THE QUICK ANSWER:
If you engage in communication with multiple individuals on multiple occasions regarding fundraising or investment activities, the law generally classifies you as ‘carrying on a financial services business’.
If you go ahead without one, you may be prosecuted, fined, jailed, or have a liquidator appointed and your investment project wound up.
The key to an AFSL requirement centers on the words: ‘Carrying on a financial services business’.
If you are in the business of providing financial services (such as the raising of private capital) then you must hold an Australian Financial Services Licence (AFSL) issued by ASIC. Many new entrants will claim they are not ‘in the business’ until they have completed more than one deal. This is a convenient point of view, but it is incorrect. The issue is not straightforward and there are several factors that contribute to determining whether you are in the business of providing financial services. These include:
- You engage in systematic and repetitive activities. Even with one prospective investment proposition, such as a single Investment Fund, you will probably meet that criteria. Every time you communicate with someone to interest them in investing in your Fund, you are likely to be giving advice and therefore providing financial services. If you speak to several prospective investors about investing, you could be deemed as undertaking systematic and repetitive activities. This, especially when taken with other activities, is likely to mean you are ‘carrying on a financial services business’.It is worth noting that under common law, a single transaction may amount to the carrying on of a business.
- You take steps to start a business. Isolated business activities may be held to be the commencement point of carrying on a business. These activities can be as basic as organising tasks in a business-like manner, such as registering a business name, registering for GST, setting up a spreadsheet of potential investors, preparing a financial feasibility model or plan for your investment proposition, or the keeping of books, records and the use of a system.
- The nature of your activities has a profit motive. The framework in which this is viewed by ASIC is whether you are undertaking these activities with the aim of generating a profit; not how much profit you generate or in what year/s you receive it. You can be making no profit, or be making a loss, and still be deemed to have the objective of making a profit.
