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IR 03-16 ASIC regulation of promissory notes
The Australian Securities and Investments Commission (ASIC) today announced the release of an FAQ to assist issuers of promissory notes in understanding their obligations under the Corporations Act. The FAQ provides guidance on the circumstances when promissory notes are likely to be regulated as financial products.
A promissory note is an unconditional promise by an issuer to pay an agreed sum of money at a fixed or determinable future time to, or at the order of, a specified person.
Generally, where an offer involves just a promissory note with a face value of at least $50,000 and no other special features, it will not be regulated under the Corporations Act.
However, ASIC notes that some issuers are seeking to rely on the promissory note exemptions under the Act by offering complex investment arrangements involving promissory notes to retail investors. In some cases, although an offer involves the issue of a promissory note, the rate of return and the financial risk to retail investors varies or is dependent on the performance of certain investments.
ASIC believes that these arrangements are likely to be financial products and therefore regulated under the Corporations Act, requiring licensing and disclosure.
In particular ASIC is concerned about complex arrangements involving promissory notes that:
- are accompanied by other promises about how the money loaned may or will be repaid;
- may reasonably be considered to express or contain a representation or agreement that the investment returns will be produced by an underlying specific investment or the performance of some specific commercial activity;
- are not liquid, cannot be easily traded and are not designed to raise short term finance to manage day to day liquidity issues; and
- are directed primarily at the retail clients.
For example, an arrangement is likely to involve the offer of financial products if investors' money (raised through the offer of promissory notes) is used to partly fund the purchase and development of property and investors are led to understand that repayment is dependant on the success of the development.
‘ASIC recognises that there are subtle and complex variations to different types of promissory notes, as well as difficult issues that should be addressed by the issuers of these products. Our FAQ provides guidance to ensure that issuers comply with their legal obligations’, ASIC Executive Director FSR, Mr Ian Johnston said.
‘Offers of financial products to retail clients must meet the requirements of the Corporations Act, and we will consider action where there is a breach of the law’, he said.
Is a promissory note arrangement where each note has a face value of more than $50,000 a financial product?
Generally, a simple promissory note with a face value of more than $50,000 would not be a financial product. Other promissory notes may either be a debenture or another sort of financial product, as set out below.
Is a promissory note with a face value of more than $50,000 a debenture?
A financial product that is just a promissory note with a face value of more than $50,000 is not a debenture.
However, ASIC considers the exclusion of promissory notes from the definition of debenture only includes those instruments that are simple promissory notes or similar debt instruments (such as Negotiable Certificates of Deposit), which do not have any other significant obligations or undertakings arising from the note or other instrument. These types of instruments meet the definition of promissory note contained in the Bills of Exchange Act 1909.
Is a promissory note with a face value of more than $50,000 another sort of financial product?
Even if not a debenture, if the person who is issued the note has been led to understand that the payment under the note will be produced by the use of the proceeds of the note issue in a common enterprise or from a pool to produce those benefits, the note may be an interest in a managed investment scheme. If the managed investment scheme has more than 20 members or the promoter is in the business of promoting managed investment schemes, the interest will be a financial product.
Also if the person who is issued the note, or the issuer intends that the proceeds from the note issue be used to enable the payment under the notes, then the notes could also be a facility for making a financial investment. Generally such a facility will also be a financial product.