AFS Licensing - Exploring the 2/20 Exemption
For emerging fund managers in Australia, navigating the complexities of Australian Financial Services License (AFSL) regulations can be daunting. However, certain exemptions, such as the 2/20 exemption, offer flexibility when launching a small fund. This article explores the 2/20 exemption, its benefits, limitations, and how it can serve as a stepping stone for new fund managers entering the industry.
What is the 2/20 Exemption?
The 2/20 exemption is a provision within the Corporations Act 2001 (Cth) that allows fund managers to raise up to $2 million from no more than 20 investors over a 12-month period without requiring an AFSL. This exemption can be particularly useful for those looking to set up a Pooled Investment Vehicle (PIV) or Managed Investment Scheme (MIS) on a small scale, with minimal regulatory burden.
Key Conditions of the 2/20 Exemption
1. Investment Cap: The total funds raised under this exemption must not exceed $2 million within any 12-month period.
2. Investor Limit: You are restricted to a maximum of 20 investors in that period.
3. Non-Commercial Intent: The exemption can only be used if the fund manager is not deemed to be "carrying on a business in financial services." This means no management fees, performance fees, or other financial compensation can be charged. Operating under this exemption is strictly limited to personal ventures or small-scale pooling arrangements, without the ability to profit from management activities.
Advantages of the 2/20 Exemption:
• Easy Entry for New Fund Managers: The exemption is an excellent way for new or small-scale fund managers to begin pooling capital and launch “proof of concept” funds without the need to meet the significant regulatory and financial burdens of holding an AFSL.
• Lower Administrative Burden: Without the need for full AFSL compliance, the operational and administrative burden on the fund manager is significantly reduced.
Limitations of the 2/20 Exemption
While the 2/20 exemption can be an attractive option for small fund managers, there are notable limitations:
• No Fees Permitted: As the fund manager, you are prohibited from charging management or performance-based fees, which limits your ability to generate income from managing the fund.
• Small Fund Size: The $2 million cap significantly limits the size of the fund you can manage, making this a short-term solution rather than a scalable business model.
• No Retail Investors: This exemption typically applies only to wholesale investors, meaning you cannot offer the fund to the general public.
• AML/KYC Compliance: Even under the 2/20 exemption, you are still subject to Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations and must comply with them.
Regulatory Compliance and Transparency
Even under this exemption, it is crucial to ensure that the fund operates in a transparent manner and that investors are provided with all relevant information. Fund managers should ensure they meet their fiduciary duties and maintain proper documentation to protect investors.
Conclusion
The 2/20 exemption can be a valuable tool for fund managers looking to start small, but it comes with important limitations. It is essential to understand the boundaries of this exemption and ensure that you remain compliant with ASIC regulations. As your fund grows, transitioning to a full AFSL or becoming a Corporate Authorised Representative (CAR) may be the next step for expanding your investment activities.
If you are considering using the 2/20 exemption or need guidance on fund licensing and compliance, contact FundBase Group today for assistance in navigating Australia's regulatory landscape.