ASIC RG 262 — ASIC Regulatory Guide – RG 262 Crowd-sourced funding: Guide for intermediaries

Page 1 REGULATORY GUIDE 262 Crowd-sourced funding: Guide for intermediaries October 2018 About this guide This guide is for entities providing, or looking to provide, a crowd-funding service as a crowd-sourced funding (CSF) intermediary by operating a platform for CSF offers and investments. This guide explains the general ongoing obligations that apply to CSF intermediaries as Australian financial services (AFS) licensees and the specific obligations that apply under the CSF regime in the Corporations Act. Page 2 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 2 About ASIC regulatory documents In administering legislation ASIC issues the following types of regulatory documents. Consultation papers: seek feedback from stakeholders on matters ASIC is considering, such as proposed relief or proposed regulatory guidance. Regulatory guides: give guidance to regulated entities by:  explaining when and how ASIC will exercise specific powers under legislation (primarily the Corporations Act)  explaining how ASIC interprets the law  describing the principles underlying ASIC’s approach  giving practical guidance (e.g. describing the steps of a process such as applying for a licence or giving practical examples of how regulated entities may decide to meet their obligations). Information sheets: provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. Reports: describe ASIC compliance or relief activity or the results of a research project. Document history This guide was issued in October 2018 and is based on legislation and regulations as at the date of issue. The note on the front page was inserted on 27 July 2020. In March 2022 we updated the note at RG 262.13, RG 262.73 (and its note) and RG 262.192 to reflect the breach reporting reforms that commenced on 1 October 2021. In June 2025, we updated references to reflect changes to Regulatory Guide 1 Applying for and varying an AFS licence (RG 1) and related guidance. In April 2026, we made amendments to reflect updated Regulatory Guide 181 AFS licensing: Managing conflicts of interest (RG 181) and Regulatory Guide 271 Internal dispute resolution (RG 271), as well as current style and drafting practices. Previous versions:  Superseded Regulatory Guide 262 Crowd-sourced funding: Guide for intermediaries, issued September 2017 Disclaimer This guide does not constitute legal advice. We encourage you to seek your own professional advice to find out how the Corporations Act and other applicable laws apply to you, as it is your responsibility to determine your obligations. Examples in this guide are purely for illustration; they are not exhaustive and are not intended to impose or imply particular rules or requirements. Page 3 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 3 Contents A Overview ........................................................................................... 4 Crowd-sourced funding in Australia ................................................... 4 Purpose and scope of this guide ....................................................... 6 B AFS licensee obligations .............................................................. 11 AFS licence and authorisation to provide a crowd-funding service . 11 Conflicts of interest .......................................................................... 12 Financial resource requirements ..................................................... 14 Adequacy of other resources ........................................................... 16 Outsourcing functions that relate to your licence............................. 18 Organisational competence ............................................................. 19 Dispute resolution ............................................................................ 23 Risk management ............................................................................ 23 Compensation arrangements .......................................................... 27 Client money handling ..................................................................... 27 Providing an FSG ............................................................................ 28 Advertising by CSF intermediaries .................................................. 29 Financial product advice .................................................................. 31 C Specific obligations under the CSF regime ................................ 32 Gatekeeper obligations .................................................................... 32 Prominent display of certain information on platform ...................... 37 Providing an application facility........................................................ 38 Providing a communication facility .................................................. 39 Dealing with application money ....................................................... 40 Timing rules for CSF offers .............................................................. 41 Defective CSF offer documents ....................................................... 42 Additional obligations when dealing with retail clients ..................... 43 Consequences if there is a breach .................................................. 45 D Data reporting requirements ........................................................ 46 Key terms ............................................................................................... 49 Related information ............................................................................... 51 Page 4 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 4 A Overview Key points Crowd-sourced funding is a form of fundraising that allows a company to access capital from a large number of investors. The crowd-sourced funding (CSF) regime in Pt 6D.3A of the Corporations Act 2001 (Corporations Act) provides a regulatory framework for equity- based crowd-sourced funding by small unlisted public companies and proprietary companies, enabling them to make offers of ordinary shares to retail clients, through a licensed intermediary’s platform, using a CSF offer document. This guide will assist you, as a CSF intermediary, to: • understand how to apply for authorisation to provide a crowd-funding service; • meet your obligations and responsibilities as an Australian financial services (AFS) licensee under the law; and • meet specific requirements under the CSF regime. Crowd-sourced funding in Australia RG 262.1 Crowd-sourced funding involves raising funds—usually through an online intermediary—from a large number of people who make relatively small financial contributions to the company. RG 262.2 Crowd-sourced funding generally falls into two categories: non-investment and investment-based. Non-investment crowd-sourced funding allows participants to make a donation to support a cause or pre-purchase a good or a service that will be made using the funds raised. Investment-based crowd- sourced funding involves participants investing money for a financial reward or gain. RG 262.3 The CSF regime in Pt 6D.3A of the Corporations Act provides a regulatory framework for equity-based crowd-sourced funding, which