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Research
Article - ASIC Policy Proposal on Electronic Commerce (September 1998)
- Key Features
- Background
- Regulatory approach
- Purpose of the policy proposals
- Regulatory options
- Proposed requirements
- Meaningful jurisdictional disclaimers
- Conduct
- Conduct of issuers that ASIC regulates
- Civil action
- Next Steps
- Recommended Policy Approach
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On 14 September 1998 the Australian Securities and Investments Commission (ASIC) released a draft policy paper titled ‘Electronic Commerce: Offers, Invitations and Advertisements of Securities on the Internet’.
This policy proposal has been developed as part of ASIC’s commitment to recognising the benefits that electronic commerce can offer and removing unnecessary impediments. The proposal sets out when ASIC will apply Australian law to fundraising activities on the Internet and when it will leave it to regulators in other jurisdictions to apply their laws.
ASIC has called for comments on the draft paper, and expects to issue a final paper in December.
The article below summarises the main discussion points in the paper. The box contains the recommendations.
Key Features
The main features of the policy proposal are:
(a) ASIC will not seek to regulate offers, invitations and advertisements of securities that appear on the Internet if the offer, invitation or advertisement:
(i) is not targeted at persons in Australia;
(ii) contains meaningful jurisdictional disclaimers; and
(iii) there is no misconduct;
(b) Issuers that ASIC regulate will be required to include a statement in their electronic prospectuses identifying the countries where their securities are available; and
(c) ASIC will continue to cooperate with international regulators to improve certainty for Australian issuers who make available offers, invitations or advertisements of securities on the Internet and to promote the confident and informed participation of consumers in Internet transactions in financial products.
Background
The Internet provides a quick, inexpensive and effective distribution mechanism for offers, invitations and advertisements of securities. However, for those involved in making them available on the Internet, uncertainty exists in relation to the application of the laws of the jurisdictions in which the offers, invitations or advertisements can be accessed.
The Corporations Law requires a prospectus when an offer or invitation is made in Australia. An offer or invitation is made in Australia if it is received in Australia. This means that the Law may apply to an offer or invitation of securities on an Internet site accessible from Australia irrespective of where the offeror is located. The implications of this are significant because ‘offer’ when used in the fundraising provisions of the Corporations Law is not limited to a technical or contractual meaning, but includes the distribution of material that would encourage a member of the public to enter into a course of negotiations calculated to result in the issue or sale of securities.
Similarly, the Law places significant restrictions on the publishing of advertisements in Australia. Therefore, the advertising restrictions may also apply to an Internet site accessible from Australia.
Regulatory approach
ASIC states that it ‘does not generally seek to regulate offers, invitations and advertisements that have no significant effect on consumers or markets in Australia. If regulators in each jurisdiction sought to regulate all offers, invitations and advertisements that appear on the Internet and can be accessed in their jurisdiction, the use of the Internet for transactions in financial products would be severely hampered.’
The paper notes that such an approach would also conflict with the stated goals of the Federal Government in respect of electronic commerce:
‘It is important to ensure that regulatory interventions support and do not hinder the operation of the competitive process. The benefits that electronic commerce offers, and its increasing use across a wide range of markets, make it important that regulation does not impede the evolution of new electronic technologies and products.’[1]
Purpose of the policy proposals
The primary purpose of this policy is to provide a clear statement about when ASIC will seek to regulate offers, invitations and advertisements of securities that appear on the Internet and can be accessed in Australia.
The Securities and Exchange Commission in the United States[2] and the Financial Services Authority in the United Kingdom[3] have already published guidance about the regulatory requirements affecting Internet transactions and communications in their jurisdictions, and significant work has also been done in international fora on common principles, including a forthcoming paper by the International organisation of Securities Commissions (IOSCO).
The provision of this guidance by regulators around the world (including ASIC) will assist persons involved in making available information about securities on the Internet by making it clear how regulatory action can be avoided.
