facility.

3.61 Where a person tries to apply for CSF securities other than via the application facility, the intermediary must reject the application and refund any money paid as soon as practicable [Schedule 1, Part 1, item 14, subsection 738ZA(4) and paragraph 738ZB(4)(b)]. Requiring all applications in response to the CSF offer to be made via the intermediary is a means of ensuring that applicants are aware of and receive the various investor protections.

3.62 The application facility must only be available while the offer is open - applications must not be able to be made while an offer is closed or suspended. [Schedule 1, Part 1, item 14, paragraphs 738ZA(3)(a) and (c)]

3.63 Where a retail client is trying to apply for securities that are the subject of a CSF offer, the intermediary must ensure that the investor completes a risk acknowledgment [Schedule 1, Part 1, item 14, paragraph 738ZA(3)(b)]. The requirement that a person 'complete' rather than 'sign' the risk acknowledgment means it will not be mandatory for an intermediary to require an applicant to digitally sign the risk acknowledgment (although it could choose to require this). The risk acknowledgment must comply with the requirements set out in the regulations [Schedule 1, Part 1, item 14, paragraph 738ZA(3)(b)].

Communication facility for each CSF offer

3.64 The intermediary must provide a communication facility in relation to each CSF offer while the offer is open or suspended [Schedule 1, Part 1, item 14, subsection 738ZA(5)]. Requiring a communication facility to be provided in relation to each CSF offer is consistent with one of the premises underlying crowd-funding, which is that investors can, in part, rely on the collective wisdom of the 'crowd' in making their investment decision.

3.65 The purpose of the communication facility is to allow potential investors, the issuer and intermediary to communicate with each other about a particular CSF offer. Specifically, the communication facility should enable a person who accesses the offer document to make posts relating to the offer, see posts relating to the offer and ask the company making the offer, or the intermediary, questions relating to the offer. It should also enable the company or intermediary to respond to questions and posts. [Schedule 1, Part 1, item 14, paragraphs 738ZA(5)(a) and (b)]

3.66 The communication facility does not need to be open to the general public, but must be made accessible to persons that are able to access the CSF offer document. Where a person is unable to access a CSF offer document until they have registered on an intermediary's platform, the person must be able to make and see posts on the communication facility for the offer on registration.

3.67 While the communication facility will provide an important mechanism for investors to communicate with each other and with the issuer company, persons who are officers, employees or agents of the issuer company, a related party or an associate of the issuer, or of the intermediary, must clearly disclose that fact when making posts on the facility [Schedule 1, Part 1, item 14, subsection 738ZA(6)]. Failure to comply with this rule means the person making the post will commit an offence, punishable by a maximum penalty of 60 penalty units, or one year's imprisonment, or both [Schedule 1, Part 1, item 34, item 245N in the table to Schedule 3].

3.68 The amendments include a power to make regulations covering the operation, management or use of the communication facility. For example, regulations could be made covering the removal of material from the communication facility. [Schedule 1, Part 1, item 14, subsection 738ZA(7)].

3.69 Statements made on the communications facility that refer to the CSF offer or would reasonably be likely to induce a person to apply for the CSF offer would ordinarily be subject to the advertising restrictions contained in the Bill. The Bill includes a carve out for statements made in good faith on the communication facility. This carve out is discussed in more detail in paragraphs 6.52 to 6.57.

Cooling-off rights must be displayed on the platform

3.70 The intermediary must ensure that the offer platform prominently displays information regarding the cooling-off rights for retail investors (refer to paragraphs 6.18 to 6.22), including the means by which the investor can exercise these rights. This information must be displayed on the platform at all times, including where an offer is open or suspended. [Schedule 1, Part 1, item 14, subsection 738ZA(8)]

3.71 Whether the information is prominently displayed is a question of fact and degree and will vary depending on how the intermediary's platform is designed.

Fees and interests must be prominently displayed on the platform

3.72 There are no restrictions, in the CSF regime, on the fee arrangements that may be agreed between an issuer and intermediary. For example, there are no prohibitions on an intermediary's fees being calculated based on funds raised under the offer or an intermediary being remunerated in the form of securities in an issuer company in lieu of cash. However, it is appropriate that the fee arrangements between the issuer and intermediary be disclosed to investors and, therefore, there is a requirement that this information be prominently displayed on the platform while the offer is open or suspended. [Schedule 1, Part 1, item 14, paragraph 738ZA(9)(a)].

3.73 Similarly, while there are no restrictions on an intermediary having or taking a direct or indirect pecuniary interest in the company whose securities it is offering on its platform, it is appropriate that this information is disclosed to investors. Therefore, there is likewise a requirement that this information be prominently displayed on the offer platform at all times while the offer is open or suspended [Schedule 1, Part 1, item 14, paragraph 738ZA(9)(b)].

Intermediary must deal with application money appropriately

3.74 The client money provisions contained in Division 2 of Part 7.8 will apply to the intermediary as they are an AFSL holder. Broadly, these provisions require an intermediary to hold application money in a qualifying account (the requirements for the account are set out in section 981B). Regulations made under the Division specify matters such as when money may be withdrawn from the account, and how interest earned on the account is dealt with.

