Crowd funding involves the use of a crowd funding platform1 to raise a small amount of capital from a large number of individual contributors to finance a specific project or business proposal.
These individual contributors may receive a reward or asset. This depends on the crowd funding arrangement. The different crowd funding models include:
- equity-based model, which involves the offer of securities;
- lending-based model, which involves individual contributors making loans to project owners with promised interest return (s);
- reward-based model, which involves returns in the form of a merchandise or other non-monetary rewards to individual contributors; and
- donation-based model, which involves no returns as funds raised are in the form of donations.
In contributing funds to a project or business proposal through a crowd funding platform, you may be subject to various risks, including:
- Risk of fraud – as the fundraising is being carried out through crowd funding platforms, individual contributors may not have personal contact with the project owners. There may also be limited information on the projects or business proposals. Hence, there is no assurance that the projects or proposals are legitimate, or that promised rewards or returns to the individual contributors would materialise.
- Counterparty risk – by contributing funds through a crowd funding platform, individual contributors will have to rely on the operator of the crowd funding platform to ensure that the funds collected are passed on to the project owners. As a result of this, there is a risk that funds raised through a crowd funding platform may be lost due to fraud or bankruptcy of the operator of the crowd funding platform.
- Risks related to start-ups – as crowd funding is commonly used by start-up businesses to raise funds for their initial stages of the business cycle, individual contributors are subject to risks related to start-ups. There is no certainty that a start-up business will be able to generate returns in cases where the individual contributors are promised certain returns.
You should exercise care and diligence in reading the applicable terms and conditions on the crowd funding platform before signing up or agreeing to contribute funds to any project or business proposal. You should also ensure that you sufficiently understand the project or business proposal, the form of return (if any), how and when you might get a return, and the risks involved.
If you are in doubt, you may wish to consult a professional adviser.
Crowd funding may be regulated under various legislation in Singapore depending on the form or method of fundraising.
For example, if the equity-based model is used, the crowd funding exercise would involve an offer of securities. This is subject to the requirements set out in the Securities and Futures Act (Cap. 289) (the “SFA”).
On the other hand, crowd funding arrangements which do not involve the offer of securities (for example, where contributions are in the form of donations or pre-payment for merchandise) are not subject to MAS’ regulations.
Under the SFA, any person who makes an offer of securities2 to investors in Singapore, whether through a crowd funding platform or otherwise, will be required to provide a prospectus. The prospectus must be lodged and registered with MAS. The prospectus serves to provide investors and their professional advisers with all information that they would reasonably require to make an informed assessment on the offer.
A person need not provide a prospectus in respect of an offer if it can be exempted under Part XIII of the SFA. For example, personal offers of securities which do not exceed S$5 million within any period of 12 months or offers which are restricted to accredited investors3 may be exempted from prospectus requirements under sections 272A and 275 respectively. These exemptions are subject to certain conditions including the condition that the offer is not subject of any mass solicitation, advertising or canvassing.
Where the crowd funding platform facilitates any offer of securities or the provision of advice relating to the securities offering, the person operating the crowd funding platform may be deemed as dealing in securities or advising on corporate finance and may require a capital markets services licence for that regulated activity under the SFA. Where financial advice is provided to investors who wish to purchase the securities, the person may be deemed as providing financial advisory services under the Financial Advisers Act (the “FAA”) and be required to comply with relevant requirements under the FAA.
For more information on the regulated activities and licensing requirements under the SFA and FAA, please refer to the Second Schedule of the SFA and FAA, and MAS’ Guidelines on Criteria for the Grant of a Capital Markets Services Licence [Guideline No. SFA04-G01].
If the crowd funding platform is regarded as a “securities market” under the SFA, MAS’ approval is required for the establishment or operation of such markets under section 6 of the SFA.
Any person who contravenes the relevant requirements under the SFA or FAA in conducting crowd funding or other related activities may be subject to fines or other penalties. For example, any person who makes an offer of securities without a prospectus registered by MAS shall be guilty of an offence and shall be liable on conviction to a fine not exceeding S$150,000 or to imprisonment for a term not exceeding two years or to both, and in the case of a continuing offence, to a further fine not exceeding S$15,000 for every day during which the offence continues.In addition, any person who carries on business in any regulated activity under the SFA without the requisite capital markets services license shall be guilty of an offence and shall be liable on conviction to a fine not exceeding $150,000 or to imprisonment for a term not exceeding three years or to both, and in the case of a continuing offence, to a further fine not exceeding $15,000 for every day or part thereof during which the offence continues after conviction.
Any person who wishes to raise funds through crowd funding or to establish and operate a crowd funding platform is encouraged to seek independent legal advice to ensure that the proposed activities are in compliance with all applicable laws, rules and regulations in Singapore.
This depends on the business model of the overseas crowd funding platforms. For example, offers made through an overseas crowd funding platform that solicits funds from investors in Singapore will be subject to prospectus and other applicable (e.g. licensing) requirements under the SFA, as described under question (3) above. However, given the borderless nature of the internet and the fact that many such crowd funding platforms do not have any presence in Singapore, there are practical limits to the enforcement of local requirements. Thus, it is all the more important that consumers exercise vigilance when considering participating in such offers.
Before you contribute funds through such overseas crowd funding platforms, you should ascertain if the platform is authorised or required to be authorised to facilitate such offerings, including in Singapore. You are encouraged to deal with regulated persons. MAS’ regulatory regime aims at safeguarding investors’ interests by ensuring that only competent and professional persons provide financial services to investors in Singapore. If you deal with an unregulated entity, you should be aware that the protection afforded under laws administered by MAS will not apply.
MAS notes that crowd funding is emerging in some countries as an alternative source of financing for start-ups and small companies. MAS is closely monitoring the developments in other jurisdictions on this front and looking into an appropriate regulatory framework for such new business models.
If you suspect that a person has breached the requirements under the SFA or FAA, you can report the matter to MAS by sending your feedback to firstname.lastname@example.org.
If you have suffered a loss as a result of a breach of contract, you can approach the Consumers Association of Singapore (“CASE”) or the Singapore Mediation Centre (“SMC”). You can also take legal action, which can be a time-consuming and costly process. If you wish to seek legal advice or to engage a lawyer to take legal action on your behalf, the Law Society maintains a list of all registered lawyers in Singapore which can be accessed on their website at http://www.lawsociety.org.sg/ .
You can refer to the Financial Institutions Directory found on MAS’ website. The Financial Institutions Directory provides a listing of entities licensed to conduct regulated activities under the various Acts administered by MAS.