Regulation Of Fundraising On The Internet

Article Insights Introduction

The use of the Internet for all forms of commercial and social interaction will continue to grow at an astounding pace. This note briefly summarises how the Australian Securities and Investments Commission (ASIC) has to date responded to the use of the Internet or e-commerce for fundraising activities.

The ASIC issued a media release on 10 February 1999 entitled "ASIC Regulation of Fundraising in the Internet". The releasE heralded ASIC Policy Statement 141 "Offers of Securities over the Internet" (PS141). PS141 has been described as "...the first step in the next stage of our electronic commerce policy. We're keen to remove roadblocks to the use of e-commerce provided we can maintain our enforcement capability."

PS141 should be considered in conjunction with the ASIC's Policy Statement 107 on Electronic Prospectuses (PS107). In PS107 the ASIC realised the potential benefits of using the Internet or electronic commerce for fundraisers. As a result, the ASIC will allow electronic prospectuses provided the policy underlying the prospectus provisions of the Corporations Law is satisfied. That policy is that:

• (a)investors are able to make informed investment decisions; and
• (b)such decisions are based on a prospectus containing all material information about the securities being offered and the issuer.

PS107 allows an issuer to distribute a paper prospectus, lodged with the ASIC, electronically. It does not provide any relief from the substantive requirements of the Corporations Law. It is inevitable that in time the ASIC will reconsider the need for a paper prospectus to be lodged with it.

What is the purpose of ASIC Policy Statement 141?

1.Certainty

According to the Media Release, PS141 "gives people making offers on the Internet certainty about when they will be subject to the Australian Corporations Law and when the ASIC will consider Internet offers fall under other regulatory jurisdictions". Unfortunately PS141 does not deliver the degree of certainty one expects from the statements contained in the media release.

2.Regulation of new medium

The ASIC recognises the impact electronic commerce will have on fundraising and securities dealing. PS141 represents the ASIC's continuing commitment to adapting its regulatory approach to the new demands of emerging technologies.

3.Cooperation with international regulators

As the Internet knows no boundaries, we are told that PS141 forms part of an international cooperative effort to regulate and develop effective enforcement strategies on the use of the Internet for fundraising.

4.Promotion of confidence and reduction of costs

The ASIC believes that PS141 will help it achieve its aims to:

• (a)reduce regulatory costs for issuers of securities; and
• (b)promote the confident use of the Internet by issuers and investors as another effective means of doing business.

What is the ASIC's Policy?

PS141 provides that the ASIC does not intend to "regulate offers, invitations and advertisements of securities that are accessible in Australia on the Internet if:

• (a)the offer, invitation or advertisement is not targeted at persons in Australia;
• (b)the offer or invitation contains a meaningful jurisdictional disclaimer;
• (c)the offer, invitation or advertisement has little or no impact on Australian investors; and
• (d)there is no misconduct."

Class Order 99/43 has been issued to give effect to the above policy statement.

At what level is the bar set?

PS141 lists the ASIC's guidelines on how the above criteria may or may not be met. Unfortunately, the policy statement falls short of reaching the ASIC's stated purpose of improving certainty for people who use the Internet for commercial transactions that may involve securities, in a number of areas.

Not targeted at persons in Australia

An example of PS141 falling short of its certainty objective is the list of precautions one must take to ensure that an offer or invitation is not targeted at persons in Australia. One of those precautions is to avoid publishing, distributing or making available offering material or advertisements in ways or locations which are calculated to draw it to the attention of Australian Residents. PS141.14 specifically states that this includes posting the material on web sites maintained in Australia or with Australian content.

Such a requirement severely limits the extent to which an offeror can use the Internet to offer or advertise material pertaining to an offer or invitation to subscribe for securities. Does the guideline mean that if an offeror distributes offering material through the Internet and that information is available to Australian residents, Australian residents have been targeted, even if the:

• (a)offeror takes precautions to prevent accepting subscriptions from Australian residents; and
• (b)offering material does not contain information that may be relevant to Australian residents?

If other jurisdictions apply similar criteria, an offeror could find itself unwittingly being regulated in jurisdictions it has no interest in.

Offer has little or no impact on Australian investors

We are told by the ASIC that it is concerned with the effect of an offer, invitation or advertisement of securities in Australia. Will an Internet offer have a significant effect on consumers or markets in Australia? That is a question of fact. As we know, a question of fact can only be answered once all the facts and circumstances of that case are taken into account. PS141 gives examples rather than an exhaustive list of factors that the ASIC will consider in determining whether an offer has a significant effect on consumers and markets. Examples of the factors that the ASIC will consider are the number of:

• (a)enquiries that an issuer receives from Australian investors about investing in the securities being offered;
• (b)Australian investors to whom securities are issued; and
• (c)complaints which it receives from Australian investors.

The above criteria suggests offerors need to keep records of enquiries from Australian investors. This will be an additional cost for offerors.

No misconduct

PS141.18 states:

"If those responsible for an Internet offer, invitation or advertisement of securities (or involved in its publication) appear to have been involved in any misconduct, we will consider the means available to regulate that conduct. We will do this whether the conduct occurred in Australia or overseas."

What is misconduct? We are informed that misconduct may involve "significant non-compliance with Australian or overseas laws, such as fraudulent, misleading or deceptive conduct, or failure to abide by other regulatory requirements, such as inadequately disclosing the jurisdictions in which the offer is intended to be made."

This is another example of the fuzziness of some of the important requirements set out in PS141.

International Regulation

PS141 indicates that the ASIC intends to continue working with international regulators to seek a consistent approach on issues relating to the use of the Internet for fundraising activities.

The importance of a harmonious set of laws dealing with international fundraising cannot be over emphasised. While the goal may be clear, the path to that goal contains significant obstacles including the sovereignty of States and different legal systems.

Other financial Products

The ASIC has indicated that it is considering how it should approach the regulation of other financial products offered over the Internet, for which it has regulatory responsibility under other legislation. Such other financial products include derivatives, insurance and savings products.

Conclusion

PS141 is a clear recognition by the ASIC of the potential benefits and abuses of the Internet in fundraising activities. Offerors must ensure that they do not overlook the requirements of the Corporations Law when publishing or distributing securities information over the Internet. Given the borderless nature of the Internet, it is quite feasible that an offeror could find itself unwittingly subject to the laws a number of jurisdictions.

What is certain is that if you intend to:

• (a)offer securities; or
• (b)publish information that may encourage a member of the public to enter into a course of negotiations calculated to result in the issue or sale of securities,

you must not overlook the requirements of the Corporations Law or how to structure your offer or the information you publish, to avoid a breach of the Corporations Law or the need for a prospectus.

For further information regarding E-Commerce or PS141 please contact us.

This publication is provided by Gadens Lawyers to its clients and correspondents on a complimentary basis. It represents a brief summary of the law applicable in New South Wales as at March 1999 and should not be relied on as a definitive or complete statement of the relevant laws.