What Investors Should Know About Crowdfunding Singapore Regulations
Today, crowdfunding is becoming familiar and a concept accepted by many investors. Though investment is about risk-taking, investors want to take a calculated risk. Crowdfunding abandons banks’ bureaucracy in issuing financial support. However, without due care, people can exploit others. This is where crowdfunding Singapore regulations come handy to protect investors interests.
With the crowdfunding trend growing globally, it is easy for an inexperienced investor to fall a victim of fraud. Such investors can obtain security from some form of legislation that regulates crowdfunding. Monetary Authority of Singapore (MAS) is the body that governs the crowdfunding activities under the Securities and Futures Act(Cap.289), and the Financial Advisers Act (Cap. 110).
Types of Crowdfunding and Their Legal Requirements
1. Lending-based Crowdfunding
This model of crowdfunding is also known as peer-to-peer lending to businesses. It is a scenario whereby many persons lend sums of money to a business. The company receiving money provides a legally binding commitment to repay the money. The commitment agreement contains the predetermined time of repayment and agreed-upon interest rates.
This lending typically takes place online. It is a model of crowdfunding that MAS regulates. MAS expects that an invitation to the public to lend money to a company should have an offer of debentures as security. Such an invitation is thus subject to a prospectus requirement which involves preparing and registering a prospectus with MAS as the ACT describes. However, there are exemptions to the prospectus requirements and they include:
- Small offers – Security-based crowdfunding (SCF) companies that make small offers of less than S$5 million within 12 months need not issue a prospectus. However, the company must disclose the key risks of this investment to all investors. An example of a small offer may include a personal offer directed to a pre-identified individual.
Notably, MAS has reduced the base capital requirement in this case from S$ 250,000 to 50,000. Better, it has removed the S$100,000 security deposit clause for offers targeting accredited investors.
- Private placements – Offer of security to 50 persons or less within 12 months may be exempt from the prospectus requirements.
- Institutional and accredited investors – Entities that lend money and also those with special financial status are exempt from prospectus requirements.
In the case of a foreign issuer, Singapore investors should note that their rights are subject to the laws of that country.
2. Reward-based Crowdfunding
This model of crowdfunding enables issuers to bundle funds from investors who appreciate non-financial compensations. The reward may be the company’s product or service when it becomes available. It may also be a present of sentimental value. Investors who want to be in this kind of investment may be drawn by the purpose of the entrepreneur rather than the monetary reward.
MAS regulations do not apply to reward-based crowdfunding. Nevertheless, the Commissioner of Charity (CoC) introduced the code of practice for online charitable fundraising appeals. This code of practice came to effect in January 2018. It is based on ensuring accountability, legitimacy, and transparency of charitable appeals. It requires online fundraisers to complete a declaration of compliance with the fundraising regulations.
The code of practice aims to guide fundraisers to make accurate representations to donors. They should also keep proper donations records as well as using the donations for the purpose intended. Crowdfunding platforms that subscribe to this code of practice include Giving.sg, Give.Asia, Simply Giving and Ray of Hope Initiative Limited.
3. Donation-based Crowdfunding
In the donation type of crowdfunding, donors do not expect anything in return for their offer. It is a model common for charitable and artistic activities. The only reward for the givers is the sense of achievement for the noble cause. Donation-based funding is suitable for social enterprises which can attract sympathy from the public which push them to give offers. It is an emotional-driven model.
MAS does not regulate donations-based crowdfunding too. Fundraisers here are also subject to the charity law. They should also observe strict fiduciary duties that include acting in good faith. Just like the reward-based crowdfunding, the CoC code of practice binds the donation-based model. An update of collections is vital as well as proper use of the donations.
4. Equity-based Crowdfunding
This model is another regulation-sensitive type of crowdfunding. Investors contribute to the subscribed company’s capital thereby acquire shares and can subsequently participate in profits. It is similar to stock market investment only that the companies are not listed but private. Equity-based model is suitable for start-ups to help them establish their business ideas.
It has helped in a significant manner to change the investment landscape where only accredited investors, and ventures capitalist could invest in startups. It has brought democracy to the process and even opened the door for small traders.
MAS controls equity-based crowdfunding the same way it controls debt-based crowdfunding. For both cases, the crowdfunding platform must have a Capital Markets Service (CSL) license. If a platform also wishes to offer advice to investors, it should acquire a license as a financial advisor. The equity-based model therefore also falls under prospectus requirements with exceptions thereof.
Remarkably, investors should be wary of these requirements to avoid dealing with illicit platforms. If a platform breaches the MAS rules, a penalty is imposable. MAS may perform an enhanced-audit or may decide to revoke the operator’s license.
Legal Requirements for Moneylenders
A person who engages in money lending either as the principal or an agent must acquire a moneylenders license from Singapore registrar of moneylenders. A person must be qualified and experienced in the money lending business to acquire the license. An exception applies if the money is to go to accredited investors or business entities. In such a scenario, the lending is carried out by “excluded moneylenders.”
Should Crowdfunding Platforms Hold Moneylenders License?
If a crowdfunding platform lends funds to business entities, commonly the SMEs and startups, the exception to this rule applies. The platforms that will require moneylenders license are those that lend to non-accredited natural persons. This is a narrow type of P2P lending. Investors should note that the moneylender’s license is limited to protecting the moneylender. Protection is only guaranteed where it requires a purchase of debentures as here the securities regulation apply.