A FREQUENTLY asked questions notice has been provided to help issuers of promissory notes have a better understanding of 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, when an offer involves just a promissory note with a face value of at least $50,000 and no special features, it will not be regulated under the Corporations Act.
However, the Australian Securities and Investments Commission has noted 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 the rate of return and financial risk to retail investors, even though the offer involves a promissory note, varies or is dependent on the performance of certain investments.
ASIC executive director financial services regulation Ian Johnston said the commission believed these arrangements were likely to be financial products and should, therefore, be regulated under the Corporations Act requiring licencing and disclosure.
He said ASIC was concerned, in particular, 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 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 retail clients.
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