3.75 The Bill confirms that the intermediary must deal with application money in accordance with the client money provisions but also contains specific provisions (discussed below) regarding when an intermediary must either pay money to the issuer or refund money to applicants. [Schedule 1, Part 1, item 14, subsection 738ZB(1)]

When money must be paid to the issuer or refunded to the applicants

3.76 The intermediary must pay application money to an issuer, net of any fees due to the intermediary, as soon as practicable after an offer is 'complete' (that is, the minimum subscription condition has been met and all withdrawal rights have expired, refer to paragraphs 4.50 to 4.53) and the company has issued the shares to the applicants [Schedule 1, Part 1, item 14, subsections 738L(8) and 738ZB(2)].

3.77 The intermediary must refund money to applicants as soon as practicable in the following situations:

·
the offer was closed because it was withdrawn by the company (paragraphs 4.47) or because the intermediary was required to close the offer pursuant to its 'gate keeper obligations' (paragraph 4.48);
·
the offer was closed for another reason (because the maximum offer period was reached (paragraphs 4.37 to 4.43) or the intermediary considered the offer to be fully subscribed (paragraphs 4.44 to 4.46)) but not complete; or
·
an applicant exercised their withdrawal rights - these could be statutory or non-statutory cooling-off rights, or the right to withdraw an offer within one month of receiving a supplementary or replacement offer document relating to a defective offer document (paragraph 5.31) [Schedule 1, Part 1, item 14, subsections 738ZB(3) and (4)].

3.78 An intermediary that does not comply with the above rules will commit a strict liability offence, punishable by a maximum of 50 penalty units [Schedule 1, Part 1, item 14, subsection 738ZB(5) and item 34, item 245P in the table to Schedule 3].

3.79 Strict liability, and the level of penalty, is considered appropriate because:

·
the requirement to deal appropriately with application money is a key element of the CSF regime;
·
an intermediary that fails to comply with the rules (for example, by not refunding money when cooling-off rights are exercised, or by paying money to an issuer before the securities are issued), compromises the investor protection and other elements that are central to the CSF regime;
·
exposure to the penalty is entirely dependent on the conduct of the intermediary who is liable for the offence; and
·
the penalty for the offence complies with the requirements of the Government's Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers (that is, the maximum penalty is no more than 60 penalty units and does not include a term of imprisonment).

Regulations may be made regarding how intermediaries are to deal with applications

3.80 The amendments provide for a regulation making power that can permit regulations to be made regarding how CSF intermediaries are to deal with applications pursuant to CSF offers, including in relation to:

·
the order in which applications are to be dealt with;
·
the circumstances in which applications must or may be rejected; and
·
when applications are to be counted towards the maximum or minimum subscription amounts. [Schedule 1, Part 1, item 14, section 738ZJ].

Consequential amendments

3.81 Consequential changes have been made to the ASIC Act to include a crowd-funding service, as defined in the Corporations Act, in the range of financial services covered by the ASIC Act [Schedule 1, Part 2, items 35 and 36, subsection 5(1) and subsections 12BAB(1C) and 12BAB(1D) of the ASIC Act].

3.82 Consequential amendments have been made to extend two current exceptions to the takeover laws.

3.83 The first exception to the takeover laws relates to an acquisition that results from an issue of securities in a company to a promoter under a Chapter 6D disclosure document and where certain required disclosures have been made. The amendments extend the existing exception to cover acquisitions that arise pursuant to a CSF offer document where the required disclosures have been made. [Schedule 1, Part 1, item 6, item 12 in the table in section 611].

3.84 The second exception to the takeover laws relates to an acquisition that results from an issue of securities in a company to an underwriter or sub-underwriter under a Chapter 6D disclosure document so long as the disclosure document disclosed the effect the issue would have on the underwriter's or sub-underwriter's voting power in the company. The amendments will extend the exception to cover issues of securities pursuant to a CSF offer in a company to an underwriter or sub-underwriter as long as the relevant disclosures have been made in the CSF offer document. [Schedule 1, Part 1, item 6, item 13 in the table in section 611].

3.85 As a CSF intermediary can be established as a partnership or a trust, consequential amendments have been made to ensure the rules in Chapter 7 that treat partnerships and trusts as legal persons generally apply to CSF intermediaries except where the rule is expressed to relate only to specific parts of Chapter 7. [Schedule 1, Part 1, item 14, paragraphs 738F(1)(a) and (b), subsection 738F(2)]

3.86 Consequential amendments have been made to extend the application of the rules in Chapter 7 that provide that a person is generally responsible for the conduct of their directors, employees, agents to the CSF regime. [Schedule 1, Part 1, item 14, paragraph 738F(1)(c)]

3.87 A regulation making power has been included to permit regulations to be made to modify how the above rules apply. [Schedule 1, Part 1, item 14, subsection 738F(3)]

3.88 This modification power is required to ensure that the application of the relevant Chapter 7 provisions to the CSF regime is consistent with the existing provisions in Chapter 7. The existing provisions in Chapter 7 (sections 761F, 761FA and 769B) all have a regulation making power to exclude or modify their effect in relation to specified provisions.

3.89 In applying the existing Chapter 7 provisions to the CSF regime, it is necessary to include a similar modification power so that any changes to the application of the existing provisions to Chapter 7 can also be reflected in the application of these provisions to the CSF regime. As such, the modification power has been included to eliminate the risk that there could be a mismatch between the way the current provisions operate in relation to Chapter 7 or the intended application in Chapter 6D and the way the provisions apply in relation to the CSF regime.


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