On 8 June 2016, the Monetary Authority of Singapore (“MAS”) finally announced its long awaited policy posture on crowdfunding. This was done by publication of formal responses to feedback received after the release of its consultation paper in February 2015 (the “February 2015 consultation paper”).
To recap, the term “crowdfunding” describes an approach to capital fund raising that involves participation by a large number of investors (the so-called crowd). Crowdfunding can be deployed to raise funds for a variety of purposes, for instance, to raise funds for charitable purposes, or to help finance the production of a novel consumer product that could then be given out to the investors who helped by participating in the crowdfunding effort.
The MAS consultation and the policy posture announced on 8 June 2016 relate only to securities-based crowdfunding, which refers to the offer of securities (whether in the form of debt or equity instruments) via a crowdfunding platform.
This note summarises the key policy postures announced by MAS.
The Target Audience for Securities-based Crowdfunding
In the February 2015 consultation paper, MAS had sought views as to whether participation in securities-based crowdfunding should be limited mainly to accredited investors and institutional investors, or whether participation should also be open to retail investors (i.e. those who are not accredited investors nor institutional investors). MAS has now decided that the existing legal rules concerning offering of investments to retail investors should remain largely intact for securities-based crowdfunding. It was felt that securities-based crowdfunding remains very much a nascent industry globally, and that retail investors might not have the experience or expertise to fully appreciate the risks involved when participating in and investing through crowdfunding platforms.
Prospectus Requirements under Part XIII of the SFA
Currently, the offering within Singapore of certain types of investment products (such as equity and debt instruments, and units in collective investment schemes) is subject to the requirements of Part XIII of the Securities and Futures Act (“SFA”). Broadly speaking, Part XIII of the SFA provides, amongst other things, that such offerings must be accompanied by a prospectus which meets specified requirements and which must be registered with MAS. Various exemptions from the prospectus requirements are provided for, and these exemptions would typically be based on various factors, such as the circumstances of the particular offering, the amount sought to be raised from the offering, the type of investors targeted by the offering, etc. These rules would largely be retained and apply to securities-based crowdfunding.
New Guidelines on Advertising Restrictions for certain Exempt Offerings under Part XIII of the SFA
Although the existing rules on prospectus requirements will remain in place, MAS has pointed out that some of the prospectus exemptions currently do enable an issuer to make investment offerings to retail investors. However, such exempt offerings are subject to conditions.
For instance, the Small Offers Exemption allows an offering to be made without a prospectus if the amount raised within any period of 12 months does not exceed S$5 million, whilst the Private Placement Exemption allows an offering to be made without a prospectus if the offer is made to no more than 50 persons within a period of 12 months. There is also a prospectus exemption for offerings that are aimed at persons who are accredited investors or in a comparable position. These exemptions are further subject to other conditions, including a requirement that there must not be any advertisement of the offer or advertisement calling attention to the offer or intended offer. The purpose of this restriction against advertisements is to help ensure that the offering remains limited in reach.
Recognising that the current regulatory regime in Part XIII of the SFA does not fully take into account the role played by a securities-based crowdfunding platform, MAS has issued a new set of guidelines on what would be considered to be sufficient compliance with the advertising restrictions whenever reliance is placed on the prospectus exemptions provided in either section 272A (Small Offers), section 272B (Private Placement) or section 275 (Accredited Investors and other relevant persons) of the SFA. In general, the platform cannot be one that permits unrestricted access. Communications may only be made to persons who are qualified to be offered under the relevant prospectus exemption, and the content of such communications must be confined to factual information. Offers made through a securities-based crowdfunding platform that provides unrestricted access would not be considered to be compliant with the advertising restrictions applicable to the relevant prospectus exemption.
Easing of Pre-Qualification Requirements under the Small Offers Prospectus Exemption
Recognising that the Small Offers Exemption in section 272A of the SFA will be of relevance in a crowdfunding scenario, but that the exemption (originally provided in 2005) might not cater specifically to a crowdfunding model, MAS has agreed to ease certain requirements in the existing Guidelines on Personal Offers made pursuant to the Exemption for Small Offers (the “Guidelines on Small Offers”).
Currently, the Guidelines on Small Offers require that both of the following pre-qualification requirements are observed:
- That potential investors have sufficient knowledge or experience to invest (“Knowledge/Experience Test”); and
- That the investment is suitable for them in the light of their investment objectives and risk tolerance (“Suitability Assessment Test”).
