Watchful eye on crowdfunding

As crowdfunding exploded onto the Singapore scene in the past year or so, increasing numbers of investors have piled in, attracted by the potential of earning high returns for relatively low sums of capital.

Lending-based crowdfunding players have become popular among retail investors, who can contribute as little as $1,000 to a loan for a small and medium-sized enterprise (SME) and get potential returns of close to 20 per cent over the next 12 months. These days, it is not unusual to hear of SMEs raising loans of more than $100,000 in under an hour, thanks to the power of the crowd.

The Monetary Authority of Singapore's move on Wednesday to bring such crowdfunding players into its licensing regime sends a strong signal that despite the relatively small capital outlays investors put in, this is an area that warrants the regulator's keen eye, especially as the financial technology scene is only going to grow bigger from here on.

Under the regime, crowdfunding firms that want to allow retail investors to participate on their platform must set aside a base capital of $500,000.

This applies to crowdfunding platforms that deal in offering securities, such as raising loans or selling shares, on behalf of other companies.

This sets a high barrier to entry, and as MAS noted, the licensing application process will help to ensure only "fit and proper persons" are allowed to provide financial services here.

The licence will also require the firm to comply with rules such as ensuring proper segregation of customer funds and record-keeping of transactions.

For investors, being able to check which operators are licensed serves as a quick and easy way of determining which ones have at least undergone the approval process and are playing by MAS' rules.

Another new rule, requiring operators to remind investors of the risks of participating in securities-based crowdfunding and getting investors to acknowledge these risks before putting in funds, will also ensure that cooler heads prevail, even as the crowdfunding scene picks up heat.

A version of this article appeared in the print edition of The Straits Times on June 10, 2016, with the headline 'Watchful eye on crowdfunding'. Print Edition | Subscribe