It is also proposed to assist Australian issuers avoid the potential for regulatory action in jurisdictions where their offers are not targeted and enhance international coordination of consumer protection. This is to be done by requiring Australian issuers to include meaningful jurisdictional disclaimers in their electronic prospectus about the jurisdictions in which the securities are available. This consumer protection initiative will be supplemented by ASIC continuing to monitor conduct by Australian issuers on the Internet both in relation to offers targeted at consumers in Australia and overseas.
Regulatory options
ASIC’s preferred option is to issue guidance about when it proposes to regulate offers, invitations and advertisements that are made available on the Internet.
Guidance from ASIC will improve certainty for Internet users and allow the potential of the Internet to be exploited.
Guidance is considered to be preferable to class order relief because of the flexibility that it permits. That is, broad principles can be described without reference to particular technologies or means of achieving stated aims. This makes it possible to avoid linking relief to outdated technology or stifling innovative approaches.
ASIC previously publicised its intention to give class order relief from the Australian regulatory requirements for issuers who place foreign prospectuses on the Internet which are accessible from Australia. This relief was to be conditional on the issuer not accepting applications from Australian residents and clearly stating that fact in the offering material. A class order of this kind would remove civil liability under Australian law for the regulatory offence of failing to lodge and provide a prospectus.
It is proposed not to issue such relief in respect of Internet transactions because of the practical difficulties in ensuring that absolutely no applications from Australian residents are accepted. The proposed guidance is preferred by ASIC as it does not take an all or nothing approach (which is a feature of class order relief). Instead it clearly sets out the principles that will be considered by ASIC when deciding whether regulatory action is appropriate. In addition, the use of guidance will mean that ASIC is not hindered by any superficial compliance with black letter requirements which is not backed by compliance with the broader regulatory principles.
Proposed requirements
Two factors are listed in the proposals as relevant to a decision by ASIC about whether it should regulate an offer, invitation or advertisement on the Internet. These factors are whether:
(a) the offer, invitation or advertisement is targeted at persons in Australia; and
(b) meaningful jurisdictional disclaimers are used.
In order not to target persons in Australia, ASIC believes the offeror must use the following safeguards:
(a) Precautions reasonably designed to guard against issues or sales to persons in Australia. This may include: checking the e-mail, mailing address or telephone area code; using a gateway, blocking or other limiting device; or by not providing the means to apply for securities.
Positive checks will be necessary to satisfy this requirement.
Precautions that place the responsibility on the applicant, such as simply asking a person whether they are from an appropriate jurisdiction, would not alone be sufficient to guard against sales in Australia. If it is known that the procedures that have been implemented are ineffective then they cannot satisfy the reasonableness test.
(b) The offer, invitation or advertisement must not be written in a manner that makes it appear that it is aimed at persons in Australia. Factors that would lead to such a conclusion include details of specific relevance to persons in Australia such as details of local tax treatment, the use of local distribution agents or the use of local currency.
(c) The offer, invitation or advertisement must not be distributed by other means in Australia. For example, it must not be advertised in an Australian newspaper or other publication.
(d) The offer is not directed or ‘pushed’ to persons who the offeror should reasonably know reside in Australia. For this purpose, ‘push’ technology means any technology which directs or broadcasts information to a particular Internet user or group of users. As ‘push’ technology is rapidly evolving it is not appropriate to try to specify every method that would amount to targeting persons in Australia - although a commonplace example is broadcasting messages via email in a similar manner to direct mail.
Meaningful jurisdictional disclaimers
The use of meaningful jurisdictional disclaimers is a simple way to make it clear to consumers and regulators where an offer is made and therefore, subject to regulation. In order for a jurisdictional disclaimer to be meaningful it must:
(a) Clearly indicate that the securities are not available to persons in Australia. This may be done by specifying that the offer is not available to persons in Australia or by specifying the countries in which the offer is available. A statement that ‘the offer is not being made in any jurisdiction in which the offer could or would be illegal’ would not satisfy this requirement as it does not clearly state the jurisdictions in which the securities are available.
