Crowdfunding in Singapore
Learn about crowdfunding regulations and how to fund the launch of your Singapore company using crowdfunding.
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Crowdfunding is a type of alternate funding for a venture by raising small amounts of money from a large number of people, typically via the Internet. The emergence of Crowdfunding has allowed entrepreneurs the ability to get their business ideas financed easier than before. The crowdfunding market was valued at 10.2 billion USD in 2018 and is expected to reach 28.8 billion USD by the end of 2025.
The purpose of this article is to describe the crowdfunding landscape in Singapore and to provide guidance to those who wish to use crowdfunding as a source of funds for launching or growing their venture in the country.
What is Crowdfunding?
Crowdfunding is the practice of funding a venture by aggregating many small investments from multiple sources. The concept of pooling the resources of many parties to fund a new venture is an old one (for example the British East India Company was formed as a joint-stock company in 1599). But “crowdfunding” is formally considered as a new industry and it is growing rapidly.
The appeal of crowdfunding lies in its simplicity: instead of dealing with the voluminous paperwork, bureaucratic processes, and high fees of an investment bank, an entrepreneur can quickly and easily raise funds on a crowdfunding platform. Typically, the funds raised are relatively small. As a rule, investment banks, venture capitalists, and angel investors favour projects and industries a) that they are familiar with and b) in whom they can make a sizable investment (typically more than USD 2 million) that justifies their due-diligence cost and efforts. These investors avoid early-stage startups due to their risks. Crowdfunding platforms fill this gap; they act as mediators who bring entrepreneurs who are seeking relatively small funds and small investors together. The target audience of crowdfunding platforms is most often small and mid-sized businesses or startups. These firms usually struggle in the beginning (and when they have to expand) due to their limited access to capital.
However, sometimes established companies also use crowdfunding to a) fund a discrete new project that is separate from their main line of business or b) gauge market interest in a new product that they may be considering.
Crowdfunding Regulations in Singapore
Since crowdfunding is a relatively new industry, scams and risks abound in this sector. Both investors (i.e. those who want to put their money to use) and entrepreneurs (i.e. those who are seeking funds for their ideas) can fall a victim of fraud. The fraud can be perpetrated by the crowdfunding platform (e.g. through excessive fees), by the entrepreneur (e.g. by showcasing fraudulent product plans), or by the investor (e.g. by making investments using funds that are of shady origins).
To create a healthy and trustworthy environment for all parties involved in the crowdfunding industry, Singapore has introduced a basic regulartory framework that must be satisfied before platforms are allowed to engage in crowdfunding services. Monetary Authority of Singapore (MAS) is the legislative body that governs the crowdfunding activities under the Securities and Futures Act (Cap.289), and the Financial Advisers Act (Cap. 110).
All crowdfunding participants should be thankful of these requirements as they ensure that honest participants are not at the mercy of unscrupulous players. If a platform breaches the MAS rules, a penalty is imposable. MAS may perform an enhanced-audit or may decide to revoke the operator’s license if violations repeat.
Regulations for Crowdfunding Platforms
Since platforms partly act as financial intermediaries, they may be required to get a Capital Market Services License (CMS) that is issued by MAS. Second Schedule, Regulated Activities, Part I contains an extensive list of financial activities that fall under this regulation. In general, community models of crowdfunding (reward-based and donation-based) are not subject to MAS, thus, only financial return models of crowdfunding (equity-based and lending-based) need to be granted the license.
Regulations for Crowdfunding Investors
Singapore law considers a person who lends money through a crowdfunding platform to be a “money-lender”. Any person involved in the business of money-lending is required to obtain a moneylender’s license from Singapore’s Registrar of Moneylenders. This license requires a) a deposit of S$20,000 and b) a qualified and experienced person who must manage the money lending business. An exception is available if the lending is solely to business entities or by accredited investors. Such a lender is considered to be an “excluded moneylender”. Most crowdfunding platform use this exception for their investors.
Regulations for Companies Seeking Crowdfunding
Crowdfunding can involve different types of relationship between the investor and the entrepreneur. Before you develop your crowdfunding plan, it is important that you understand the differences between these types:
- Lending-based crowdfunding
- Equity-based crowdfunding
- Rewards-based crowdfunding
- Donations-based crowdfunding
Further information on each of the above types of crowdfunding along with applicable Singapore regulations is described in the sections below.
This model is also known as peer-to-peer lending. In this case many individuals lend money to a business. The recipient company provides a legal commitment to pay back the money with a pre-agreed interest. The commitment may also include the predefined time of repayment.
This lending primarily takes place online through peer-to-peer crowdfunding platforms such as FundedHere, Fundnel, InvestaCrowd etc. MAS expects that the public appeal to lend money to a company should offer debentures as security. Such an appeal is subject to a prospectus requirement which involves preparing and registering a prospectus with MAS. Under the existing rules of securities regulation in Singapore, the following exemptions apply:
- Small offers. The exemption is applicable when the total amount raised from all offers by the issuer of securities within any period of 12 months does not exceed SG$5 million (or its equivalent in a foreign currency). MAS has also changed the base capital requirement for crowdfunding platforms from S$ 250,000 to S$ 50,000. Nevertheless, the company must disclose the key risks of the investment to all investors.
- Private placements. To be eligible for this exception, the offer must not be made to more than 50 persons within any 12-month period and must not be accompanied by any advertisement that draws the attention of the general public to the offer. Entities and trustees are counted as one person if “the entity or trust is not formed primarily for the purpose of acquiring the securities which are the subject of the offer”. But if the entity or trust is formed specifically for the purpose of acquiring the security then every member of the entity or beneficiary of the trust is counted individually.