is a type of investment-based crowd-sourced funding that involves a company offering its ordinary shares to investors in return for a relatively small cash investment. This guide focuses specifically on the equity-based crowd- sourced funding that is covered by the CSF regime. Note: In this guide, references to sections (s), chapters (Ch), divisions (Div) and parts (Pt) are to the Corporations Act, unless otherwise specified. References to regulations (reg) are to the Corporations Regulations, unless otherwise specified. RG 262.4 Figure 1 illustrates how equity-based crowd-sourced funding works, with an intermediary performing checks on the issuing company, operating an online platform (through which the company offers shares and investors invest Page 5 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 5 money in exchange for shares), holding investor money and passing investor money to the company when the offer is complete. Figure 1: A basic illustration of how equity-based crowd-sourced funding works mplete Offers shares Performs checks on offering company; passes on investor money when offer is complete Holds investor money until offer is co Operates platform Invest money in exchange for shares Note: The process shown in Figure 1 is described in RG 262.4 (accessible version). RG 262.5 Under the CSF regime, unlisted public companies and proprietary companies with less than $25 million in assets and annual revenue can make offers of ordinary shares to retail clients, through an AFS licensed CSF intermediary’s platform, using a CSF offer document. Eligible companies can raise up to $5 million in any 12-month period under the CSF regime. RG 262.6 Crowd-sourced funding provides an additional funding option for entrepreneurs and small companies to grow their businesses, and provides an additional investment option for people wishing to invest in start-ups and small businesses. RG 262.7 However, crowd-sourced funding is recognised internationally as a risky form of investment. Note: See the Crowdfunding: 2015 survey responses report (PDF 0.5 MB), released December 2015, by the International Organization of Securities Commissions (IOSCO). RG 262.8 The development of Australia’s CSF regime has followed a global trend towards law reform facilitating investment-based crowd-sourced funding, including in the United States, Canada, the United Kingdom and New Zealand. RG 262.9 In its Crowdfunding: 2015 survey responses report, IOSCO observed that the regulatory approaches of each jurisdiction it surveyed aim to balance the need for appropriate investor protection with facilitating a new form of fundraising by companies. Common key elements include: (a) appropriate regulation of intermediaries (i.e. licensing or registration); (b) investor protections proportionate to the high risk and low liquidity of the investments; and (c) some disclosure and other requirements for companies raising funds. Company Online platform Investors Intermediary Page 6 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 6 The role of a CSF intermediary RG 262.10 A CSF intermediary plays a significant role under the CSF regime, operating the platform through which investors invest and companies offer their shares. This role includes managing some of the risks identified by IOSCO in relation to crowd-sourced funding, to help ensure that investors and offering companies can be confident in using the CSF regime. ASIC’s role in regulating crowd-sourced funding RG 262.11 ASIC is Australia’s corporate, markets and financial services regulator. We administer the Corporations Act and the Australian Securities and Investments Commission Act 2001 (ASIC Act). Our role includes the regulation of fundraising and licensing of financial service providers. RG 262.12 Crowd-sourced funding under the CSF regime involves offering shares in the company that is raising funds. Providing a crowd-funding service to offering companies and investors is a financial service. A CSF intermediary must hold an AFS licence authorising it to provide this service. A CSF intermediary might require an Australian market licence if the operation of a platform involves operating a financial market; however, this guide does not address this requirement. Note: For information on market licences, see Regulatory Guide 172 Financial markets: Domestic and overseas operators (RG 172). RG 262.13 As well as issuing your AFS licence, we also oversee your compliance with the Corporations Act and the ASIC Act. To do this, we may conduct surveillance to check your compliance with the law, including in response to reports of misconduct from investors or companies using your services. ASIC has a range of powers to check compliance and investigate suspected breaches. Note: As a CSF intermediary, you have an obligation to notify ASIC of reportable situations—see Regulatory Guide 78 Breach reporting by AFS licensees and credit licensees (RG 78). Purpose and scope of this guide RG 262.14 This guide aims to assist you, as a CSF intermediary, to understand and comply with your obligations when providing a crowd-funding service to offering companies and investors. In particular, it will help you: (a) understand how to apply for an AFS licence authorisation to provide a crowd-funding service; (b) meet your obligations and responsibilities as an AFS licensee; and (c) meet specific requirements under the CSF regime. Page 7 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 7 RG 262.15 This guide covers the key features of the CSF regime in the Corporations Act for CSF intermediaries, as set out in Table 1. Table 1: Key features of the CSF regime for CSF intermediaries Key feature Summary Guidance AFS licence obligations You need to hold an AFS licence with an authorisation to provide a crowd-funding service. As an AFS licensee, you must comply with the general obligations in s912A and other obligations in the Corporations Act. For example, you must have adequate resources and, in particular, you must meet requirements to demonstrate you will maintain an adequate cash buffer through preparing projections and arranging a report by an auditor on the projections annually. Section B of this guide Specific obligations under the CSF regime You must meet gatekeeper obligations, including:  performing checks on a prospective offering company, CSF offer and CSF offer document; and  not publishing, or not continuing to publish, a CSF offer document on your platform in certain circumstances. Under the CSF regime, you must also:  display certain information prominently on your platform;  provide a facility on your platform to enable people to apply under a CSF offer (application facility) for all offers on your platform;  provide a communication facility for investors to ask questions about a CSF offer, and monitor posts on this facility;  deal with application money compliantly;  comply with timing rules for CSF offers;  appropriately deal with defective CSF offer documents; and  ensure advertising is not misleading or deceptive, and advertising of CSF offers directs investors to the general risk warning and CSF offer document. Section C of this guide See also Regulatory Guide 261 Crowd- sourced funding: Guide for companies (RG 261) Additional obligations for retail clients You have additional obligations to retail clients, to help ensure that they can be confident to invest. You must ensure that, for all CSF offers made on your platform:  retail clients complete a risk acknowledgement before applying for shares under a CSF offer;  retail clients do not invest more than the investor cap ($10,000) per company in any 12-month period; and  retail clients are informed of and able to exercise their cooling-off rights to withdraw from a CSF offer within five business days of applying. Section C of this guide Data reporting You have obligations to provide information to ASIC about your activities on an annual basis. Section D of this guide Page 8 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 8 What is not covered by this guide? Companies seeking to make CSF offers RG 262.16 To raise funds under the CSF regime, a company must meet certain requirements, including being eligible to make a CSF offer and providing the prescribed disclosure to investors. We provide guidance for companies seeking to raise funds under the CSF regime in RG 261. Secondary trading of shares by CSF companies RG 262.17 CSF intermediaries and other entities seeking to operate a secondary market in shares of eligible CSF companies must hold an Australian market licence or be exempt from the requirement to hold an Australian market licence. We provide guidance for market operators in RG 172. Other forms of crowd-sourced funding RG 262.18 This guide does not provide guidance about non-investment crowd-sourced funding, including donation-based crowd-sourced funding and funding based on the pre-purchase of goods and services other than financial products and services. This type of crowd-sourced funding is not regulated by ASIC. RG 262.19 ASIC is the regulator responsible for investment-based crowd-sourced funding, including the equity-based crowd-sourced funding covered by the CSF regime. Other forms of investment-based funding include offers under prospectuses and Product Disclosure Statements, through business introduction services, by personal offers under s708, involving the use of nominee services and fundraising activities arranged as managed investment schemes—these types of fundraising are not covered by this guide. RG 262.20 Where a CSF intermediary intends to facilitate other forms of investment- based funding (as well as equity-based crowd-sourced funding) on the same website, it is important that these are clearly segregated to ensure that consumers do not confuse the funding options. In particular, the website should make clear the differences between the funding options, the risks, and any other information a consumer may need to make an informed decision about where to invest their money. It is also important to make clear if each funding option is provided by the entity in its capacity as an AFS licensee. Business introduction services RG 262.21 Some entities provide a service of introducing potential investors to companies looking to raise funds, to enable the companies to make personal offers to those investors. The investors introduced to the companies can be retail and wholesale investors who have registered their interest in investing and receiving personal offers from the type of companies that they are introduced to. This is generally known as a business introduction service, and might be promoted as a form of crowd-sourced funding. Page 9 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 9 RG 262.22 This guide does not apply to entities operating a business introduction service. In light of the CSF regime, these entities must take care in referring to their services as a form of crowd-funding, and make clear to investors that they do not hold an AFS licence to provide a crowd-funding service under the CSF regime and are not subject to the gatekeeping obligations that apply to CSF intermediaries. Retail clients in particular may be misled, or confuse business introduction services with a crowd-funding service provided by a CSF intermediary holding an AFS licence. Fundraising involving managed investment schemes RG 262.23 Fundraising involving managed investment schemes is another type of investment-based funding, which typically involves the operator of the scheme raising funds for investments that it makes on behalf of investors in the scheme. The fundraising activity may be promoted through a website. In return for making an investment in the scheme, the investors acquire an interest in the scheme that gives them a return based on the performance of the investments chosen and made by the operator of the scheme. The investors may not acquire any specific interest in the investments made by the operator on their behalf. RG 262.24 Operating a registered managed investment scheme is a financial service that requires the operator to hold an AFS licence issued by ASIC. Where the scheme is offered to retail clients, it will generally need to be a registered managed investment scheme unless certain exclusions apply. This guide for CSF intermediaries is not directed at operators of managed investment schemes. Operators of managed investment schemes should see our dedicated regulatory guides for managed investments schemes. RG 262.25 Operators of such managed investment schemes will also need to take care in promoting their products as a form of crowd-sourced funding, to ensure that investors do not confuse their product with CSF offers under the CSF regime. It is important to ensure that investors understand the nature of the investment that is being offered to them and, where applicable, that by investing in the scheme they are not acquiring a specific interest in the investments made on their behalf. Custodial arrangements RG 262.26 The CSF regime does not apply to offers of interests in shares that are held through a nominee as a result of a CSF offer, whether the nominee is the CSF intermediary or another person. A nominee may apply for shares under a CSF offer but will need to comply with applicable laws, including: (a) when carrying on a business of providing a custodial or depository service—holding an AFS licence authorising that service, and meeting the relevant requirements under Regulatory Guide 133 Funds management and custodial services: Holding assets (RG 133) and Page 10 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 10 Regulatory Guide 148 Platforms that are managed investment schemes and nominee and custody services (RG 148) and associated legislative instruments. This includes ensuring that, if the client would be acquiring as a retail client if they had acquired directly, the client has access to the CSF offer document, cooling-off rights and the communication facility; and (b) when carrying on a business of acquiring shares on behalf of the clients of the nominee—holding an AFS licence authorising those dealings. Marketplace lending RG 262.27 Marketplace lending can involve fundraising by small and medium sized businesses through an online platform in the form of a loan (or another credit facility) from the marketplace lending provider or, in some cases, by issuing debentures. The funding may be