Overview of the Regulatory Framework for P2P Lending and Equity-based Crowdfunding in Singapore

This is a guest post by Pawee Jenweeranon, a graduate school student of the program for leading graduate schools – cross border legal institution design, Nagoya University, Japan. Pawee is a former legal officer of the Supreme Court of Thailand. His research interests include internet finance and patent law in the IT industry.

1. Introduction

In the recent years, it is inevitable that the financial technology or Fintech takes the significant role toward the evolution of financial services industry in this region. In other words, Fintech normally be used to improve the financial industry services.

In 2015, the Monetary Authority of Singapore (hereinafter referred to as “MAS”) has committed two hundred twenty five million Singapore Dollar (around 166 million USD) to support the development of Fintech industry for the startup ecosystem in the upcoming years[1]. This is a good reflection of the significance of the financial technology or Fintech development in Singapore.

From the economic perspective, Small and Medium Enterprises (hereinafter referred to as “SMEs”) are important part of Singapore’s economy. SMEs account for 99 percent of all registered enterprises in Singapore[2]. From this reason, enhancing the competitive capacity of Singapore SMEs is essential for Singapore economy development.  Even almost all of the SMEs in Singapore are supported by the Governmental Enterprise Development Agency and Centers[3], (more than 100,000 SMEs got funding support by the Singapore government[4]); however, internet financial technology was also proposed as an alternative mechanism for enhancing the competitiveness of Singapore SMEs in the recent years[5].

 

2. Regarding Peer to Peer Lending


2.1 Background

Generally, there are many peer to peer lending platforms in Singapore; however, they normally lend money to businesses rather than individuals due to the strict regulation for money lenders. The additional limitation on lending to low-income borrowers[6] who are Singaporean citizens or permanent residents which is another requirement should be considered by the lenders.

In general, money lending in Singapore is mainly regulated by the Moneylenders Act 2010 and the Moneylenders Rules 2009. For the Moneylenders Act 2010, due to the main purpose of this act is to develop consumer protection mechanism to protect borrowers of small amount loans[7], this is the reason why the act provides stringent limitation for moneylenders to operate their business. This is another key different of money lending law of Singapore compared to other countries in Asia such as Hong Kong which focusing more on lending activity[8]. Briefly, the act requires moneylenders to hold the Moneylenders license with obligations and limitations for licensee[9].

In Singapore, even there are strict regulations in the existing law relating to a money lending business; however, there is the legislative effort of the Singapore government to address the issue regarding Securities-based Crowdfunding, which can reflect the understanding of the Singapore government toward the development of Financial Technology (Fintech) and the supporting regulatory framework.[10]

2.2 The Regulatory Framework for Peer to Peer Lending Business

From the document published by the MAS on Lending-based Crowdfunding – Frequently Asked Questions (FAQs)[11], generally, the operation of P2P lending is restricted by MAS under the Securities and Futures Act (Cap. 289) (SFA) and the Financial Advisers Act (Cap. 110) (FFA).

Specifically, the P2P lending business needs to prepare and register a prospectus with MAS in accordance with Section 239(3) of the SFA. In addition, not only the registration of the prospectus but also the P2P lending platform need to follow the licensing requirements, particularly, the P2P lending business which fall within the scope provided by MAS needs to hold a Capital Market Services (CMS) license.

From the document, MAS states in paragraph 10 that “ …Platform operators should now ensure that the participants on their platforms are aware that each lender has to lend at least $100,000 if the borrower is to fall within the Promissory Note Exclusion. Offers of consolidated promissory notes commenced after the date of these FAQs must comply with the Prospectus Requirements” This means, that the P2P lending platforms, which previously used a single promissory note issued by the borrowers, need to apply for a license, if they still want to proceed their lending business; however, as provided in the MAS document, the removal of the Promissory Note Exclusion will be effected after the amendment of SFA.

This will affect many of existing P2P lending platforms such as MoolahSense and Capital Match which have the main function to help businesses to find loan from investors because some of P2P lending platforms are using a promissory note exemption without a Capital Market Services (CMS) license; however, MAS will make it easier for licensed P2P platforms. Therefore, a small offer exemption in accordance with the aforementioned law might be used by many P2P lending platforms.

3. Regarding Equity-based Crowdfunding

3.1 Background

Crowdfunding is a new phenomenon in Singapore. In the recent years, there are some crowdfunding platforms have been established in Singapore, which are reward based and donation based crowdfunding; however, there is no equity-based/security-based crowdfunding platform that already launched their business in Singapore.

The main reason why Singapore needs to facilitate security based crowdfunding is quite similar to the rationale behind establishing of security based crowdfunding in other Southeast Asian countries. The aforementioned information regarding SMEs in Singapore reflects that the security base crowdfunding might be used as a supportive mechanism or an alternative method for raising fund especially for the SMEs which cannot get funding support by the government.

3.1 The Regulatory Framework for Security-based Crowdfunding Business

In general, due to the characteristic of security based crowdfunding which involves an offer of security, the Securities and Futures Act (Chapter 289) (SFA) require the company which wants to make offering of its shares (the issuer company) to register with the MAS.