Moving forward, where an offering is made through a securities-based crowdfunding platform in reliance on the Small Offers Exemption, the Guidelines on Small Offers will be amended such that the operator of the securitiesbased crowdfunding platform as well as the offeror must make sure that either the Knowledge/Experience Test or the Suitability Assessment Test is administered to pre-qualify the investor to whom the offer will be made. As part of the pre-qualification procedure, the crowdfunding platform operator will also be required to provide the investor with a risk disclosure statement in a prescribed format and to obtain the investor’s acknowledgment (in electronic or written form) that he has read and understood the risk disclosure statement.
Abolition of Provision excluding certain Promissory Notes from the scope of Part XIII of the SFA
Currently, the investment offering rules in Part XIII of the SFA do not apply to a promissory note that has a face value of at least S$100,000 and a maturity period of 12 months or less, and as such the prospectus rules do not apply to an offering of such a note. This exclusion will be removed so that promissory notes of all value and maturity periods will, moving forward, be subject to the same investment offering rules.
Regulation of Securities-based Crowdfunding Platform Operators under Part IV of the SFA
In the February 2015 consultation paper, MAS had already highlighted that given the definition in the SFA of the expression “dealing in securities”, the operator of a securities-based crowdfunding platform would be required to hold a Capital Markets Services Licence (“CMSL”) for dealing in securities under Part IV of the SFA.
However, promissory notes are currently not considered to be “securities” for the purposes of Part IV of the SFA. As a result, a crowdfunding platform that deals only in debt instruments (as opposed to equity) will be able to operate without having to hold a CMSL for dealing in securities, since it would not be dealing in securities as such. Noting that a promissory note has features no different from other types of debt instruments which would be considered to be “securities”, MAS has decided in line with the policy posture taken in relation to Part XIII of the SFA, that the exclusion of promissory notes from being considered as “securities” should also be removed.
The effective result is that operators of all securities-based crowdfunding platforms (whether for debt or equity instruments) will at the very least need to hold a CMSL for dealing in securities. Additional authorisations from the MAS, either under Part IV of the SFA or under the Financial Advisers Act might well be required as well, depending on the specific operating model of, or services offered on, the platform.
As a concession to licensed dealers that (i) do not carry any customer’s positions in securities, margins or accounts in their own books; (ii) serve only accredited and/or institutional investors; and (iii) do not act as principal counterparty vis-à-vis the customers, MAS will, in recognition of their reduced level of operational risks, make the following changes to the criteria for grant of a CMSL:
- The base capital requirement will be lowered from the current S$250,000 to S$50,000; and
- It would no longer be necessary for the dealer, upon being granted a CMSL, to place with MAS a deposit of S$100,000 as security to cover losses suffered by customers.
Closure of Loopholes relating to Promissory Notes
As already mentioned above, the two existing exclusions relating to promissory notes, which in fairness can only be described as loopholes, will be closed.
Pending the formal removal of these loopholes by legislative amendment, MAS has, in a newly issued set of Frequently Asked Questions on Lending-Based Crowdfunding, specifically warned that the attempt by some crowdfunding platforms to keep within the Part XIII promissory notes exclusion – by having the borrower issue a single promissory note with a face value of S$100,000 or more, to a group of lenders who each lend less than S$100,000 – will not be considered to be compliant with the requirements of the SFA.
The adoption by MAS of a formalised policy posture on crowdfunding has been long anticipated and the specific positions articulated seem eminently practical. Some industry participants might perhaps be disappointed that MAS has decided against further liberalisation of the regulatory rules, but it seems that the revised MAS approach does strikes a sensible balance between supporting innovation and taking excessive risks.
In recent times, there has indeed been a lot of enthusiasm over crowdfunding. It might well be trendy to invest through a crowdfunding platform and business enterprises might find crowdfunding platforms attractive as an alternative source of funding. But ultimately one must not lose sight of the fact that investing through crowdfunding platforms involves a very substantial degree of risk, which can be easily underappreciated or entirely overlooked. All it takes to burst the bubble is one case of a default. Naturally, no one wishes for this to occur, and as such it would be hard to fault the regulator for loosening current rules only ever so slightly but otherwise continuing to limit participation in securities-based crowdfunding to investors who have the requisite sophistication and experience.