Curtain falls on CoAssets crowdfund platform, but no systemic risk seen in P2P lending

Singapore

SINGAPORE-BASED crowdfunding platform CA Funding - formerly known as CoAssets - has thrown in the towel and is in the process of winding down, but there is no sign it is a harbinger of the collapse of others in the peer-to-peer lending space, said industry watchers.

Still, the episode is likely to bring to the fore issues of transparency and investor education, which could impact how crowdfunding is carried out in the future, they added.

The winding down of CA Funding is the latest turn of events for the troubled CoAssets Group, which had left hundreds of investors - mostly promissory note holders - shaken in December after it was revealed that it had transferred US$30 million of receivables to debt recovery firm Sunfits. Hong Kong-based Sunfits had said it could not recover the debt, which means investors are likely to lose the money put in.

To be clear, these notes were issued by subsidiaries of CoAssets Group, and not CA Funding itself.

CA Funding is a wholly-owned subsidiary of the CoAssets Group, and is regulated by the Monetary Authority of Singapore (MAS) with a capital markets service licence. The crowdfunding platform is the intermediary, not the issuer of securities listed on the platform.

When asked what plans are in place for investors, CA Funding's CEO Getty Goh declined to comment. He also declined to reveal the number of investors and the total value involved.

In an email sent to MAS in May 2020 seen by BT, former chief operating officer of CoAssets Lawrence Lim alleged that crowdfunding projects that were put up on the platform are fronted by special purpose vehicles set up by related parties based in Hong Kong that CoAssets have lent money to. The risks associated with such projects and how beneficiaries were commercially related to CoAssets were not revealed to investors, he added.

Mr Lim said he left CoAssets in March 2019 due to irreconcilable differences in business direction and management with company founders, namely Mr Goh and Seh Huan Kiat.

MAS had earlier said that it does not disclose its dealings with regulated financial institutions, but will review and take necessary action if CA Funding - the regulated entity - has breached regulations.

Shaun Leong, Partner, Dispute Resolution and Litigation, Withers KhattarWong said: "Whether investors (on the crowdfunding platform) stand to lose their investments completely could very well depend on how the assets were structured."

"For example, it is possible that investors may not lose their investments completely if their funds were held in a trust structure."

Varun Mittal, Global Emerging Markets Fintech Leader, EY, said crowdfunding platforms usually just play the role of a matchmaker between borrowers and receivers.

As such, they do not have liability if issuers go under, he said. "The winding down of the platform itself doesn't mean the money won't come back - the question is what's the underlying asset quality," he said.

Nithi Genesan, compliance specialist Argus Global's Director - Compliance, said that crowdfunding platforms such as CA Funding will usually have investor funds handled by escrow agencies.

Loan agreements in place cannot be dissolved and a reputable agency will typically be assigned to fulfil the services duties, with a debt recovery agency usually appointed to recover the debts, she said.

"Licensed crowdfunding platforms need to ensure there are appropriate default procedures in place to handle issuer defaults," she said, adding that "there is no guarantee if the investors will recover their investments".

Before cessation of the business, however, licensed entities are required to provide regulators with an auditor's certification that the licensee has fully discharged all customer obligations and ensure that customer assets and monies have been accounted for and returned to customers before ceasing its business, she noted.

Moreover, checks must be done to ensure that investors are knowledgeable, especially for small offers. Under this "small offers exemption", offerors can raise personal offers of securities to investors of up to S$5 million within any 12-month period, without a need for a prospectus, subject to certain conditions.

On top of that, MAS has also mandated that crowdfunding operators are to disclose key risks to investors and obtain investors' acknowledgement.

The risks will be laid out in these statements, explaining to investors that there is a high risk that they may lose all their money on such investments.

Industry watchers told BT that the regulatory safeguards are already in place, but investor education may need to be stepped up. This comes as some investors rely on licensing by regulators as a form of endorsement without conducting due diligence.

Withers KhattarWong's Mr Leong said: "MAS would not be in a position to advise investors on the financial viability of the platforms, or whether such platforms present a good investment opportunity for potential investors."

He pointed out that the episode "may not necessarily be symptomatic of a wider, systemic issue", as securities-based crowdfunding is "generally accepted as part of the broad diversity of the financing ecosystem and fintech landscape".

But at the same time, it is inherently risky given that investors are funding debtors with a riskier default profile that banks may not ordinarily fund, he said.

"Ultimately, the investors have a part to play as well by taking a serious look at the legal terms that they sign on to even as they are enthusiastic about the potential financial rewards that come with the investment," he added.

Bart Zhou Yueshen, Assistant Professor of Finance at INSEAD, said that part of the function of crowdfunding platforms is to have investors contribute to the candidate projects' evaluation, using their own judgment, experience and preference.

"They direct their money to 'good' projects and as such the platform serves as a venue of information gathering and aggregation," he said. "The quality of such aggregated information depends a lot on how much effort investors choose to spend in evaluating the projects."

"Any explicit or implicit regulator protection would destroy such an incentive, resulting in investors taking too much risk in potentially risky and bad projects, defeating the information aggregation function of the crowdfunding platforms," he added.

That being said, observers concurred that platforms operators must ensure that they are transparent and do not resort to dishonest tactics.

Assistant Professor Ruan Tianyue, Department of Finance, NUS Business School, added: "Any conduct of misleading investors should be condemned."

To her, the folding of CA Funding "raises questions about information disclosure and investor education", which she says "may impact the business model of crowdfunding in the future".

She has a less sanguine view of the fate of alternative lenders, as Covid-19 has made it more difficult for many borrowers to service their debt. "We may see a wave of restructuring among crowdfunding platforms: those with solid operations survive in the challenging times while those with poor operations or fraudulent practices wind down," said Prof Ruan.

On the other hand, INSEAD's Prof Zhou noted that CA Funding only contributes to a "negligible fraction" of the total market share of the crowdfunding business: "It's hard to see why it would have any market-wide impact on this industry."

READ MORE: Bitter wait for CoAssets noteholders as investments turn sour