CROWDLENDING platforms, which allow individual investors to lend directly to businesses for a fixed return, are calling for clearer regulations to grow this nascent industry, one they say will offer small and medium enterprises (SMEs) and startups wider funding access and options.
The call has come in the absence of a regulatory framework for crowdlending and after what appears to be diverse interpretations of the Securities and Futures Act (SFA) - a few clauses of which the Monetary Authority of Singapore (MAS) says may apply to crowdlending platforms here, depending on their fund-raising methods.
"Clear regulations and compliance are critical as they help to boost investor confidence and avoid the mismanagement of any platform that could threaten the reputation and credibility of this very young industry. Therefore, we are eager to have MAS regulate this industry to ensure its continuous growth," said Kelvin Teo, co-founder of Funding Societies, the newest of crowdlending platforms here, having launched just last month.
The others are New Union (launched in February 2014), MoolahSense (November 2014), Capital Match (April 2015) and FundedHere (yet to be launched).
With no dedicated framework in place, operators of these platforms have largely referred to the SFA to ensure compliance. According to MAS, there are two applicable requirements under the SFA that are relevant to crowdlending activities: the Capital Markets Services (CMS) licensing and the prospectus requirements.
But each requirement features a unique definition of the term "securities" and this seems to have led to diverse interpretations of the act and disparate fund-raising methods by platform operators to circumvent both requirements. This has led at least one operator to be disturbed over what he said is now an unlevel playing field.
For instance, under Section 80 of the SFA, crowdlending platforms deemed to be "dealing in securities" are required to hold a CMS licence. Here, "securities" is defined as (among others) stocks issued by a corporation but excludes (among others) any promissory note, which contains a written promise by one party to pay another party a fixed sum of money on demand at a specified future date.
Under Section 239, the SFA says borrowers raising funds on a crowdlending platform via the "public offer of securities" to Singapore investors must register a prospectus with MAS. Here, "securities" is defined to include "debentures", which are (among others) debenture stock and bonds issued by a corporation but exclude (among others) promissory notes having a face value of not less than S$100,000 and having a maturity period of not more than 12 months.
Asked how these regulations have influenced their operations, MoolahSense said it has from day one been "fully compliant" with the latter promissory note exclusion, ensuring that all notes issued by its borrowers have a face value of at least S$100,000 and a maturity period of not more than 12 months, so as to overcome the prospectus requirement. It added it had obtained written confirmation from MAS that its crowdlending model also does not "deal in securities" and hence no CMS license is needed.
"(In the first place), the definition of 'securities' applied in each instance is incongruous," said MoolahSense chief executive Lawrence Yong. "It becomes the responsibility of platform operators to ensure that they don't structure crowdlending formats that may subject participants to potential illegality, as this poses risks to borrowers and may also lead to the loan contracts becoming unenforceable."
He added: "As most borrowers on crowdlending platforms do not lodge prospectus, it is necessary for responsible operators to guide them to issue instruments that wouldn't be otherwise construed as 'securities' under the SFA. This would safeguard investors from the risk of entering into contracts that may be deemed illegal and hence unenforceable."
For all that, it is a different scenario at the other platforms, which facilitate a wider - and, according to Mr Yong, more attractive - range of financing options. These include loans under S$100,000 - with some as low as S$10,000 and having a maturity period of up to 24 months - as advertised on their websites. They too do not own a CMS licence.
Capital Match CEO Pawel Kuznicki said: "We offer both loan facilities via promissory notes and invoice discounting facilities. If the amount falls below S$100,000, we would only facilitate such transactions under invoice discounting. In future, we may extend our services to include a broader definition of promissory notes in which case we would prepare a prospectus for each borrower."
Funding Societies, which accepts loan applications of S$10,000 to S$200,000, said it does not fall under the purview of any authority as it does not deal in securities, provide financial advice or engage in fund management. Said its co-founder Mr Teo: "If a platform acts mainly as a marketplace lending platform with no ancillary services provided, it would not need to comply with the SFA."
Nonetheless, Funding Societies is believed to be the first here to engage a MAS-registered trustee agency (Orangefield Trust) to hold and handle crowdlending monies - a move Mr Teo said is costly but necessary to comply with the government's anti-money laundering efforts.
The disparity in interpretations of the SFA and priorities among the platform operators is clear. Said MoolahSense's Mr Yong: "The crowdfunding industry should be given clear directions. It will prevent rogue players from operating under the veil of ambiguity to arbitrage services that unfairly penalises the responsible and compliant ones, and materially relax the constraints that have been imposed on our operations."
MAS has been reviewing the feedback received since the close of its public consultation on facilitating securities-based crowdfunding in March. As part of the ongoing policy review to ensure that the SFA remains relevant and effective, MAS also does review the scope of "securities" and "debentures". It targets to complete its review in 2015, BT has learnt.
To-date, Capital Match has funded over S$950,000, New Union S$21 million and MoolahSense S$1.99 million to SMEs. Said New Union co-founder Eddie Lee: "Crowdlending is a viable industry as even the more established companies look for alternative financing sources to grow their businesses. As a financial hub in Asia, Singapore is in a good position to build up its crowdlending credibility."