THE QUICK ANSWER:
Usually, yes.
The financial services rules were introduced to regulate the raising of money and promote transparency and accountability in financial transactions. They generally apply to anyone who is raising money by whatever means.
In finance and investment, the concept of an Australian Financial Services License (AFSL) is often met with confusion and uncertainty. Many individuals who engage in fundraising activities, whether it be for personal projects, business ventures, or investments, wonder whether they need an AFSL to comply with the law. This article sets out the reasons behind the AFSL requirement and clarifying when it is necessary.
In almost every case, if you raise money – from people you know or from strangers – you need an Australian Financial Services License (AFSL). The method by which you raise funds does not alter this requirement. Whether you choose to set up a unit trust, operate through a company, enter into informal agreements, or use any other mechanism to pool funds, the fundamental principle remains: if you are raising money, you need an AFSL. Here’s why.
The core purpose of the AFSL requirement is to enhance investor protection and ensure the integrity of financial markets. The rules were introduced to regulate the raising of money and promote transparency and accountability in financial transactions. They apply to anyone who is engaged in carrying on a ‘financial services business.’
When people who raise money hear about the AFSL requirement, their immediate reaction is often one of denial. They may argue that they are not carrying on a financial services business and that the rules do not apply to them. However, this assumption is often incorrect.
Why? The reason lies in the way the law defines certain activities related to fundraising and investments. By default, when you raise money for an investment, you are essentially offering people an opportunity to participate in an investment activity. This action, in legal terms, is considered as providing ‘financial product advice.’ It’s crucial to understand that providing such advice does not solely mean offering detailed financial analysis or making investment recommendations. Even if you merely inform potential investors about the investment opportunity and influence them to invest, you are still considered to be giving ‘financial product advice.’
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.’ This classification does not depend on whether fundraising or investment is your primary business activity, or if it is related or unrelated to your other business ventures. Even if you have another full-time business, if you are raising money and engaging in financial services, you are still required to obtain an AFSL.
It is essential to recognize that the AFSL is not meant to deter individuals or businesses from raising money or engaging in investment activities. Instead, it is a regulatory framework designed to ensure that fundraising and investment activities are conducted in a fair and transparent manner, safeguarding the interests of investors. The AFSL provides a set of rules and standards that entities must adhere to when dealing with investors, which ultimately contributes to a more secure and trustworthy financial ecosystem.
The question of whether you need an AFSL when raising money or engaging in investment activities is not a matter of choice but rather a legal requirement. The rules surrounding AFSL were introduced to protect investors and regulate financial services businesses, and they apply regardless of the specific mechanisms or terminologies used in fundraising. If you are involved in raising money and influencing others to invest, it is crucial to be aware of your obligations under the law and seek proper licensing and compliance to avoid potential legal issues in the future. Complying with AFSL regulations not only ensures legal compliance but also helps build trust and credibility in your fundraising and investment endeavours, benefiting both you and your investors in the long run.
Common misconceptions
A common misconception is that you don’t need an AFSL if all of the investors are wholesale. This is also incorrect. The need for an AFSL does not depend on whether your Fund is required to be registered or not, the type of disclosure document required or whether the product offering is to retail or wholesale investors. You may still be required to hold an AFSL even if all your investors are wholesale investors.
Another common misconception is that there is an exemption from the need to have an AFSL if you have less than 20 investors or are raising less than $2m. This is also incorrect. The 20/12/$2m exemption, as it is commonly known, exempts a wholesale fund from providing retail investors with a PDS thereby allowing retail investors to invest in a wholesale fund without satisfying the definition of “wholesale investor”. An AFSL is still required.
