Crowdfunding: What You Need To Know Before Investing

Key Takeaways

Not all crowdfunding projects are regulated
Beware of the risks of unregulated investments
Always check before you invest

Crowdfunding is an innovative way to raise money through social sharing and personal networks. Commonly used to fund charitable causes, crowdfunding is also used by start-ups to find investors for their projects and business.

Types Of Crowdfunding

Type	How it works	Returns
Donation-based	Individuals pool their money to support a charitable cause.	None.
Reward-based	Individuals give money to a company in return for a “reward”.	Non-monetary. It is usually a product from the company.
Lending-based (Debt-based)	Individuals lend money to a company.	Interest rate and return of amount lent at pre-determined intervals.
Equity-based	Individuals invest in shares sold by a company.	Profit-sharing in the form of dividends.

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 under donation-based and reward-based crowd funding respectively) are not subject to MAS' regulations.

Lending-based and equity-based crowd funding which involve offers of securities by companies are generally referred to as securities-based crowd funding (SCF). SCF is subject to securities regulations, but not lending-based crowd funding occurring directly between individuals.

Is Crowdfunding Regulated?

SCF is an alternative source of financing for start-ups and SMEs.

All SCF platform operators who want to operate in Singapore must be licensed by MAS. Only donation-based and rewards-based crowdfunding that do not involve offers of securities, are not subject to MAS’ regulations.

What Are The Risks?

Before signing up or agreeing to contribute funds to a crowdfunding platform, you should always read the terms and conditions and understand the risks involved.

Common risks associated with crowdfunding include:

Loss of capital	SCF is usually used by start-ups and SMEs with little or no track record. Failure rate for start-ups is high. You could lose some or all your capital.
Foreign issuers	Securities offered by foreign issuers will mean that your investment is subject to the laws of that country. You may have to pay additional taxes, costs and fees.
Fraud risk	As fundraising is carried out through online platforms, you may not have direct contact with whoever is making the offers of securities. There is a risk that the projects or proposals may not be legitimate and that expected rewards or returns may not materialise.
Lack of liquidity	When you want to exit the investment, there is a risk that you may not be able to sell the securities or have to sell them at a significant discount.
Failure of the platform	If the operator of the SCF platform that you are relying on to ensure that your funds are passed on to the project owner fails, you may lose all your money. You should find out the recourse if the SCF platform ceases business or fails. Check if there is an appointed party who can assist with debt recovery.

You may not receive enough information to make a fully informed investment decision as there is no regulatory requirement for issuers and SCF platform operators to provide specific information on the securities offered.

Also, the financial statements of the issuers may not have been audited. An unaudited financial statement may not reflect the true financial health of a company. For foreign issuers, the financial statements of the issuers may not be made accessible to you if there are no requirements in their home country to do so.

Requirements For Operators

MAS will only admit SCF platform operators that are assessed to be fit and proper.

Operators must:

Ensure proper segregation of investors’ monies
Keep proper records of transactions
Deal fairly with investors in the conduct of their business
Disclose the key risks of the investments to you

They must issue a prospectus unless the offer falls within these exemptions:

Small offers: Personal offers of securities less than $5 million within any 12-month period.
Private placement: An offer of securities to no more than 50 persons within a 12-month period.

But they must disclose the key risks (as prescribed by MAS at a minimum) of such investments to you. Before investing, you will be required to acknowledge that you have read and understood these risks. Do take time to consider the investment carefully as ultimately investors bear responsibility for their investment decisions.

If a licensed operator is found to have breached MAS’ rules, supervisory steps will be taken, ranging from enhanced audits to revoking the licence.

Overseas Crowdfunding Platforms

Any platform that solicits funds from investors in Singapore will be subject to a prospectus and other requirements.

However, there are limits to the enforcement of local requirements on crowd funding platforms which do not have any presence in Singapore. Be extra vigilant if you decide to take part in such offers.

MAS aims to safeguard your interests by ensuring only competent and professional persons provide financial services to investors in Singapore. If you deal with an unregulated person or entity, you will forgo MAS’ protection.

If Something Goes Wrong

Take these steps to resolve any disputes:

Approach the SCF platform if there's a default on payment.
Explore the debt recovery options and costs to be borne by you (if any). Some SCF platforms engage agencies on investors' behalf to collect outstanding debts from the issuers.
Speak to your Financial Institution (FI).
You should seek help with your FI as they have easy access to your records. All FIs are expected to handle consumer complaints and feedback independently and promptly.
Approach FIDReC.
If you are unable to resolve your problem, you may approach the Financial Industry Disputes Resolution Centre Ltd (FIDReC) within 6 months of receiving the final reply from the FI.

Checklist

Before committing any money, take a moment to consider the following:

Have You Conducted Due Diligence?

Read the terms and conditions on the SCF platform carefully before signing up or agreeing to contribute funds. Assess whether you are satisfied with the extent of the due diligence that the SCF platform operator conducts on issuers before allowing deals to be listed on the platform.

For example:

Find out if checks have been conducted on the issuer's board of directors or senior management, financial performance and ability to repay the funds. Such checks should minimally include past credit records, cash flow and financial strength of the issuer
Also check with the SCF platform operator on the total outstanding loans of an issuer

What Are The Non-Performing Loan Rates?

Don't focus just on the SCF operator's interest rates of return. You should also examine the non-performing loan rates to get an indication of the loans which have defaulted on interest or principal repayments to investors.

What Happens If The Platform Closes Down?

Find out what courses of action are available if the SCF platform ceases business. SCF platform operators are expected to put in place proper business cessation plans and disclose the arrangements and communications which they will make if that happens.

Questions to ask include:

How will investors receive their future repayments from the issuers?
Will there be another party appointed to help investors monitor future repayments due from issuers or assist with debt recovery?
What are the arrangements for handling investors' monies (i.e. whether investors monies are placed in segregated trust accounts) or loan agreements kept on behalf of investors?
What are the procedures for communication with investors regarding business cessation?

Do You Understand The Investment?

Make sure you fully understand the benefits and risks of the product or service before committing. Assess whether the features of the product or service offered meet your needs.