Introducing investors, finders' fees and when you need an AFSL.

Regulation 7.6.01 of the Corporations Regulations 2001 exempts a person whose financial service consists only of a referral. The exemption is confined by that word and by the content of what may be said. The permitted service is informing another person that a licensee, or a representative of a licensee, is able to provide a particular financial service or class of financial services, and giving that person information about how to make contact. The referrer must disclose any benefit, including commission, that the referrer or an associate may receive in respect of the referral or that is attributable to it. Referrals made by a person who is already a representative within the licensee's group are dealt with separately in the same regulation.

Two features of the drafting settle most arguments about it. The benefit disclosure has to be made at the time the referral is made and in the same form as the referral, so an introduction made in a telephone call carries a spoken disclosure in that call and a written disclosure sent afterwards does not cure the gap. The second feature is the content of the permitted communication, which covers telling someone that a licensee is able to provide a financial service and does not extend to describing a particular offer, its pricing or its expected return.

The relief attaches to the referral itself, and the rest of the engagement is assessed on its own facts. An introducer who makes a clean referral on Monday and then spends a fortnight explaining the instrument, answering questions about the security package and chasing an unsigned application form gets no protection for that later work from the compliance of the first step.

ASIC sets out its approach in Regulatory Guide 36, Licensing: financial product advice and dealing. The guide treats arranging as a broad concept whose limits the courts have not fully settled, and describes it as occurring where a person brings into effect the issue, variation, disposal or acquisition of, or application for, a financial product. Three markers carry most of the weight: involvement in the chain of events of sufficient importance that without it the transaction would probably not take place, involvement that significantly adds value for the person the introducer is acting for, and benefits received that depend on the decisions that person makes. Those markers are applied to what the introducer actually did, and the description in the agreement carries little weight against the conduct.

ASIC's guidance works the point through the example of a business introduction service, and accepts that an operator will probably not be arranging where it does not play a significant role and does not benefit from the investment decisions consumers make. Both limbs are where private introducer arrangements fail, because the introducer is usually the person the investor talks to and is usually paid on the subscription. The steps below most often move a referral across the line. Several are neutral standing alone, and in a live raise they seldom do.

Payment does not decide the licensing question on its own. A person who passes on another party's material and takes no further part in the transaction is not converted into an arranger by the fact of being paid. Payment does sit inside the test, because a benefit that depends on the investor's decision is one of the three markers, and a person paid on outcome is in practice more likely to take an active part in producing that outcome. A fee expressed as a percentage of funds subscribed also tells a regulator that the parties treated the payment as consideration for bringing a subscription about, which closes off the argument that the introducer was paid for something else.

Who pays the fee matters as much as how it is calculated. An introducer paid by the issuer provides whatever service it provides to the issuer, and the issuer is the counterparty the unlicensed conduct provisions in Part 7.6 are built around. An introducer paid by the investor, or paid out of the investor's subscription, is much harder to keep on the referral side of the line, because the investor is then receiving something for a fee and the conversation that earns it is seldom confined to contact details. The conflicted remuneration rules that otherwise bear on outcome based payments are directed at benefits connected with advice to retail clients, so they seldom reach a wholesale placement, and their absence answers nothing about licensing.

A business raising equity works through section 708, satisfies itself that the offers go to sophisticated or professional investors or fit inside the small scale offering exception, and concludes that no disclosure document is required. That conclusion belongs to Chapter 6D, which decides whether an offer of securities needs a prospectus or an offer information statement. Chapter 7 decides who may provide financial services in relation to financial products, and both a security and an interest in a managed investment scheme are financial products. An offer that needs no disclosure document, arranged by an unlicensed introducer, is still an unlicensed arrangement, and the two questions have to be worked separately.

The two chapters also treat the same evidence differently. A certificate from a qualified accountant supporting the sophisticated investor test in section 708(8)(c) must have been given no more than six months before the offer is made. The equivalent certificate for the wholesale client test in section 761G(7)(c) is treated as current for two years. An introducer who collects a certificate once and reuses it across a year of introductions can be holding a document that is current for one chapter and stale for the other.

Chapter 6D also constrains the introducer directly. Section 734 restricts advertising and publicity for offers of securities, and the restriction reaches an offer that escapes disclosure only because it sits inside the small scale offering exception, so a teaser broadcast to a mailing list is a contravention in its own right. It also undermines the personal character each small scale offer must have, since such an offer may only be accepted by the person to whom it was made and must be made to someone the issuer had reason to think would be interested.