- Offers to institutional investors or accredited investors. Such offers are not required to provide a prospectus.
If you use a reputable crowdfunding platform for seeking lending-based crowdfunding, the platform will ensure that all of the above rules are complied. Examples of such platforms also include Funding Societies, MoolahSense, Zopa, Upstart etc.
This type involves contributing to the company’s capital and receiving equity shares which give a right to participate in the venture’s future profits. The concept is similar to initial public offering in the stock market with the only difference that the companies are not listed but private. As a result, the shares in a crowdfunded equity-based investment can not be traded on any secondary market and thus carry liquidity risk. Equity-based model is common with start-ups as it provides the right risk-reward combination for their investors.
MAS administers equity-based crowdfunding the same way it governs debt-based crowdfunding. For both cases, the crowdfunding platform must have a Capital Markets Service (CMS) license. If a platform also offers financial advice on investment, it should hold a license to act as a financial advisor; see Financial Advisers Act (Cap. 110).
In donation-based crowdfunding, investors act as donors and do not expect anything in return for their contribution. Usually this type of crowdfunding appeal is used by artistic and charity projects, and by social enterprises.
MAS regulations are not applicable to reward-based crowdfunding. However, the Commissioner of Charity (COC) has established a code of practice for online charitable fundraising appeals. It is designed to ensure accountability, legitimacy, and transparency of charitable appeals. It requires online fundraisers to complete a declaration of compliance with the fundraising regulations. The code of practice aims to guide fundraisers to make accurate representations to donors. They should also keep proper donations records as well as using the donations for the expected purpose intended.
This type of crowdfunding enables a group of individuals who are interested in a non-financial reward (such as a novel product or experience) to bundle their funds to ensure that their desired reward materializes. The reward may be the product or service. Examples of such rewards include a new gadget, a documentary movie, a custom cruise vacation, etc.
Reward-based crowdfunding is not covered under MAS regulations. But in this case fundraisers must also abide by charity law. Similar to the case of donation-based crowdfunding, the COC code of practice administrates the reward-based model as well.
Crowdfunding Your Venture - A Step-by-Step Roadmap
Crowdfunding allows anyone to raise funds for the project or idea and bring it to life, whether it’s a new social project, gadget, mobile application, video game or anything else. All these diverse ideas have one thing in common: they will be represented at the online crowdfunding platforms, so your self-presentation as well as presentation of the project should look appealing to the public. It’s important to remember that in fact you are asking strangers to open their pockets to you.
To get a general overview and a better understanding of how to run a good campaign, you may look into the examples of successful campaigns below:
- Hopping Gnome Brewing Company
- TrackR Bravo - The Thinnest Tracking Device Ever
- Lily: An Incredible Way to Learn Chinese
A high-level step-by-step roadmap for organizing your crowdfunding effort would be as follows:
- Define your fundraising needs. Find out how much money you need for a successful implementation of your project. Get sufficient financial data before you start asking for money. Create a business plan. Clearly define the end goal of your campaign and brainstorm to figure out what you can contribute to potential investors.
- Set up a plan. The structure of the plan will be fully dependent on the type of your project. The plan should contain not only an attractive campaign but the implementation steps as well. Experienced crowdfunders put their projects online starting from the second or third stage of their plan as the public is more likely to invest when they see the final results are close.
- Choose a platform with a crowdfunding model that complements your project. Do research on existing crowdfunding platforms websites and choose the ones that would be a good match for the niche your business plans to target. It’s not the factor that will necessarily make or break your project, but it’s important to match the needs of your potential investors. If you’re not sure, it’s best to stick with the rewards model. The equity and lending models are more suitable for businesses, while the donation model is suitable for social causes. Find out the fundraising experience of similar projects and fine tune your plans based on that knowledge.
- Share your story wisely. Let your potential audience know how your product or business idea can be beneficial for them. This is a very important factor so spend sufficient effort on it. Create a video, a prototype, schematic drawings, etc. as appropriate. Articulate your vision well through a write up, website, or a video introduction. Tell your personal story, make it compelling, be genuine.
- Look professional. The website of your project will make it look more credible. With a professional website, the potential investor is more likely to consider your plans to be serious and find you to be more reliable than other similar projects without it.
- Think about promotion. Making your project viral is one of the most crucial yet most difficult challenges you will encounter. Ideally your promoters should be people who have invested in your project and are waiting for its success. Also, you may consider cross-promotion with some similar existing campaigns.
- Offer something in return. Many successful campaigns offer some perks to their backers in return as a token of gratitude for the funds invested. To motivate investors, you may consider tiered rewards: the more they contribute, the better perk they get.
- Make changes based on feedback. Make sure you have taken enough time to review and test your prototype product or idea and made all the necessary improvements before the start of your campaign. However, unexpected things will happen, so take feedback seriously. This will also show your commitment and will potentially attract more funds.
- Update your audience. Be regular and honest with your updates. If you don’t keep your audience updated on your progress, people will lose interest and you won’t attract investors in the future. If things aren’t going exactly as you hoped for, it is crucial to be transparent. Describe problems honestly.
Crowdfunding campaigns involve a lot of tedious work and can be risky. However, by creating the right structure and plan you can achieve your goals. Remember that the crowdfunding campaign works only if the founder does. So work out your plan meticulously and go make it happen!
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