An AFSL is a legal requirement for virtually every person that raises money

An Australian Financial Services License (AFSL) is a legal requirement for virtually every person that raises money.

But considering its longevity and integral role it plays in the industry, it’s surprising how much confusion and uncertainty surrounds an AFSL.

We explain more in this article.

UNDERSTANDING THE ROLE OF AFSLs AND WHEN THEY’RE REQUIRED

An AFSL is the bedrock of the financial services industry. Embedded in the Corporations Act, it aims to protect investors and ensure the integrity of the financial markets, making it a legal requirement for virtually every person that raises money.

Let there be no misunderstanding. Although there can be exemptions, they are the exception, not the rule. The regulator ASIC’s definition of a financial service is all encompassing, ranging from talking to prospective investors about investing in a project (classified as financial product advice), issuing shares in a company or units in a unit trust (both classified as dealing in a financial product) to holding an insurance policy (classified as having custody of a financial product).

If any of these activities are executed in what ASIC determines as a regular, systematic, repetitious, or business-like manner, it will be viewed as the carrying on of a financial services business and, as such, an AFSL will be required. This is the case even if the main activity of the person raising funds is something else.

A property developer can have a property development business and be carrying on a financial services business if they are raising money for their developments from people in what ASIC determines is a business-like manner.

So, AFSLs are integral to the financial services industry and have been for nearly a quarter of a century, evolving with a changing industry. For example, in the wake of the handing down of the Financial Services Royal Commission’s final report in 2019, changes were introduced to tighten the regulatory framework such as having a “fit and proper person” test replace the “good fame and character” test, thereby giving ASIC more discretion as to why and whom the test can be applied in issuing an AFSL.

But considering its longevity and integral role it plays in the industry, it’s surprising how much confusion and uncertainty surrounds an AFSL. In particular, this applies to raising money, whether it be for personal projects, business ventures or raising capital, with many thinking they don’t need an AFSL to comply with the law. In most instances, they are wrong. Let us explain why.

BREAKING DOWN AFSL REQUIREMENTS IN SIMPLE TERMS

The starting point for anyone considering raising money should be simply this – an AFSL will be required. How the funds are raised – a unit trust, company structure, informal agreements, or any other vehicle you can think of – is irrelevant. Who the funds are raised from – family, friends, or complete strangers – is another irrelevancy.

Quite simply, if you want anyone to give you money for an investment opportunity then ASIC will want it done under the umbrella of an AFSL. That’s because the raising of money means you are offering people the opportunity to participate in an investment activity. Legally, this is considered providing financial product advice.  Even if you merely inform potential investors about the investment opportunity, it may still be considered financial product advice.

ASIC’s PERSPECTIVE

From ASIC’s perspective, an AFSL best ensures fundraising and investment activities are fair and transparent, and, most of all, investor interests safeguarded. AFSLs provide a set of rules and standards that must be adhered to when dealing with investors, which ultimately contributes to a more secure financial ecosystem.

It’s not a question of whether an AFSL is required when raising money or engaging in investment activities. Instead, it must be seen as a legal requirement that comes with potential financial penalties or even becoming a guest of His Majesty for those who transgress.

What must always be remembered is that ASIC’s primary task is to protect investors and regulate the industry – and it will adhere to the letter of the law to achieve these outcomes. It therefore behoves anyone going down a capital-raising path to understand their legal obligations and seek proper licensing and compliance.

Besides, there’s an upside to this. Complying with AFSL regulations not only ensures legal compliance but helps build trust and credibility in any fundraising and investment endeavours, benefiting you and your investors long term.

MORE INFORMATION ABOUT AFSL REQUIREMENTS

To read more, refer to our other Knowledge articles Do I need an AFSL if I raise money? and Am I carrying on a “financial services business”?