Crowdfunding is the latest investment trend that uses online technology platforms to address both the needs of investors and small-medium enterprises (SME). At one hand, retail investors are looking for viable fixed income sources to grow their wealth. On the other hand, we have start-ups and SMEs which lack access to alternative pools of private financing, other than commercial banks. This is where crowdfunding can help to bridge the gap.
In a recent consultation paper issued, the Monetary Authority of Singapore (MAS) is proposing measures to facilitate crowdfunding involving securities.
Generally there are four types of crowdfunding – donation-based, reward-based, lending-based and securities-based. According to MAS, donation-based and reward-based are not subjected to securities regulation as there are no exchange of securities and promised of financial returns. However, for lending-based and securities-based, MAS deemed that they are subjected to securities rules.
Henceforth, MAS’ proposed framework for securities-based include the requirement for companies operating lending-based or securities-based crowdfunding platforms to hold Capital Markets Services (“CMS”) licenses. In addition, MAS would restrict offerings from lending-based and securities-based to only Accredited (AIs) and Institutional Investors (IIs). The rationale for this approach is because MAS aims to safeguard the interest of retail investors as there is a certain amount of risks in such investment products and MAS deemed that AIs and IIs are better positioned to handle the level of risks involved as they have more capitals and experiences.
In the paper, MAS listed a number of risks involving securities-based funding platforms, such as lack of liquidity of the investment products, potential loss of capital, frauds and closing of platforms. My view is that MAS’ concerns are probably valid because crowdfunding is something very new and is gaining tract globally in the investment community. As such, the regulatory framework is still not established in many countries. Therefore, retail investors may not be aware of the kind of risks involved in such investment schemes.
MAS’ new proposed measures would also mean that those weaker industry players would be impacted directly because of the base capital requirements. The restriction of retail investors’ participation would also mean that crowdfunding platforms have to step up their game to attract better quality of investors.
SG Wealth Builder