provided by wholesale and retail clients through a managed investment scheme structure. This guide does not apply to marketplace lending. Note: Information Sheet 213 Marketplace lending (peer-to-peer lending) products (INFO 213) provides guidance for marketplace lending providers. Page 11 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 11 B AFS licensee obligations Key points A CSF intermediary must hold an AFS licence authorising the licensee to provide a crowd-funding service: see RG 262.28–RG 262.32. As a CSF intermediary, you must meet the general obligations that apply to AFS licensees for: • conflicts of interest (see RG 262.33–RG 262.38); • adequacy of financial resources (see RG 262.39–RG 262.47); • adequacy of other resources, such as human and technological resources (see RG 262.48–RG 262.57); • outsourcing functions that relate to your licence (see RG 262.58– RG 262.59); • organisational competence (see RG 262.60–RG 262.77); • dispute resolution (see RG 262.78–RG 262.84); • risk management (see RG 262.85–RG 262.98); • compensation arrangements (see RG 262.99–RG 262.102); • client money handling (see RG 262.103–RG 262.105); and • providing clients with a Financial Services Guide (FSG) (see RG 262.106–RG 262.110). You must also comply with advertising restrictions and be authorised to provide financial product advice, if necessary: see RG 262.111– RG 262.125. AFS licence and authorisation to provide a crowd-funding service RG 262.28 To be a CSF intermediary, you must have an AFS licence that expressly authorises you to provide a crowd-funding service. RG 262.29 You do not need an authorisation to deal in the securities offered on your CSF platform: see s766C(2A). However, if you provide financial product advice you will need to have an AFS licence authorisation to do so. For guidance on financial product advice provided by CSF intermediaries, see RG 262.122–RG 262.125. Note: Providing the CSF offer document, or a statement contained in or drawn from the document which is attributed to the document, is not financial product advice—see reg 7.1.08. RG 262.30 When deciding whether to grant an AFS licence authorisation to provide a crowd-funding service, we will assess your capacity and expertise to act as a CSF intermediary in accordance with your obligations as an AFS licensee. Page 12 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 12 For example, we will consider whether you are likely to do all things necessary to carry on the business efficiently, honestly and fairly. Relevant guidance can be found in: (a) Regulatory Guide 1 Applying for and varying an AFS licence (RG 1); (b) Regulatory Guide 104 AFS licensing: Meeting the general obligations (RG 104); (c) Regulatory Guide 105 AFS licensing: Organisational competence (RG 105); (d) Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees (RG 126); (e) Regulatory Guide 166 AFS licensing: Financial requirements (RG 166); (f) Regulatory Guide 167 AFS licensing: Discretionary powers (RG 167); (g) Regulatory Guide 181 AFS licensing: Managing conflicts of interest (RG 181); and (h) Regulatory Guide 271 Internal dispute resolution (RG 271). Single CSF platform RG 262.31 Generally, we expect that your application for authorisation to provide a crowd-funding service will be for a single platform, on a particular website. If granted, the authorisation will be tailored to specify the platform that we have assessed. RG 262.32 It must be your platform and should not be, or appear to be, made available by anyone else. You cannot appoint an authorised representative to operate your platform for dealing with applications under your authorisation to provide a crowd-funding service, including to hold the trust account into which application money is paid. However, you may have an authorised representative to provide other aspects of the crowd-funding service, such as operating the communication facility on your platform, transacting in relation to the trust account or performing certain checks for your gatekeeper functions: see RG 262.58–RG 262.59. You may also contract for the provision of information technology (IT) or other services for your platform that are not financial services. Conflicts of interest RG 262.33 An AFS licensee must have in place adequate arrangements for managing conflicts of interest that may arise wholly or partially from the provision of financial services by the licensee, or a representative of the licensee, as part of the financial services business of the licensee or the representative: see s912A(1)(aa). Page 13 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 13 RG 262.34 This obligation will apply to the crowd-funding service provided by you as a CSF intermediary. You should consider our general guidance for AFS licensees in RG 181 on conflicts of interest, including our guidance on having adequate arrangements and what effective conflicts management will generally involve. RG 262.35 Your conflicts management arrangements should be documented and include measures to identify, assess and respond to conflicts of interest. For them to be adequate, you should also implement, monitor, maintain and review your arrangements. Effective conflicts management may involve a combination of avoiding, controlling and disclosing conflicts of interest. Although disclosure is one way of managing conflicts, it may not be adequate on its own unless it gives sufficient assurance that you are not at risk of not meeting your obligations. Your arrangements should be adequate to provide confidence that, despite any conflicting interest or duty you may have, you will comply with your obligations as an AFS licensee. RG 262.36 A key conflict of interest that you are likely to face, and which is specific to CSF intermediaries, is the conflict between your various obligations under the CSF regime and the financial benefits you derive from publishing CSF offers and ensuring the success of those offers. The risk posed by this conflict is heightened by the extent to which your remuneration depends on the success of an offer. RG 262.37 Your arrangements to manage conflicts of interest may include, but are not limited to: (a) ensuring that investors can exercise their cooling-off rights and receive a refund of their money, even though this may lead to the CSF offer being unsuccessful (as it reduces the amounts raised), which can in turn have a negative impact on your income (where this is linked to the offer being successful); (b) managing the communication facility knowing that negative factual information or opinions may detract from the success of the offer and consequently harm your revenue; (c) performing checks to the required standard, which may result in you declining to publish certain offers and in turn negatively impact your ability to generate revenue; and (d) reviewing the CSF offer document, which may result in you declining to publish certain offers and in turn negatively impact your revenue. RG 262.38 There are no restrictions under the CSF regime on the fee arrangements that may be agreed between a CSF intermediary and a company making a CSF offer, including fees based on the amount of funds raised or on providing an interest in the