Indonesia’s OJK Moves to Regulate on Equity Crowdfunding
The Indonesian Financial Services Authority (“OJK”) has issued a long-awaited regulation on equity crowdfunding that it is hoped will provide a solid foundation for the development of the industry going ahead. The new regulation forms part of a series of instruments issued by the OJK since 2016 to establish a regulatory framework governing the financial technology (fintech) sector as a whole.
As with other disruptive business models, such as app-based transportation, fintech (including crowdfunding in general) poses particular challenges for the regulators. In specifically addressing the rapidly growing equity-crowdfunding business, the OJK needed to come up with a formula that balanced the interests of all involved, including those of crowdfunding companies, investors and borrowers, the interests of the conventional financial-services industry (primarily the banks), and the public interest by affording protection from fraud.
These challenges are reflected by the fact that it took some five months for the new regulation to be promulgated following publication of the original draft in August 2018.
The regulation (OJK Regulation No. 37/POJK.04/2018 / “Reg. 37”) entered into effect on 31 December 2018.
2. What is Equity Crowdfunding?
Equity crowdfunding, also sometimes referred to as investment crowdfunding, crowd-investing, or crowd equity, generally refers to the provision of equity-based financing to startups or small enterprises by broad groups of investors (the “crowd”). In return for an investment, the investor receives shares in the business. If the business grows and prospers, then the value of the investor’s shares will also grow, thus providing a return on their investment. Conversely, the investor runs the risk of not receiving the anticipated return on their investment or even losing their investment altogether if the business fails to grow or eventually collapses.
As a considerable degree of risk is involved in equity crowdfunding, and the businesses that seek financing are usually not considered eligible for bank loans (“unbankable”), it serves a very useful function by filling gaps in conventional financing for startups and small enterprises.
3. Reg. 37: Key Provisions
Reg. 37 defines equity crowdfunding as an offering of shares by an Issuer directly to an Investor using a publicly accessible electronic system, while an equity crowdfunding “Provider” is defined as an Indonesian legal entity that provides, manages and operates an equity crowdfunding platform (Reg. 37 subsequently makes clear that such “legal entity” must be a limited liability company or cooperative).
An “Issuer” is defined as an Indonesian limited liability company that offers shares through a Provider, while an “Investor” is a party that purchases shares from an Issuer through a Provider.
(b) Exemption from Capital Markets Rules
From a legal perspective, raising capital through equity crowdfunding is essentially the same as raising funds on the capital markets through an initial public offering (IPO). However, Reg. 37 allows Issuers to avoid the tight regulatory requirements and considerable expense involved in an IPO by stipulating that an offering of shares through a Provider does not constitute a public offering under Law No. 8 of 1995 on the Capital Markets if the following requirements are satisfied:
(1) the shares are offered for sale through a Provider that is licensed by the OJK;
(2) the financing raised does not exceed IDR 10 billion (USD 708,560) in any 12-month period, or such other amount as may be stipulated by OJK from time to time;
An issuer may make more than one offering of shares for sale in any 12-month period provided that all the offerings are made through the same Provider. However, each offering period must not exceed 60 days.
(c) Specific Requirements for Issuers
As mentioned earlier, an issuer must be an Indonesian limited liability company. In addition, a company is prohibited from raising capital through equity crowdfunding if it (i) has assets of more than IDR 10 billion (excluding lands and buildings), (ii) is a public company or a subsidiary of a public company, and/or (iii) is either directly or indirectly controlled by a business group or conglomerate.
(d) Specific Requirements for Providers
Reg. 37 requires a Provider to be a limited liability company or a cooperative (koperasi) that has a data center located in Indonesia and an Indonesian domain name. Further, a Provider must, among other things:
(i) be licensed by the OJK;
(ii) be registered as an “electronic system” provider by the Ministry of Communications and Informatics; and
(iii) have minimum capital of IDR 2.5 billion (USD 178,000) at the time of submission of its application for a license to the OJK.
Reg. 37 also imposes a duty of care on a Provider by requiring it to verify an Issuer’s eligibility to make an offering of shares for sale before posting the offering on its website. In addition, a Provider may only act as facilitator for an offering and is thus prohibited from extending any form of financial assistance to an Issuer or recommending an Issuer to prospective Investors.
A Provider may establish a secondary market for the trading of Issuers’ shares as between Investors registered with the Provider.
(e) Specific Requirements for Investors
Importantly, there is no requirement for an Investor to be a legal entity or be domiciled in Indonesia, unlike in the case of both Providers and Issuers. Thus, overseas-based investors (both individuals and legal entities) are free to invest in Indonesian Issuers through platforms operated by Indonesian Providers.
However, Reg. 37 does impose a number of restrictions on who may invest in crowdfunding. These include the requirement that an Investor:
- Has the capacity to purchase shares of the Issuer (no guidance is provided by Reg. 37 as to the precise meaning of “capacity” in this context) ;
- Has the capacity to analyze the risks involved in the investment (once again, no guidance is provided as to the extent of this capacity); and
- Complies with the following investment limits:
These limits are obviously designed to protect Investors from over-extending themselves. However, they do not apply in the case of (a) a legal entity; or (b) a sophisticated investor, as shown by their having a stock account for at least two years prior to the offering.
(f) Contractual Aspects and Settlement
Reg. 37 explains that an equity crowdfunding arrangement involves two separate agreements or contracts:
- agreement between the Provider and Issuer (must be set out in deed form – an electronic deed is permissible); and
- agreement between the Provider and Investor (a standard-form electronic agreement is sufficient).
The payment for shares purchased by an Investor is required to be deposited in an escrow account, as designated in the agreement with the Provider, and the funds must then be paid by the Provider to the Issuer within 21 days of the end of the offering period or after all the offered shares have been sold. The Issuer is obligated to deliver the shares to the Provider within five days of payment being received by the Issuer, and the Provider shall then deliver them to the Investor within five days of receiving them. Such delivery may either be electronic (via a custodian) or physical.
The issuer must record the shares purchased by an Investor in its shareholders’ register.
(g) Transitional Provisions
A provider is required to institute a compliance program for the anti-money laundering and counter-financing of terrorism regulations in the financial-services sector, commencing four months after the date of issuance of Reg. 37.
Under Reg. 37 Article 70, Providers conducting operations at the time Reg. 37 entered into effect must apply for a license within six months (that is, counting from 31 December 2018). Interestingly, Article 71 further states that existing providers may not enter into any new crowdfunding agreements until the license has been obtained. It is unclear as yet how this provision will be applied in practice by the OJK. However, if it were to be strictly applied, it would clearly have adverse implications for the business continuity of Providers.