Additionally, for facilitating the establishing of security based crowdfunding in Singapore, the consultation paper was issued by MAS on 16th February 2015 for public hearing. Particularly, the consultation paper set out the proposal to facilitate operation of security based crowdfunding in Singapore. Briefly, the main issues provided in the consultation paper can be separated as follows;

(1) Regarding type of investor, due to concern about risk of the investors, generally, MAS only focusing on the accredited and institutional investors for investing money in security based crowdfunding[12]. This is due to the accredited and institutional investors are likely to have more resources and experience investing in start-ups or SMEs and have risk management capacity.

(2) Regarding burden and unique characteristic of SMEs, basically, intermediaries which deal with equities or securities, including an security crowdfunding platform, are regulated by the Security and Future Act (Chapter 289) and required to hold a Capital Markets Services (hereinafter referred to as “CMS”) license[13]; however, the regulations provided in the Security and Future Act is a big burden SMEs.

(2.1) The MAS consultation paper proposed to reduce the above mentioned burden, specifically, the base capital requirement will be reduced to fifty thousand dollar Singapore (around 40,000 USD)[14] and the requirement to maintain a security deposit will be removed.

(2.2.) From the characteristic of a security or security based crowdfunding business, the consultation paper also clarifies that the Advertising Restriction does not prohibit a security or security based crowdfunding business from advertising the existence of its platform to the general public.

Security or security based crowdfunding is in the beginning stage in Singapore; however, from the unique social, economic and political context of Singapore, many practitioners and scholars expressed that crowdfunding is a promising way of fundraising especially for Singapore SMEs which will take the significant role in economic development in the upcoming years. Even it is too early to decide whether crowdfunding will be successful in Singapore or not, but the recognition of MAS is a good sign which can reflect the promising of crowdfunding development in this country.

4. Conclusion

Currently, in many Southeast Asian countries, there is still no regulatory framework to fully response the operation of P2P lending and security-based crowdfunding business. This is what the regulators need to consider by borrowing the foreign experiences related to this issue and adapt with the different social context in each country. The development of Fintech is promising for this region not only for improving the traditional financial service but also for the economic development in this region which relies heavily of the Small and Medium business.

 

[1] The Future of FinTech A Paradigm Shift in Small Business Finance, World Economic Forum,  http://www3.weforum.org/docs/IP/2015/FS/GAC15_The_Future_of_FinTech_Paradigm_Shift_Small_Business_Finance_report_2015.pdf (last visited Feb.18, 2016).

[2] Pond K., Bank Lending Operations in the SME Market – A Case Study from Singapore, http://www.wbiworldconpro.com/uploads/singapore-conference-2014/banking/1408440853_609- Pond.pdf (last visited Feb.18, 2016).

[3] Annual Report 2011/12, SPRING Singapore,  http://www.spring.gov.sg/About-Us/Documents/FV_ar2011_2012/web/flipviewerxpress.html  (last visited Feb.18, 2016).

[4] Gardner J., Regulating Money Lending in Singapore: Looking at All Sides,
http://law.nus.edu.sg/cbfl/pdfs/reports/CBFL-Rep-JG1.pdf (last visited Feb.18, 2016).

[5]  How this Fintech Startup is plugging the SME Funding Gap, CNBC,
http://www.cnbc.com/2015/07/30/how-this-fintech-startup-is-plugging-the-sme-funding-gap.html (last visited Feb.18, 2016).

[6]  Money Lenders Rule 2009 of Singapore, rule 19.

[7]  The Second Reading Speech by SMS Assoc Prof Ho Peng Kee on the Moneylenders (Amendment) Bill , Ministry of Law Singapore, https://www.mlaw.gov.sg/news/parliamentary-speeches-and-responses/second-reading-speech-by-sms-assoc-prof-ho-peng-kee-on-the-moneylenders-amendment-bill.html (last visited Feb.18, 2016).

[8] Jodi Garner, Supra note 4.

[9] Moneylenders Act 2010 of Singapore, sec. 5(1).

[10] Consultation Paper : Facilitating Securities-Based Crowdfunding, Monetary Authority of Singapore, http://www.mas.gov.sg/~/media/MAS/News%20and%20Publications/Consultation%20Papers/Facilitating%20Securities%20Based%20Crowdfunding.pdf (last visited Feb.18, 2016).

[11]  The MAS on Lending-based Crowdfunding – Frequently Asked Questions (FAQs), Monetary Authority of Singapore, http://www.mas.gov.sg/~/media/MAS/Regulations%20and%20Financial%20Stability/Regulations%20Guidance%20and%20Licensing/Securities%20Futures%20and%20Fund%20Management/Regulations%20Guidance%20and%20Licensing/FAQs/FAQs%20on%20Lending%20based%20Crowdfunding.pdf (last visited Jul.20, 2016).

[12] Supra note 10.

[13] Moneylenders Act 2010 of Singapore, sec. 5(1).

[14] Supra note 10.

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