Crowdfunding and Crowdlending in Singapore
Many of our readers will have heard of crowdfunding: perhaps in the context of raising money for the needy such as the recent case of the Jurong hawkers whose stalls burned down, obtaining funds to produce a prototype for an invention, which is what the Singapore-based inventors of the “Rotimatic” tried previously, or, most relevantly for Small and Medium Enterprise (SME) owners, as a way to raise funds for a business venture, instead of taking up a bank loan. Crowdfunding, and its twin crowdlending, can be a rewarding alternative fundraising option for SMEs.
What are Crowdfunding and Crowdlending?
For those who have not heard of crowdfunding before, it is a means to raise a relatively large sum of funds through agglomerating many small contributions from members of the public. In crowdfunding, the contributors are giving the money either as a gift, for a reward, or as an equity investment. The donation model applies where contributors want to support a charitable cause or a private project which they feel a personal affinity to. The reward model is not unlike pre-ordering a product online. The investment model would be more generally applicable to raising capital.
In crowdlending, the basic premise of aggregating funds from the public is the same but those who put money into a crowdlending project expect to be repaid, so this is similar to a bond. For this reason, crowdlending is a form of investment which would potentially be attractive to both lenders and the borrowing SME.
What are the Legal Requirements for Crowdfunding and Crowdlending?
Pure donation-based crowdfunding for altruistic causes may be relevant to SMEs in the context of Corporate Social Responsibility (CSR) projects but this may be subject to charity law restrictions and any intermediary collecting such funds may be subject to strict fiduciary duties like acting in good faith as a matter of trust law. SMEs which are also social enterprises may be able to benefit from such donation-based crowdfunding. The success of such campaigns would depend on attracting some form of sympathy from the public which would push them to make a no-strings-attached gift, making it unsuitable for a straightforward commercial venture.
Reward-based crowdfunding may be relevant to SMEs in the entertainment sector or perhaps other industries where consumers feel a strong personal affinity towards certain products such as fashion or beauty products. An example of a creative reward-based crowdfunding campaign which promised to deliver intrinsic utility rather than a quantifiable return on investment to backers is when the comic strip Cyanide & Happiness utilised crowdfunding to produce its own web series and promised certain perks such as free DVDs of their intended programme to those who pledged more than a certain amount.
In such a model, most contributors would only be willing to contribute relatively small amounts as the product or service in question may never be produced if the funding threshold is not met. Hence, this would only suit a venture which is less capital-intensive. However, as something in the future is being promised in exchange for a current contribution, these would most likely be regarded as contracts rather than donations. Normal contractual rules such as making sure you do not misrepresent the nature of the product or service that you seek to develop would apply. Any industry-specific rules for the product concerned would apply too, such as age restrictions.
Nevertheless, reward-based crowdfunding can play the additional functions of helping an SME gauge market interest in their product while simultaneously drumming up pre-launch publicity before having to take on more debt or risk personally.
Crowdlending and Equity-based Crowdfunding
Both of these are deemed an offer of securities and thus are subject to stringent regulatory criteria.
The Monetary Authority of Singapore (MAS) considers crowdlending to be a form of Peer-to-Peer (P2P) lending that falls within the ambit of the Securities and Futures Act (SFA). This means that any invitation to the public to lend money to an SME would be deemed to be a debenture and therefore subject to strict prospectus requirements. Similarly, equity-based crowdfunding is essentially an offer of shares and would also be subject to the SFA.
For SMEs, the most practical way to deal with this would be to ensure their crowdlending or equity-based crowdfunding campaign falls within the grounds for exemption from the prospectus requirement. The most prominent of these would be the small offers or private placement exemptions in sections 272A and 272B of the SFA. There is no need to issue a prospectus for personal offers raising not more than S$5 million within any twelve month period (in addition to other technical requirements). This would also apply if the offer is made to no more than 50 persons within a twelve month period (in addition to other technical requirements). In both cases, no advertisement is allowed, and no selling and promotional expenses should be incurred. Offers to accredited (such as those with net assets above S$2 million or an annual income over S$300,000) or institutional investors may also be exempted.
Additionally, if you wish to use a platform for crowdlending or equity-based crowdfunding, the platform would need to hold a Capital Markets Services (CMS) license. Some platforms licensed to operate in Singapore include Crowdo and Fundnel. Given these rules, only restricted access platforms which can only be accessed by, for example, accredited investors using a password, would be suitable for this form of fundraising if SMEs wish to avoid the prospectus requirements.
Ultimately, MAS has indicated in the findings of their recent consultation paper that it is not inclined to change the regulatory environment to make securities-based fundraising easier so it is unlikely that this form of fundraising will expand beyond its current scope.
Is Crowdfunding/Crowdlending Suitable for Me?
Crowdfunding and crowdlending are useful alternative ways to raise capital. Reward-based crowdfunding can be particularly helpful in certain but businesses should be conscious of their resulting contractual obligations. However, SME owners looking to raise capital through equity- and debt-based financing this way should note that they would be subject to essentially the same restrictions which would apply to issuing shares or bonds in a private company. Regardless, it would be advisable to speak to a corporate lawyer to best understand your options.