Crowd Funding


What is crowd funding? What type of crowd funding is regulated by the Monetary Authority of Singapore (MAS) in Singapore?

Crowd funding generally refers to raising funds from a large number of individuals through an online platform. Here are some forms of crowd funding:

 

Form What it is Financial returns Offer of securities may be involved 
Donation-based crowd funding where individuals pool their resources to support a charitable cause Nil Nil
Reward-based crowd funding where individuals give money to a company in return for a “reward”, usually a product produced by the company Nil. Return is usually non-monetary Nil
Lending-based crowd funding where individuals lend money to a company and the company commits to repay the loan at pre-determined intervals and interest rate Interest rate and return of amount lent. Yes
Equity-based crowd funding where individuals invest in shares sold by a company and receive a share of the profits in the form of a dividend or distribution. Profit-sharing in the form of dividends Yes

Crowd funding arrangements which do not involve the offer of securities (for example, where contributions are in the form of donations or pre-payment for merchandise under donation-based and reward-based crowd funding respectively) are not subject to MAS' regulations. Lending-based and equity-based crowd funding which involve offers of securities by corporations are generally referred to as securities-based crowd funding (SCF). SCF is subject to MAS' regulation under the Securities and Futures Act (SFA). Lending-based crowd funding occurring directly between individuals fall outside of the ambit of SFA.

Depending on its business model, a crowd funding platform operator facilitating invoice factoring activities may be deemed to be carrying out lending-based crowd funding under the SFA. Typically, this involves an arrangement where the investors lend moneys to the platform operator, and the platform operator pays the invoice creditor for the purchase of the invoices from the invoice creditor.

This consumer guide provides guidance on the risks and areas which investors should consider before investing in SCF securities.

What are some risks of participating in fundraising through SCF crowd funding platforms?

As with any investment, do bear in mind whether your individual circumstances allow you to take on the risks involved. Here are some of the risks you should be aware of when considering SCF:

 

Risk What it means
Loss of capital SCF tends to attract start-ups and small medium sized enterprises (SMEs) which may have yet to establish a track record. Globally, the failure rate for start-ups is high so there is a high risk of losing some or even all of your capital, especially if you are unfamiliar with early stage investing.
Lack of liquidity When you want to exit the investment, there is a risk that you may not be able to sell the securities or have to sell them at a significant discount.
Fraud risk As fundraising is carried out through online platforms, you may not have direct contact with whoever is making the offers of securities. There is a risk that the projects or proposals may not be legitimate and that expected rewards or returns may not materialise.
Platform closure or failure If the operator of the SCF platform that you are relying on to ensure that your funds are passed on to the project owner fails, you may lose all your money.
Risks of investing in foreign issuers If the securities are being offered by an issuer in another country, your rights will be subject to the laws of that country. You may also be subject to additional tax liabilities, transaction costs and capital controls.
Lack of information You may not receive enough information to make a fully informed investment decision as there is no regulatory requirement for issuers and SCF platform operators to provide specific information on the securities offered. Also, the financial statements of the issuers may not have been audited. An unaudited financial statement may not reflect the true financial health of a company. For foreign issuers, the financial statements of the issuers may not be made accessible to you if there are no requirements in their home country to do so.

 

What should I look out for if I wish to contribute funds to a project on an SCF crowd funding platform despite the risks involved?

- Exercise care and diligence in reading the applicable terms and conditions on the SCF platform before signing up or agreeing to contribute funds to any project or business proposal.

- Find out and assess whether you are satisfied with the scope and extent of due diligence conducted by the SCF platform operator on issuers before allowing deals to be listed on the platform. For example, you may wish to know if due diligence checks on the issuer's board of directors or senior management, financial performance and the ability of the issuer to repay the funds have been conducted. Such checks should include, but are not limited to, past credit records, cash flow and financial strength of the issuer. In addition, you may also wish to check with the SCF platform operator on the total outstanding loans of an issuer.

- Do not be attracted only by the SCF operator's interest rates of return published in its marketing materials or on its website. You should also examine the non-performing loan rates presented alongside the interest rates of return. The non-performing loan rates provide an indication of the amounts of loans which have defaulted on interest and/or principal repayments to investors.

What do you do when an issuer defaults on repayment? 

In the event of a default by the debt issuer, you should approach the SCF platform to explore the debt recovery options available and costs to be borne by you (if any). Some SCF platforms engage debt collection agencies or commence legal proceedings against the debt issuer on investors' behalf to collect outstanding debts from the issuers.

What if the SCF platform fails?

