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Negotiating a delicate balance

Crowdfunding needs the right regulatory framework to succeed as a source of funding for innovative ideas and businesses.

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"Overly restrictive rules will prevent crowdfunding from delivering its many potential benefits. On the flip side, a laissez faire attitude will most likely damage the market if investors and backers have bad experiences." - Adrian Harkin, chief executive officer, management consulting for KPMG in Asean

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"I do think there is a lot of information out there on the Internet and good crowdfunding platforms operating in a country like Singapore will have strong investor protection and transparency to mitigate risks." - Andy Lim, chairman and co-founder of private equity firm Tembusu Partners

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"Angel investors and PE firms who have the right risk appetite and business acumen to understand the potential of investing early in growth companies will find the crowdfunding platform useful as an additional avenue for sourcing for deals." - Albert Ho, director of boutique corporate advisory and investment firm Centrum Capital

AS online crowdfunding platforms that allow new businesses to source financing from a wide range of backers gain popularity in Singapore, regulators need to strike a balance between protecting investors and promoting innovative businesses, industry watchers say.

The global reach of the Internet means that startups are able to significantly widen the potential pool of investors for their business or idea. According to consultants KPMG, the potential for crowdfunding is huge in Singapore, and provides many opportunities for individuals to become an entrepreneur.

Already, websites like Indiegogo offer individuals a chance to help fund a whole range of homegrown projects and businesses involved in everything from films to mobile phone accessories. However, experts say that this fledging market needs the right regulatory framework if it is to provide a real impetus to innovation and entrepreneurship here.

"Overly restrictive rules will prevent crowdfunding from delivering its many potential benefits. On the flip side, a laissez faire attitude will most likely damage the market if investors and backers have bad experiences," says Adrian Harkin, chief executive officer, management consulting for KPMG in Asean.

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Crowdfunding comes in many forms, whether it is a local band offering an equity investor the right to call themselves a record producer in return for an investment, or an investor agreeing to invest to "pre-purchase" an innovative product when it is finally produced.

There are also numerous ways in which an equity crowdfund investment can seek a financial return. According to a KPMG report, Crowdfunding in Singapore, this wide range of manifestations blurs the legal and regulatory framework that surrounds it.

"At one end, an investment in stocks, shares, bonds or something similar of a company is clearly subject to Singapore's Securities and Futures Act (SFA). At the other end of the continuum, buying membership of a club for which you earn rewards or pre-purchasing a product under development is not likely to be caught by the SFA. Clarifying the applicable legal and regulatory framework to cover the many examples in between is much harder," the report said.

Consulting the industry

In February, the Monetary Authority of Singapore (MAS) published a consultation paper setting out proposals and clarifications to facilitate access by corporates to securities-based crowdfunding (SCF). As a start, MAS will facilitate SCF offers to accredited investors and institutional investors.

Two weeks after the paper was issued, a new equity and lending-based crowdfunding platform called FundedHere was set up by Andy Lim, the chairman and co-founder of private equity firm Tembusu Partners.

While Mr Lim believes that the MAS's suggested regulatory framework is on the right track, he notes that limiting the framework to only accredited investors and institutional investors could "take the 'crowd' out of crowdfunding and severely restrict the power of crowd-wisdom to adjudicate good startup ideas".

"I think sensible discrimination of different types of investors makes sense here - imposing a cap on an individual's investment amounts depending not just on income bracket but also on his or her financial sophistication is not inconsistent with our local regulator's goals of facilitating innovation while protecting unsophisticated investors from making unwise investment decisions," he says.

He proposes the creation of a general framework tailored for the crowdfunding industry that addresses key issues such as anti-money laundering, solicitation and due diligence. Such a framework, he says, can then give platforms such as FundedHere greater clarity on the boundaries for the Singapore market and help to protect the reputation of the industry.

Risk and reward

Mr Lim says that investors who take on more risk in funding early stage startups usually expect to earn multiple times the potential amount of their investments in a 12-18 month time frame. This is in contrast to more mature public companies where investors usually expect a 10-15 per cent internal rate of return.

On the risk side, investors will have to consider the higher failure rate of early-stage startups. And as crowdfunding is essentially a virtual platform with no physical brokers, investors will find it harder to determine whether a particular business is trustworthy or whether or not the information presented is accurate.

"With all that said, I do think there is a lot of information out there on the Internet and good crowdfunding platforms operating in a country like Singapore will have strong investor protection and transparency to mitigate this risk," says Mr Lim.

However, local retail investors might be better off investing in companies listed on an established stock exchange rather than startups through an equity-based crowdfunding platform, says Albert Ho, director at boutique corporate advisory and investment firm Centrum Capital. Unlike startups, publicly listed companies offer potential investors a financial track record, better disclosure and corporate governance.

"Angel investors and PE firms who have the right risk appetite and business acumen to understand the potential of investing early in growth companies will find the crowdfunding platform useful as an additional avenue for sourcing for deals," says Mr Ho, who is also Singapore divisional councillor at CPA Australia.

So could crowdfunding potentially displace venture capital or angel investing as the key source of financing for startup companies? Tembusu's Mr Lim does not think so.

"I think when the model fully develops, equity crowdfunding in Singapore will be a source of funding for all kinds of startups that are just not part of the current ecosystem in the first place. I also see equity crowdfunding in Singapore as complementary rather than disruptive to the traditional angel and VC models."

What's more, angel investors and venture capitalists are a critical source of advice for entrepreneurs on how to make their businesses a success. Says KPMG's Mr Harkin: "The lack of key management competencies can be an Achilles heel for many budding entrepreneurs. The tax breaks the Singapore Government may be considering for innovation would be better channelled through more formal angel investing or venture capital schemes rather than put towards crowdfunding."

 

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