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2 August, 2016
I Introduction
On 8 June 2016, the Monetary Authority of Singapore (“MAS”) released its Response to Feedback Received on Facilitating Securities-based Crowdfunding (the“Response”) and five related documents discussing various aspects of securities- based crowdfunding (“SCF ”). The Response relates to the Consultation Paper on Facilitating Securities – based Crowdfunding published on 16 Feb ruary 2015 ( the “ CP ”). Below, we discuss each of the six documents in turn.
II. The Response The Response discusses several regulatory issues relating to SCF and their impact on SCF platform operators (“ SCFPOs ”). The Response is market – positive in that it highlights and clarifies a number of issues on SCF .
All topics raised in the CP were addressed in the Response. (a) Restricted Sales Currently, offers of securities must be made in or accompanied by a prospectus, unless they qualify for one of the exemptions from the prospectus requirement provided for in Part XIII of the Securities and Futures Act (“ SFA ”). One exemption, the A ccredited I nvestors (“ AI ”) exemption, 1 applies to offers made only to accredited investors. Another exemption, the I nstitutional I nvestors (“ II ”) exemption, 2 applies to offers made only to institutional investors. In the Respons e, MAS confirmed that current restrictions on offers of securities continue to apply in the SCF context. One key set of restrictions to note concerns advertisements of offers of securities.
Generally speaking, such advertisements must be written, can only be made to qualified persons, and must contain only factual information. Statements of opinions and predictive statements are not allowed. In a situation where an offer of securities is made in reliance on the AI exemption through an SCF platform, advertis ements accompanying that offer cannot solicit any offers or call attention to the offer or intended offer ( the “ Advertising Restrictions ”). Hence, information about specific offers such as the offer size, share price, and business of the offeror should be excluded. Based on this, SCFPOs should note that the design of their SCF platform will affect whether an offer complies with the Advertising Restrictions.
SCF platforms that allow non – AIs to access information about offers or intended offers are considere d ‘unrestricted access platforms’, and offers made through such platforms will not be considered eligible for the AI e xemption. SCF platforms that allow only AIs to access information about offers or intended offers upon login via a unique identifier and p assword are considered ‘restricted access platforms’, and offers made through such platforms will be considered eligible for the Advertising Restriction s . Restricted access platforms may, however, have sections that are accessible by non – AIs.
If generic in formation that draws attention to an offer or intended offer is published on any unrestricted section of a restricted access platform, the Advertising Restriction s will be violated and those offers will not be eligible for the AI e xemption. Offerors should , therefore, ascertain whether a platform has unrestricted sections and establish clearly what information of theirs, if any, should be published in those sections Restrictions also apply to advertisements of the SCFPO in general.
Advertisements containi ng generic information about the existence of an SCF platform, its nature, the services offered thereon, and past offers made and/or completed through it are permitted provided that no reference is made to open offers or intended offers. It is also inadvis able to suggest that past successful SCF cases made via the SCF platform will assure similar future successes. (b) Offers made to retail investors MAS confirmed that SCFPOs may crowdfund to retail investors. However, in doing so, it declined to remove the re gulatory safeguards currently applicable to offers involving retail investors.
Furthermore, MAS outlined several points to tailor the small offers exemption , 3 which allows offers to be made to retail investors without an accompanying prospectus, to the SCF context. 4 Investor pre – qualification process :
The current guidelines will be relaxed for licenced SCFPOs. Licenced SCFPOs appointed by an offeror must ensure that:
(i ) potential investors have sufficient knowledge or experience to make SCF investments; or
(ii) SCF investments are suitable for potential investors given their particular investment objectives and risk tolerance levels. SCFPOs must conduct a fresh pre – qualification on investors if the information or responses they provided previously change materially and cannot facilitate any SCF investments until the fresh pre-qualification is completed.
The refined pre – qualification process is summarised in Annex C , one of the six documents released by MAS. Risk disclosure requirements : Offerors who intend to rely on the small offers exemption must provide, at minimum, a prescribed risk disclosure statement and obtain a risk acknowledgement annually from the investor: (i ) before the investor makes his first SCF investment on the SCF platform; and (ii) if a material change is made to information provided during the pre-qualification process, before any subsequent SCF investment is made on that platform .
MAS has prescribed the form of both documents. The content of both documents largely accords with the current standards expected of product warnings for retail investors. Offerors are expected to satisfy themselves of an SCFPO’s compliance with these requirements when appoin ting a licenced SCFPO as their intermediaries. (c) E asing of financial requirements for dealing licen s ees MAS affirmed that it will ease the current financial requirements for intermediaries that deal in securities (including SCF intermediaries) as well as capital markets services licence holders who trade in futures contracts, provided that they:
(i) serve only AIs and IIs;
(ii) do not handle or hold customer moneys, assets or positions; and
(iii) do not act as principal against customers. The mi nimum base capital requirement and operational risk requirement will each be lowered to S$50,000.
