Crowdfinance (i.e. crowdfunding) platforms, which currently use a promissory note exemption to connect and engage with retail investors will soon have to obtain licenses from the Monetary Authority of Singapore (MAS) to continue operating, in conjunction with tweaks to existing rules, so as to make it simpler to easier for licensed securities crowdfunding platforms to tap the retail market.
This development follows the MAS, the financial markets regulator of the city-state, engaging in an earlier public consultation on securities crowdfunding in Singapore, which is host to about 10 debt crowdfunding platforms.This move comes as the MAS seeks to improve access to funding for startup ventures and small & medium enterprises (SMEs).
Crowfinance platforms in Singapore like MoolahSense and Capital Match help businesses to borrow money from retail investors, with some being able to operate without capital market services licences due to utilising the exemption for promissory notes worth at least S$100,000.
Currently, borrowers are able to use such platforms to borrow money without issuing a prospectus by consolidating funds from multiple lenders into a single entity exceeding the S$100,000 threshold, a workaround which violates the intention of the rule.
According to the MAS, this rule was meant to reduce the burden on good-credit borrowers attempting to resolve short-term financing needs by seeking capital from sophisticated investors.
As part of its efforts to regulate crowdfinancing, MAS is seeking a legislative amendment to remove the exemption for promissory notes. This will see crowdfinance platforms who wish to continue operation to be licensed by MAS, especially those raising business loans from retail investors. This move comes in parallel to the proposed creation of a regulatory sandbox for fintech developments by the MAS.
Borrowers on these platforms will be unable to use the promissory note exemption to avoid issuing a prospectus – which will serve to provide increased investor protection. For now, the MAS has disallowed the consolidation of multiple loans into a single promissory note to cross the S$100,000 hurdle. Concurrently, the MAS will be easing access for licensed operators to engage retail investors.
This will be achieved through streamlining existing rules that exempt offers of less than S$5 million from having to issue prospectuses. Current regulations see companies and intermediaries wanting to make use of this exemption having to ensure investors using their platform possess the knowledge, experience, suitability and financial means to invest in securities crowdfunding (SCF).
In response to the new rulings, Kelvin Teo, co-founder and CEO of crowdfinance firm Funding Societies, commented: “Learning from other more mature crowdfunding markets, we welcome the regulations as it removes legal uncertainty, protect stakeholders’ interests and ultimately grow the industry. We expect limited business impact, as we’ve proactively taken steps to qualify for the new requirements e.g., by being the first platform to use an escrow agency to handle customers’ monies.”
“We find the simplified pre-qualification process and prescribed risk disclosure statement to be fair and practical, to safeguard investors’ interest. The removal of the promissory note exclusion also helps to clarify certain investors misunderstanding.Moreover, as these amendments are only expected to be tabled to Parliament in next few months, this early notice by MAS enables platforms to take the necessary steps to compl,” Teo added.
This new rule will see investors having to only demonstrate knowledge, experience or suitability, with the financial means requirement dropped in favour of a more robust risk disclosure and assessment framework. The small-offer exemption will continue to prohibit cold-calling or unsolicited marketing to retail.
MAS also intends to lower the base capital and minimum operational risk requirements for SCF platforms to S$50,000 from the current quantum of S$250,000, as well as removing a S$100,000 security deposit. Additionally, the MAS has clarified its restrictions on advertising, making it clear crowdfinance platforms cannot market their services as long as they do not advertise specific uncompleted deals.
These measures will enable more qualifying SCF platform operators to operate in what is currently a restricted space, as well as accounting for the limited systemic and business conduct risks posed by such intermediaries.
In response to the lowered requirements, Teo opined: “While the lowered requirements aim to provide greater platform choices for SMEs, we’re concerned about the unintended consequences of destructive competition such as reckless loan approval or loan default cover-up, to the detriment of investors.”
He added, “We hope there would be more regulations now or in the near future, to restrict unhealthy lending, enforce transparency on loan performance and minimize “Ezubao-like” fraud risk, so that we avoid the disasters observed in other markets that could derail the current healthy growth of Singapore’s crowdfunding industry.”
In an official statement, MAS assistant managing director for capital markets Lee Boon Ngiap shared: “Securities-based crowdfunding is a useful addition to our financing landscape. At the same time, securities crowdfunding can be quite risky. The measures we are implementing seek to strike the right balance between improving access to securities crowdfunding for start-ups and SMEs and protecting investor interests.”
With Singapore forecast to displace the UK by 2020 as the second largest offshore financial centre, behind first-ranked Switzerland. Such regulations are necessary to meet the needs of both accredited and retail investors, as well as provide an appealing investment environment, especially as the financial industry in the city-state evolves and becomes increasingly sophisticated in its offerings.
According to the Boston Consulting Group’s Global Wealth 2016 report, the UK’s $1.3 trillion offshore financial industry will be superseded by Singapore’s over the next four years, with BCG estimating offshore money lodged in Singapore will grow to $1.7 trillion by 2020, compared to the UK’s $1.6 trillion. This comes as the global economic centre of gravity shifts towards the Indo-Asia Pacific.