Chapter 7 carries its own restriction on how an investor may be approached. Section 992A prohibits offering a financial product for issue or sale to a retail client, or inviting a retail client to ask or apply for one, in the course of or because of unsolicited contact, and a contravention gives the client a right to return the product and be repaid. Contact counts as unsolicited unless the client consented before it began, by a positive and voluntary act clear enough that a reasonable person would have understood it, and recently enough for the consent to still be operative, which in the ordinary case means within the previous six weeks. For an introducer working a cold list that is a sequencing problem, because whether the person is a retail client has to be settled before the approach is made.

The first is to appoint the introducer as an authorised representative of the licensee running the raise. Section 916A(1) lets a licensee authorise a person in writing to provide specified financial services on its behalf, and the authorisation is void to the extent it purports to cover a service the licensee's own licence does not authorise, which is why the licensee's authorisations and its client classes have to be read before the notice is signed. The appointment is notified to ASIC and appears on the public register of authorised representatives. A corporate authorised representative may sub-authorise an individual only with the licensee's written consent. The cost of this route sits with the licensee, which answers for the representative's conduct within the scope of the appointment and now supervises a person it does not employ.

The second is to leave the licensed acts with the party that holds the authorisation. Section 911A(2)(b) recognises the arrangement directly. Where a product issuer and a licensee enter an intermediary authorisation, under which the licensee makes offers to arrange for the issue of the product and the issuer issues in accordance with offers that are accepted, the issuer is relieved of the need to hold a licence for that issue, provided the making of the offers is covered by the licensee's own licence. The licensee then takes the investor conversations, applies the wholesale tests, distributes the offer documents and receives applications, and the introducer is left with a referral inside regulation 7.6.01, an authorised representative appointment, or work that is not a financial service at all.

The third is to define the engagement so that the fee is not paid for a licensed act. Preparing financial models, drafting the information memorandum, project managing diligence and building the data room are real services an unlicensed provider can deliver and charge for. Labels do not decide the characterisation, so a consulting fee invoiced on completion of a raise, for a consultant who spent the period speaking to investors, will be read against what the consultant did. Separating the work does not license the arranging, and its only effect is that the part of the engagement which was never a financial service can be paid for cleanly.

Part 7.6 of the Corporations Act deals with agreements entered into where a financial service was provided without a licence, and it carries the sharper commercial risk. Those provisions apply where the non-licensee entered the agreement in the course of a financial services business, held no licence covering the service and was not exempt, and the other party to the agreement is not itself a licensee. In an introducer arrangement that other party is usually the issuer, which can give written notice rescinding the agreement, before or after completion, within a reasonable period after becoming aware of the facts. The right is lost if, a reasonable period before the agreement was entered into, the introducer told the issuer it did not hold a licence, and the Act does not require that to have been in writing.

The fee consequences run further than rescission. While the right to give notice exists, and after notice is given, the non-licensee cannot enforce or rely on the agreement against the client and cannot recover brokerage, commission or any other fee, including by set-off or on a quantum meruit. Fees already paid can be recovered as a debt, and ASIC can bring that action in the client's name where it considers doing so to be in the public interest. The onus favours the client as well, because in a proceeding these provisions are presumed to apply unless the contrary is proved.

Other consequences arrive later. Where the raise ran under a licensee's authorisation, the licensee has its own breach reporting analysis to make about conduct in its distribution chain, and ASIC's banning powers reach individuals who provide financial services without authorisation. On the next round or an exit, buy side diligence asks who was paid to introduce capital and on whose authority, and a raise with no clear answer becomes a diligence item settled through a warranty qualification or an adjustment to price.

An introducer agreement that survives diligence identifies the licensee whose authority supports the arrangement and the capacity in which the introducer acts. It describes the permitted conduct in operational terms, so that it says the introducer may inform a person that the licensee is able to provide a financial service and hand over contact details, in place of a clause saying the introducer will assist with the raise. It states what the introducer must not do, sets out the fee and the event that triggers it, and requires the benefit disclosure to be made in the same form as the referral and at the time the referral is made.

Two records sit alongside it. The first is a copy of the benefit disclosure the referred person actually received, dated and in the form it went out to them. The second is a contact record showing who made first contact, in what order documents went out, who answered the investor's questions and who took the completed application. That record is also where the wholesale determination sits, made and dated before the offer was made to the investor.

Four questions put to an adviser at the start of a raise resolve most of this, and a buyer's lawyer will put the same four three years later, when the answers are harder to assemble.