Raising funds from a large number of people, generally through an online platform, offers start-ups a chance to push ahead despite the tightening of criteria by traditional lending sources following the global financial crisis. The new licensing regime for crowdfunding platforms, announced by the Monetary Authority of Singapore (MAS), acknowledges the utility of this form of raising capital. However, a balance has to be struck between facilitating the development of securities-based crowdfunding and ensuring that there are sufficient safeguards for investors. Complaints made by investors who failed to receive their payouts highlighted the need for action.
An MAS consultation paper released last year noted that securities-based crowdfunding could offer an alternative source of private financing for start-ups and small and medium enterprises. Market validation through successful crowdfunding campaigns might also create more funding opportunities for businesses. However, there are substantial investment risks. One is the loss of capital if SMEs without a track record and start-ups, which globally have a high failure rate, perform badly. Other risks include the lack of liquidity caused by the absence of a secondary market for trading in the securities, as well as outright fraud. In particular, the MAS had in mind retail investors who might not fully appreciate the risks inherent in securities-based crowdfunding investments, even if warnings of the downside are disclosed.
After a year-long consultation process since the release of its paper, MAS' solution is to require crowdfunding platforms that deal with debt and equity to obtain a licence to operate. Licensing will help give the sector the credibility that it needs in order to flourish. Thus, lending-based crowdfunding platforms, which allow retail investors to contribute towards the raising of loans for SMEs or start-ups and receive interest payments in return, will now have to apply for a capital markets services licence. Since they deal with retail investors, they will have to set aside a capital base of $500,000. The regulatory regime will ensure that only fit and proper persons are allowed to provide financial services. Also, it will require a licensee to comply with business conduct rules intended to protect the interests of investors, such as ensuring the segregation of customers' monies and the maintenance of a proper record of transactions.
However, platforms that wish to tap only accredited and institutional investors will now need to meet a base capital requirement of $50,000, down from $250,000 previously. This demarcation correctly makes a distinction between the interests of financially-savvy investors and the needs of ordinary people who wish to bet on innovations. While caveat emptor is the general rule, lax practices would undermine the nation's reputation as a financial centre of integrity.