offering company. You may enter an underwriting arrangement (provided you are separately authorised to do so) Page 14 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 14 or expect to derive benefits from facilitating secondary trading of shares offered in a CSF offer. However, with such arrangements, conflicts may arise between your interest in earning fees, including by acquiring an interest in the offering company, and your responsibilities as a CSF intermediary— for example, your responsibility in certain circumstances to: (a) not publish, or not continue to publish, a CSF offer document; (b) suspend or close a CSF offer; (c) where relevant, provide compliant financial product advice to investors about products offered through your crowd-funding service or to a prospective offering company about the prospects of raising funds; and (d) deal with (e.g. remove) comments on the communication facility. Financial resource requirements RG 262.39 As an AFS licensee, generally you must have adequate resources, including financial resources (except for certain bodies regulated by the Australian Prudential Regulation Authority (APRA)): see s912A(1)(d). We also consider that your risk management arrangements must be adequate for the risks relating to maintaining any required financial resources. RG 262.40 ASIC applies some particular measures for licensees to demonstrate adequate financial resources and risk management related to the financial resources. Some of the financial resource requirements apply to AFS licensees generally, while others apply to particular classes of AFS licensee (such as CSF intermediaries), as set out in RG 166. RG 262.41 The specific minimum requirements for CSF intermediaries are provided under modified provisions of Pt 7.6 in ASIC Corporations (Financial Requirements for CSF Intermediaries) Instrument 2017/339. Surplus liquid funds RG 262.42 One of the general financial resource requirements is for an AFS licensee to maintain surplus liquid funds (SLF) of $50,000 if it holds client assets of at least $100,000. As a CSF intermediary, you may hold at least $100,000 of client assets (such as application money) from time to time, and you will need to meet the SLF requirement at those times. This test can be met with the same assets that are used for the cash needs requirement below. Note: See Section C of RG 166. Page 15 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 15 Cash needs requirement RG 262.43 As an AFS licensee, you need to demonstrate that you expect to have sufficient cash to meet your expenses, including the costs involved in ensuring compliance with your AFS licensee obligations. RG 262.44 This is done through having cash flow projections that cover at least 12 months ahead at all times, based on reasonable assumptions about what is most likely, and approved by your directors or governing body (or you, if the CSF intermediary is a natural person) at least every three months. This is consistent with requirements applying to other AFS licensees that typically hold substantial client funds over a period of time, such as operators of investment platforms. However, until 1 July 2020, we will accept cash flow projections that cover at least three months ahead. This recognises that there may be challenges in projecting cash flows for a CSF intermediary business during the early years in which this type of business is able to be operated in Australia. Note: For further information see Appendix 9 to RG 166. We will review these transitional arrangements in July 2020. RG 262.45 The cash flow projections need to indicate that you will hold, at all times covered by the projection, a cash buffer of at least 5% of projected 12-month cash outflows or, if higher, the cash outflows in a previous year. Until 1 July 2020, the cash flow projections only need to show that you will hold, at all times covered by the projection, a cash buffer of at least 20% of projected three-month cash outflows or, if higher, 5% of the cash outflows in a previous full financial year. Note: Cash and cash flow are explained in Section B and Section E of RG 166. RG 262.46 This way of demonstrating adequacy of cash financial resources and related risk management arrangements through projections of likely cash flows reflects Option 1 in RG 166. Generally, we do not consider that CSF intermediaries will be able to show adequate cash financial resources and related risk management arrangements using Options 2 to 5 in RG 166. This is because CSF intermediaries are not likely to be in a position to confidently estimate and document a plan for all reasonably foreseeable circumstances, and are also not likely to be able to rely on undertakings of financial support from banks or substantial parent entities. We are willing to consider applications to modify the requirements if an alternative approach can provide the same level of confidence about the adequacy of your cash resources over the term of the projections. Audit RG 262.47 As an AFS licensee, you must lodge, in respect of each financial year, a true and fair profit and loss statement and balance sheet with ASIC under s989B, Page 16 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 16 and an audit report on those statements. The auditor is also required to audit compliance with any SLF and other financial requirements, and express certain opinions on compliance with the requirements about trust accounts. An audit is not required for your cash flow projections—but, similar to other AFS licensees, a specific opinion from an auditor (on a positive or negative assurance basis, as appropriate) is required about particular aspects of the process that you used to develop the projections. Note: For further information see Appendix 9 to RG 166. Adequacy of other resources RG 262.48 Demonstrating adequate human and technological resources is crucial to show that you have the capacity to carry on your financial services business in full compliance with the Corporations Act, including the requirement to comply with the financial services laws and to supervise your representatives. Note: See RG 1, RG 104 (particularly Section E) and RG 105. Human resources RG 262.49 Whether your human resources are adequate will depend on the nature, scale and complexity of your business. You need to have enough people to: (a) comply with all of your obligations under the law; (b) carry out monitoring and supervision; and (c) meet your current and anticipated future operational needs. RG 262.50 You need to regularly review the adequacy of your human resources. We expect that you will identify key indicators of inadequate human resources. RG 262.51 As a CSF intermediary, you should have people within your business who: (a) sufficiently understand the platform and underlying technology to ensure it operates as expected and, to the extent possible, without system issues (we expect you to have at least one person in your business with this understanding); (b) provide the financial services or monitor any authorised representatives that do so; (c) provide and maintain the application and communication facilities; and (d) meet all of the CSF intermediary gatekeeper obligations, including: (i) performing the required checks (see RG 262.127–RG 262.143); (ii) complying with restrictions on publication of CSF offer documents (see RG 262.144); and Page 17 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 17 (iii) meeting the requirements for dealing with application money (see RG 262.164–RG 262.165). RG 262.52 As the CSF intermediary, you must provide an application facility for CSF offers made through your platform, although you may use technology provided by others in doing so. If you choose to outsource other functions relating to your crowd-funding services, we expect you to have people within the business who understand these functions to appropriately monitor and assess the outsourced service provider’s performance, to help ensure that you meet your general obligations: see RG 262.59. Technological resources RG 262.53 As an AFS licensee authorised to provide a crowd-funding service, you should have sufficient technological resources, including resources to: (a) provide and maintain the platform technology, and ensure an appropriate level of system availability to comply with your day-to-day gatekeeper obligations and rules—for example: (i) for the application facility—caps on investment rules (see RG 262.188–RG 262.189) and timing rules related to a CSF offer (see RG 262.166–RG 262.170); and (ii) for the communication facility—ensuring appropriate oversight of posts to identify and promptly remove any information that is misleading or not in good faith (see RG 262.158–RG 262.161); (b) maintain client records and data integrity, and meet annual reporting requirements, for ASIC to monitor your ongoing capability to effectively perform the crowd-funding service and ensure confidence in the market for shares offered under the CSF regime (see RG 262.193– RG 262.197); (c) protect confidential and other information, taking into account cyber risks and events that may occur; (d) meet current and anticipated future operational needs, including in relation to system capacity; and (e) comply with all your other obligations as an AFS licensee. RG 262.54 You should also have adequate business continuity, backup and disaster recovery plans for any systems that support the platform. Reviewing your IT systems RG 262.55 You need to regularly review the adequacy of your technological resources to manage your risk of non-compliance. Page 18 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 18 RG 262.56 When reviewing your IT systems, you need to consider: (a) your IT system security; (b) the currency of your hardware and software; (c) the quality and relevance of the applications you use, including as demonstrated by user testing; (d) your disaster recovery systems and business resumption capacity; (e) the number of users; (f) the ongoing viability of software and other service providers; (g) the response times of your IT systems; (h) the down times of your IT systems; (i) your use of legacy IT systems; and (j) complaints (e.g. from staff, clients or service providers) about your IT systems. RG 262.57 We may ask you to provide evidence of your process for overseeing and monitoring the relevant systems—including the platform, application facility and communication facility—regardless of whether aspects of these functions are performed in-house or outsourced: see also RG 262.32. Outsourcing functions that relate to your licence RG 262.58 If an outsourced function is required to be provided by a CSF intermediary, including all aspects of the role of a CSF intermediary under Pt 6D.3A, the person to whom it is outsourced must be an officer or employee of the CSF intermediary or its related body corporate, or an authorised representative. This would apply, for example, to conducting checks required of the CSF intermediary as a gatekeeper and provision of the communication facility. RG 262.59 If you outsource functions that relate to your AFS licence, you remain responsible for complying with your obligations as a licensee: see s769B. If the outsourced service provider is providing a crowd-funding service by performing any of your obligations on your behalf, or providing other financial services on your behalf, then they are your representative. You are required to take reasonable steps to ensure that your representatives comply with the financial services laws (see s912A(1)(ca)) and are adequately trained and competent to provide those financial services (see s912A(1)(e)). For any outsourced service, we expect that you will: (a) have measures in place to ensure that due skill and care is taken in choosing suitable service providers; (b) monitor the ongoing performance of service providers; and (c) appropriately deal with any actions by service providers that breach service level agreements or your obligations as a licensee. Page 19 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 19 Organisational competence RG 262.60 You need to be able to show that you can comply with the organisational competence obligation from the time you are granted an AFS licence, and on an ongoing basis. We cannot grant you a licence if we have reason to believe you will be likely to contravene this obligation: see s913B(1)(b). Note: You should read RG 1, which explains the licence application process and the ‘proof’ documents you may need to provide to support your application. You will need to submit a C11 CSF intermediary non-core proof, in addition to other proofs. RG 262.61 You must have and maintain the competence to provide the financial services covered by your AFS licence: see s912A(1)(e). We refer to this obligation as the ‘organisational competence obligation’, because it requires you to be competent at the organisational level. Note: There is a separate obligation under s912A(1)(f) to ensure the representatives who provide financial services on your behalf are trained and competent to do so: see RG 105.20. Responsible managers RG 262.62 We assess your compliance with the organisational competence obligation by looking at the knowledge and skills of the people who manage your financial services business (referred to as your ‘responsible managers’). RG 262.63 In assessing the competence of your nominated responsible managers, we will look at a combination of their relevant experience, training and qualifications. The different options for demonstrating the competence of your responsible managers are set out in Section C of RG 105. These options provide flexibility for responsible managers with a range of different educational and occupational backgrounds. RG 262.64 Who you nominate as your responsible managers will depend on the nature, scale and complexity of your business: see Section B of RG 105. Usually, people with direct responsibility for significant day-to-day decisions about your financial services will be people who decide how your financial services are provided and supervise the provision of those services. They do not need to actually provide financial services on your behalf, although they might do so. Page 20 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 20 RG 262.65 At a minimum, you need to nominate one or more responsible managers who: (a) are directly responsible for significant day-to-day