Navigating the Australian Financial Services Licensing (AFSL) landscape can be daunting for new fund managers. Fortunately, the “2/20 exemption” offers a simpler path for those starting out with small-scale operations.
What is it?
The 2/20 exemption provides a regulatory carve-out for small-scale fund activities. It’s a popular option for launching a Managed Investment Scheme (MIS) without the upfront licensing burden.
Key conditions include:
Investment cap: maximum of $2 million can be raised within any rolling 12-month period
Investor limit: no more than 20 investors in the fund
No commercial fees: fund managers cannot charge management or performance fees, making this exemption suitable for personal or non-commercial pursuits.
Why consider this exemption?
This exemption allows fund managers to validate their investment strategy without the cost and complexity of obtaining an AFSL. It’s an excellent way to test the business case for your fund to see if it is viable as an ongoing fund.
The fine print
While the 2/20 exemption is useful, it comes with notable constraints:
No fee revenue: fund managers cannot earn income through fees, which may limit sustainability.
Small scale: the $2 million cap restrict growth opportunities, making it suitable only for early-phase ventures.
Wholesale investors only: only wholesale investors can participate, excluding retail and sophisticated investors.
Compliance obligations: Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations remain mandatory
Aggregates with other vehicles: A once off shot; you must aggregate the $2m and 20 investors with your or an associates other investment vehicles.
🟣 How King Irving can assist you
At King Irving, we specialise in financial services law, empowering fund managers with the knowledge and tools to navigate regulatory challenges confidently. Our team is passionate about supporting the next generation of industry leaders through education and tailored legal guidance. Whether you’re exploring the 2/20 exemption or preparing to scale with a full AFSL, we’re here to ensure you achieve the right outcomes.
Contact us to learn more about how we can help your venture succeed: https://kingirving.com/contact-us/