In addition, no security deposit with MAS will be required. (d) Other feedback Other points raised are, in brief: Investor classes : Some respondents proposed t he creation of a new investor class for SCF, based on the financial sophistication of SCF investors. MAS rejected this, stating that the current distinction between retail and non – retail investors is sufficient. AI qualification thresholds : Suggestions were made to lower the AI qualification thresholds for individuals. MAS declined to do so as it regards the current thresholds as being in line with those adopted by other major jurisdictions. Debt SCF : Some respondents suggested having a distinct regulat ory framework for debt – SCF as debt securities are, largely, relatively lower – risk than equity securities. MAS refrained from pronouncing on the suitability or riskiness of debt relative to equity securities, and instead emphasi s ed that investors should con sider the viability and underlying business of each issuer over the general characteristics of the class of securities they invest in. Corporate track record : Concerns about SCF intermediaries being unable to meet certain admission criteria, including at least five years of track record for the company, were raised. MAS stated that it would consider alternative factors such as the track record of the applicant’s key officers and shareholders
Customer monies, assets, or positions: MAS clarified that SCF i ntermediaries would be allowed to handle, hold, or accept customer monies, assets, or positions as part of the crowdfunding business provided that they comply with the existing financial and margin requirements for holders of capital markets services licen ces and various other requirements on customers’ monies and assets, such as restrictions on commingling monies received on account of customers with other funds.
However, SCF intermediaries should note that the lowered minimum base capital and operational risk capital requirements will not be extended to them if they do handle, hold, or accept customer monies, assets, or positions (see Part II (c) above ).
Promissory notes: MAS stated that the current exclusion of promissory notes from the statutory definiti ons of ‘securities’ and ‘debentures’ under, respectively, s ection s 2 and 239 of the SFA ( the “ PN Exclusions ”) will be removed, as promissory notes have features similar to those of various other debentures. Until then, platforms featuring offers of promiss ory notes in reliance on the PN Exclusions should note that if a single promissory note with a value of more than S$100,000 is in fact an aggregation of multiple loans of less than S$100,000 each from separate investors, that first promissory note will not qualify as an excluded promissory note.
These platforms should also note that they are responsible for ensuring that offers of promissory notes in reliance on the PN Exclusions to each individual investor is at least S$100,000. III. Annex A : Factsheet on MAS’ proposals for Securities – Based Crowdfunding (SCF) Annex A is a high level summary of the Response. It covers the changes made to the regulatory framework for SCF and how they affect SCFPOs, AIs, IIs, and retail investors, all of which we discuss ed in det ail in Part II above. IV. Annex B: G uidelines on Advertising Restrictions in sections 272A, 272B and 275 Annex B provides guidance on the scope of the Advertising Restrictions in s ection s 272A, 272B and 275 of the SFA. Examples of how an SCFPO’s activities may be affected by the Advertising Restrictions are set out in Appendix 1 of Annex B. The Advertising Restrictions also apply to advertisements of the SCF platform’s existence. We discuss ed both issues at Part II(a ) ab ove . V. Annex C: E xtract of the Guidelines on Personal Offers made pursuant to the Exemption for Small Offers [Revised on 8 June 2016] Annex C details the amended pre – qualification process that licensed SCFPOs must conduct on investors in order to assess the:
(i) sufficiency of their knowledge or experience to understand the risks of investing in the securities offered in reliance on the small offers exemption; or
(ii) suitability of the investment to the investor in light of the latter’s investment objectiv es and risk tolerance. This has been discussed in Part II(b) above . VI. Annex D: R isk Disclosure Statement and Acknowledgement Annex D is the most basic form of a risk disclosure statement that MAS is willing to allow SCFPOs to provide to potential investors during the pre – qualification process. A standard acknowledgement of the risks outlined in the risk disclosure statement is included. We discuss ed Annex D at Part II(b) above. VII.
FAQS on Lending – based Crowdfunding The FAQs clarify a number of important issues, including what sort of activities would be considered to be “lending – based crowdfunding”. The applicability of various regulatory requirements under the SFA and Financial Advisers Act was explained, including licensing requirements and pr ospectus requirements.
The regime is broadly similar to that for SCF, which is unsurprising given that MAS clarified that “any invitation to lend money to an entity…is deemed to be an offer of debentures, which is a type of security” . 5 VIII. C onclusion The Res ponse provides much – desired clarity to the regulatory regime for SCF in Singapore. Incumbents of and entities intending to enter Singapore’s financial technology industry would do well to start implementing the necessary measures and changes to ensure full compliance on their part.
1 Section 275 of the SFA. 2 Section 274 of the SFA . There are no restrictions on advertising for offers made in reliance on the II exemption. 3 The small offers exemption is provided for in s 272A of the SFA. It is available where:
(i) the total amount raised from such offers within any period of 12 months does not exceed S$5 million;
(ii) the offeror gives the person to whom he makes the offer a written statement disclosing, among other thing s, that the offer is not made in or accompanied by a prospectus registered with MAS (“ Registered Prospectus ”);
(iii) no advertisement making an offer or calling attention to the offer or intended offer accompanies any of the offers made;
(iv) no selling or promotional expenses are paid or incurred in connection with each offer other than those incurred for administrative or professional services, or by way of commission or fee for services rendered by authorised securities dealers; and (
v) there is no Regis tered Prospectus in respect of those offers. If there is one, the Registered Prospectus must be expired or the offeror must, before making the offer, have informed MAS in writing that it intends to rely on the small offer s exemption to make the offer. 4 An other exemption allowing offers to be made to retail investors without an accompanying prospectus is the private placement exemption provided for in s 272B of the SFA. However, it is not feasible in the SCF context as it limits the total number of offerees to 50 within any period of 12 months. 5 Paragraph 3 of the FAQs on Lending – based Crowdfunding.
For further information, please contact:
Nizam Ismail, Partner, RHTLaw Taylor Wessing
nizam.ismail@rhtlawtaylorwessing.com