(b) Be viewed with or before the offering material or advertisement. This is because a disclaimer could not be said to be effective if it could be overlooked or was not viewed until after the decision to invest has been made.
Conduct
Conduct that has a significant effect on consumers or markets in Australia will be of concern to ASIC. If this is the case the use of safeguards or disclaimers will not necessarily preclude regulatory action. For example, it may be that the safeguards and disclaimers are either so poorly designed as to be ineffective, or are used to provide the appearance of satisfying regulatory concerns without any real intention of compliance.
If those responsible for an offer, invitation or advertisement of securities on the Internet (or involved in its publication) appear to have been involved in any misconduct whether in Australia or overseas, ASIC will consider the means available to regulate that conduct. This includes the option of taking action in respect of all breaches of Australian law and cooperation with foreign regulators and law enforcement agencies. Misconduct may involve non-compliance with Australian or overseas law, such as fraud, misleading or deceptive conduct or failure to abide by other regulatory requirements, such as inadequate disclosure of the jurisdictions in which the offer is intended to be made.
In addition, ASIC will continue to monitor Australian issuers conducting fundraising activities overseas, particularly if their conduct affects the level of confidence in the integrity of the Australian securities market. Our enforcement powers relevant to the conduct of Australian issuers are not limited to the prospectus liability provisions and include, for example, the power to revoke an issuer’s licence or obtain an injunction to restrain an unlicensed person from dealing in securities.
Conduct of issuers that ASIC regulates
Issuers that target persons in Australia when making available offers, invitations or advertisements on the Internet must comply with Australian regulatory requirements. ASIC proposes to add a condition to ASIC Class Order 96/1578 (which gives effect to ASIC Policy Statement 107 ‘Electronic Prospectuses’) that these issuers include a meaningful jurisdictional disclaimer in their electronic prospectuses.
ASIC argues that this requirement will not significantly increase the regulatory burden on issuers. They believe it will assist Australian issuers to avoid regulatory action in jurisdictions where their offers, invitations and advertisements are not targeted, because the use of a meaningful jurisdictional clause is a factor that many regulators consider when deciding whether it is appropriate to take regulatory action.
This requirement will also assist regulators and consumers, both in Australia and overseas, by making it easier to identify offers, invitations and advertisements that are available in their own jurisdiction.
ASIC proposes to achieve this policy goal by modifying ASIC Class Order 96/1578 rather than simply requesting issuers to comply with best practice. The use of the class order condition would ensure that best practice was followed in all cases without imposing significant additional costs on issuers.
To ensure that costs to issuers are minimised ASIC will only apply this condition to electronic prospectuses registered after the amendment of the class order. Therefore, existing electronic prospectuses will not have to be modified before they expire. Issuers will also be given the freedom to choose the mechanism by which they meet the policy goal of providing a meaningful jurisdictional disclaimer.
Civil action
The guidance in this policy proposal paper does not override the right to take civil action for losses associated with an Internet offer, invitation or advertisement of securities.
A civil action may be available if an offeror breaches Australian law. For example, if the offeror failed to issue a prospectus that complies with Australian regulatory requirements for an offer or invitation of securities made in Australia. Ultimately, it would be a question for the courts whether there was a breach of Australian law, even if ASIC has taken the view that it is not appropriate to try to regulate the offer, invitation or advertisement.
Next Steps
ASIC has invited written comments on the proposals. Comments can be sent to [email protected] or you can contact the ASIC Infoline on 1300 300 630. A final paper will be released in December 1998.
More information is available at: http://www.asic.gov.au
Chris Connolly
Galexia
[1] - Corporate Law Economic Reform Program, Proposals for Reform: paper No. 5 ‘Electronic Commerce Cutting Cybertape - Building Business’, December
[2] - Securities & Exchange Commission, International Series Release No. 1123, March 23, 1998.
[3] - Financial Services Authority, Guidance release 2/98, May 1998.
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