decisions about the ongoing provision of your financial services (see Section B of RG 105; (b) together, have appropriate knowledge and skills for all of your financial services—this includes providing the platform and performing all other aspects of the role of a CSF intermediary under the CSF regime; and (c) individually, meet one of the five options for demonstrating appropriate knowledge and skills relevant to their role, taking into account the functions required to provide your financial services compliantly. RG 262.66 When nominating your responsible managers, you also need to ensure they are of ‘good fame and character’, as we consider this when we assess an application for an AFS licence. Note: For more information on the good fame and character requirement, see RG 1. RG 262.67 Our general policy for AFS licensees on competence assessment will apply to CSF intermediaries. As a crowd-funding service is a new financial service, you may look to rely on Option 5 in RG 105 to demonstrate the competence requirements. Experience that may be relevant to demonstrating your responsible managers’ competence might include a combination of some of the following: (a) experience as an investor directed portfolio service (IDPS) platform operator, managed discretionary accounts (MDA) operator or conducting due diligence on investments to be offered to retail clients as part of admission to an approved product list for advisers; (b) experience dealing in securities—for example, as a stockbroker; (c) experience as a corporate adviser in mergers and acquisitions, listing, takeovers and rights offers, initial public offers, corporate actions, underwriting, and placements of securities; (d) fund management experience (including registered and unregistered managed investment schemes); (e) experience operating a crowd-sourced funding platform, including non- investment or investment-based, using a wholesale or registered scheme arrangement or small-offers exemption under s708; (f) experience as an operator of an investment-based crowd-sourced funding platform, including overseas (such as in New Zealand); (g) experience as a financial market operator in Australia or overseas; (h) experience operating a platform-based financial services business, such as marketplace lending; and Page 21 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 21 (i) experience acting as a legal adviser to AFS licensees and providing compliance services to AFS licensees. Note: We will not regard legal and compliance experience of itself as sufficient to demonstrate organisational competence to operate as a CSF intermediary, but may demonstrate some aspects of the required competence. Key persons RG 262.68 If we are satisfied with your organisational competence, but we consider you are heavily dependent on the knowledge and skills of one or two responsible managers, we will generally include a ‘key person condition’ in your AFS licence. The key person condition will name those responsible managers whose competence we consider you heavily depend on, and you will need to inform ASIC if that person leaves the business: see Section D of RG 105. Measures for maintaining organisational competence RG 262.69 Once you have an AFS licence, you must maintain your organisational competence at all times. We expect a licensee to stop providing financial services for which a key person was appointed, where that person leaves and has not been replaced with someone else who meets the competence standards required under RG 105: see RG 262.67. This does not affect the obligations of a CSF intermediary under the Corporations Act in relation to money already held under a CSF offer. RG 262.70 If we have reason to believe you are not complying with the organisational competence obligation, we may take administrative action. This could include suspending or cancelling your licence, or imposing additional licence conditions: see s915C(1)(a) and 914A(1). Note: For guidance on our administrative powers, see Regulatory Guide 98 ASIC’s powers to suspend, cancel and vary AFS licences and make banning orders (RG 98). RG 262.71 We expect your measures for complying with the organisational competence obligation will ensure that you: (a) review your organisational competence on a regular basis and whenever your responsible managers or business activities change; (b) maintain and update the knowledge and skills of your responsible managers; and (c) keep records showing that you have reviewed your organisational competence and the steps you have taken to maintain your organisational competence. Note: For more information on compliance measures, see Sections B and C of RG 104. Page 22 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 22 RG 262.72 We expect you to document your measures to help demonstrate your compliance with the organisational competence obligation. RG 262.73 If you breach, or are likely to breach, the organisational competence obligation, you may need to notify ASIC: see s912DAA. Note: For guidance on notifying ASIC of reportable situations, see RG 78. Changes to the business RG 262.74 If you are applying for a new AFS licence, or adding new responsible managers for a variation to your existing licence, you will need to provide us with information about your nominated responsible managers: see Section C of RG 1. You should ensure that this information explains as precisely as possible how the knowledge and skills of each nominated responsible manager will support the particular financial services for which you wish to be authorised. Note 1: If you are varying your AFS licence and intend to nominate additional responsible managers to meet the competencies of the new authorisation, you will first need to complete the transaction Notify change of details of an Australian financial services licence through the ASIC Regulatory Portal. Note 2: If you appoint an authorised representative, you must generally lodge with ASIC a notice of the appointment—see s916F. RG 262.75 We expect you to review your organisational competence and ensure you will continue to be competent in the changed circumstances before you make any changes to your business, such as expanding your range of financial services or products or replacing a responsible manager. Training and competence RG 262.76 You have an obligation to ensure your representatives are trained and competent to provide financial services on your behalf. RG 262.77 We expect you to: (a) identify the knowledge and skills your representatives need to competently provide your financial services; (b) ensure that they have the necessary knowledge and skills; (c) ensure that they undertake continuing training programs to maintain and update their knowledge and skills; and (d) maintain a record of their training as required under reg 7.6.04(1)(d). Page 23 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 23 Dispute resolution RG 262.78 A CSF intermediary that provides a crowd-funding service to retail clients must have a dispute resolution system that meets certain requirements, available for those retail clients. Note: See s912A(1)(g). You are also required to report certain internal dispute resolution information to ASIC under