Prior to investing, you should find out what the available courses of action are if the SCF platform ceases business or fails. SCF platform operators are expected to put in place a proper business cessation plans and disclose to investors the arrangements and communications which they will make in the event of business cessation. Questions which you should ask include how will investors receive their future repayments from the issuers, whether there will be another party appointed to help them monitor future repayments due from issuers or assist with debt recovery, what are the arrangements for handling investors' monies (i.e. whether investors monies are placed in segregated trust accounts) or loan agreements kept on behalf of investors and what are the procedures for communication with investors regarding business cessation.

What are some of the regulatory requirements imposed on SCF platform operators and issuers?

All SCF platform operators who wish to operate in Singapore must be licensed by MAS. MAS will admit only platform operators that are assessed to be fit and proper. Operators must ensure proper segregation of investors’ monies, keep proper records of transactions and are subject to base capital and conduct requirements. SCF platform operators are expected to deal fairly with investors in the conduct of their business. If a licensed operator is found to have breached MAS’ rules, supervisory measures will be taken, ranging from enhanced audits to revocation of license.

Fund-raising companies listed on SCF platforms may make small offers (i.e. raising less than $5 million within 12 months) without issuing a prospectus (an investment offering document). But they must disclose the key risks (as prescribed by MAS at a minimum)1 of such investments to you. Before investing, you will be required to acknowledge that you have read and understood these risks. Do take time to consider the investment carefully as ultimately investors bear responsibility for their investment decisions.

1Key risks to be disclosed are set out in Appendix 2 of MAS’ Shares and Debentures Guidelines 4 – Guidelines on Personal Offers made pursuant to the exemption for Small Offers.

Are overseas crowd funding platforms that facilitate any offer of securities to Singapore investors caught under the applicable legislation?

This depends on the business model of the overseas crowd funding platforms. For example, offers made through an overseas crowd funding platform that solicits funds from investors in Singapore will be subject to prospectus and other applicable requirements. However, given the borderless nature of the internet and the fact that many such crowd funding platforms do not have any presence in Singapore, there are practical limits to the enforcement of local requirements. Thus, it is all the more important that you exercise vigilance before you decide to participate in such offers.

Before you contribute funds through such overseas crowd funding platforms, you should ascertain if the platform is authorised or required to be authorised to facilitate such offerings, including in Singapore. You should only deal with persons who are regulated by MAS. MAS aims to safeguard your interests by ensuring that only competent and professional persons provide financial services to investors in Singapore. If you deal with an unregulated entity, you should be aware that the protection afforded under laws administered by MAS will not apply.

What can I do if I encounter problems arising from my participation in an SCF crowd funding arrangement?

You should seek help on your problem with your financial institution (the party you dealt with) first as they have easy access to your records. You need to provide your financial institution with your details such as name, contact numbers, the specific nature of your complaint and any supporting documents. All financial institutions are expected to deal with consumer complaints in an independent, effective and prompt manner.

If you are unable to resolve the matter with your financial institution, you may wish to approach the Financial Industry Disputes Resolution Centre Ltd (FIDReC) within 6 months of receiving the final reply from the financial institution. FIDReC provides you with an independent and affordable avenue for resolving problems that cannot be settled directly between you and your financial institution. You should check with FIDReC on the types of cases they can handle before you file your case with them. For more information, please visit the FIDReC website.

You should always read the investment offering documents carefully as well as any accompanying documentation. Never buy a product unless you fully understand the risks involved and decide that the product is suitable for your financial needs.

What can I do if I suspect that the platform or issuer has committed fraud?

Regardless of whether an entity is regulated y MAS, it is an offence to run a fraudulent or deceptive business in Singapore. If you have a reason to suspect that there may be criminal wrongdoing or fraud, you may wish to lodge a police report via the Police E-Services at http://www.police.gov.sg/e-services/report or at any Neighbourhood Police Centre.

How do I find out whether a company is regulated by MAS?

You can refer to the Financial Institutions Directory found on MAS' website. The Financial Institutions Directory provides a listing of entities licensed to conduct regulated activities under the various Acts administered by MAS.

If a consumer chooses to participate in schemes that are not regulated by MAS, he/she will not have the protection afforded under the regulatory framework administered by MAS, particularly if the operators are based overseas. If he has a complaint against an unregulated entity, he will also not be able to approach the Financial Industry Disputes Resolution Centre for assistance. And if an operator is based overseas, it could be even harder for the consumer to pursue the matter.

Do also check the Investor Alert List which lists unregulated persons who, based on information known to MAS at the time of publication, may have been wrongly perceived as being licensed or authorised by MAS.