this provision, see Internal dispute resolution data reporting. RG 262.79 The dispute resolution system must consist of: (a) internal dispute resolution (IDR) procedures; and (b) membership of the Australian Financial Complaints Authority (AFCA). Note: For guidance on IDR, see RG 271 and for information about membership of AFCA see Section B of Regulatory Guide 267 Oversight of the Australian Financial Complaints Authority (RG 267). RG 262.80 We consider it good practice to make details of your IDR procedures and how consumers can complain to AFCA available on your website where they can be easily located, whether in the FSG or otherwise. Internal dispute resolution procedures RG 262.81 Your IDR procedures must: (a) comply with the standards and requirements made or approved by ASIC; and (b) cover complaints made by retail clients in relation to the crowd-funding service. RG 262.82 We explain what an AFS licensee must do to have a dispute resolution system that meets our requirements in Section E of RG 271. RG 262.83 You will have two types of clients in relation to a CSF offer: (a) the investor making an application for the CSF offer; and (b) the company making the CSF offer. RG 262.84 Your IDR procedures will therefore need to cover complaints made by either type of client, where they are a retail client. Note: For guidance on when a client is a retail client for the purposes of the CSF regime, see RG 262.182. Risk management RG 262.85 As an AFS licensee, you must have adequate risk management systems (except for certain bodies regulated by APRA): see s912A(1)(h). You must Page 24 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 24 also have measures in place to ensure that you comply with this obligation on an ongoing basis: see Section C of RG 104. Note: Section D of RG 104 provides general guidance on the obligation to have adequate risk management systems. RG 262.86 This means that you need to explicitly identify the risks you face and their likelihood and potential impact, and have measures in place to keep the risks to an acceptable minimum. We expect your risk management systems will: (a) be based on a structured and systematic process that takes into account your obligations under the Corporations Act; (b) identify and evaluate risks faced by your business, focusing on risks of non-compliance with the financial services laws that adversely affect clients; (c) establish and maintain controls designed to manage or mitigate those risks; and (d) fully implement and monitor those controls to ensure they are effective. RG 262.87 Your risk management systems will depend on the nature, scale and complexity of your business and your risk profile. They will be different for each AFS licensee. Your risk management systems will also need to adapt as your business develops and your business risk profile changes over time, so they will need to include arrangements for review of the risks and controls. RG 262.88 If you use external providers to provide functions that relate to your AFS licence, your risk management measures will be different than if you performed those functions in-house. Specific risks for CSF intermediaries RG 262.89 In developing your risk management systems, it is important to consider your specific obligations under the CSF regime, including gatekeeping obligations, which are intended to manage some of the key risks that may arise in the context of crowd-sourced funding. Note: For more information, see Australian/New Zealand Standard AS ISO 31000:2018 Risk management—Guidelines. Gatekeeping obligations RG 262.90 There is a higher risk of default or failure associated with start-up businesses, which highlights the risk to investors if you fail to perform your gatekeeping obligations. Fundraising through crowd-sourced funding also involves costs for companies making CSF offers, meaning that unsuccessful fundraising or successful fundraising for unviable businesses if you fail to perform your gatekeeping obligations may cause substantial loss to these clients. Page 25 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 25 RG 262.91 You should consider the types of risks particular to your gatekeeper role and your platform. For example, this will include the risk of publishing a CSF offer document for a company that is not eligible to make offers under the CSF regime. As part of carrying out your gatekeeping obligations as a CSF intermediary, you may wish to ask a prospective offering company about any prior refusal by other CSF intermediaries due to non-eligibility. You should also consider the risk of market manipulation through the abuse of cooling-off rights to create a false impression of significant demand for a CSF offer. Note: Pt 7.10, relating to market misconduct and manipulation, applies to crowd- sourced funding. Technological risks RG 262.92 A CSF intermediary business will generally have a focus on technology, so you will need to carefully consider specific technological risks—for example: (a) compliance risks associated with technological failure (such as maintenance of a communication facility and discharging obligations in relation to cooling-off rights); and (b) business continuity and disaster recovery planning. Malicious cyber activity and ensuring cyber resilience RG 262.93 You can manage the risk of malicious cyber activity, and ensure cyber resilience, by: (a) conducting regular cyber resilience health checks (for additional guidance, see Report 429 Cyber resilience: Health check (REP 429)); (b) updating policies and procedures to reflect current industry and international guidance; (c) regularly testing IT systems; (d) developing, testing and implementing disaster recovery and business continuity plans; and (e) regularly reviewing the material risks from and to other entities, as a result of technology interdependencies. Employee misconduct RG 262.94 Another relevant risk is the conduct of employees (deliberately or inadvertently) not aligning with your interests or obligations as a CSF intermediary. RG 262.95 Some ways you might seek to manage this risk include: (a) carrying out comprehensive employment screening; Page 26 REGULATORY GUIDE 262: Crowd-sourced funding: Guide for intermediaries © Australian Securities and Investments Commission October 2018 Page 26 (b) having specific provisions in your conflicts of interest policy that you implement where appropriate; (c) adequately training employees about your conflicts of interest policy; (d) having appropriate remuneration systems that support risk management and do not create incentives for employee misconduct; (e) monitoring employee conduct—for example, through exceptional reporting of unusual events and random review or audit of transaction records; (f) maintaining an internal audit function; (g) conducting peer reviews; (h) having whistleblower policies and procedures; (i) electronically monitoring high-risk functions; and (j) implementing other controls to prevent misappropriation of client funds, such as co-signing policies. Fraud RG 262.96 You can manage the risk of fraud, and the risk of other illegal activities being undertaken through your platform, by: (a) segregating duties, particularly for staff