Equity crowdfunding is rapidly gaining ground in Asia, but the region has yet to embrace it fully. Advanced financial hubs like Singapore and Hong Kong are taking a wait-and-watch approach, with much of the promise coming from emerging markets, reports Haky Moon

The evolution of financial technology or fintech has led to the emergence of new financial services, alternative financing methods and business opportunities. One key focus of fintech is equity crowdfunding (ECF), and this mechanism is facilitating entrepreneurship while creating plenty of work for financial professionals across Asia.

ECF is gaining plenty of traction throughout Asia Pacific, where sources of funding can dry up fast with every shift in the regional economy. ECF is a process through which a “crowd” invests in an early stage unlisted company – sometimes even an idea – in an exchange for a share or shares of a company. In an ideal scenario, ECF allows investors to become shareholders of a company with room for growth.

This year, ECF earned support in Malaysia from the country’s Securities Commission, which published guidelines for six licensed ECF platforms.

Thailand has also been supportive of ECF. After publishing an operating framework last year, financial regulators, including the Securities and Exchange Commission (SEC) and the Bank of Thailand (BOT) are now refining regulations. The SEC has capped the amount a retail investor may commit to 50,000 baht (about US$1,400) in a single startup and a total of 500,000 baht per year in the sector. Investors must pass a test to prove that they understand the risk involved.

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REGULATORY CONCERNS

However appealing ECF’s potential is, its high-risk nature means there are still plenty of regulatory roadblocks to overcome. ECF can breach various securities laws because soliciting investment from retail investors is, in broad terms, illegal in most jurisdictions.

Countries such as Singapore are taking a conservative approach by only allowing sophisticated investors to participate in ECF, an approach that deviates from what ECF is generally thought to be: a vehicle for everyone to invest in an early-stage venture.

Singapore’s approach is not surprising. Among the jurisdictions surveyed by Hong Kong’s Financial Services Development Council (FSDC) earlier this year, Singapore was the least enthusiastic towards ECF. The country’s approach has been to treat crowdfunding just as it does traditional fundraising activities.

“If a new regulation comes out, it’s a whole new table. We [as lawyers] need to figure out how the ECF players will fit in. The regulations are still changing and being reviewed. It’s a nascent area, apart from that, platform themselves need to figure out whether they can fit into the regime,” says Jonathan Kao, a senior associate at Bird & Bird ATMD.

Another hurdle is the inconsistency and lack of clarity as to what ECF actually is or should be because the whole industry is relatively new, particularly in Asia. “There’s not much consistency across the jurisdictions in Asia. You have one set of regulations in Singapore and another in Malaysia. That’s one of the biggest challenges. What this means is that the compliance cost skyrockets. Many of these platforms are looking to expand, from their own country to somewhere else,” says Kao.

For now, ECF platforms in Singapore have to meet higher regulatory benchmarks than in other Asian countries, which makes it difficult to launch an ECF in the city-state.

“Even if they managed to expand to different jurisdictions, regulations are still being developed and fine-tuned. So even if you’re a perfectly functioning ECF platform today, what happens next year when the ECF market goes down? There’s a lack of clarity,” adds Kao.

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MORE THE MERRIER?

In addition to external regulatory fluctuations or rigidity, ECF itself has to deal with a number of internal challenges, says Jo Yan Lim, a partner at Malaysia’s Mah Weng Kwai & Associates.

“At the early stage, lawyers are involved, because there are some regulatory grey areas in the guidelines issued by the Securities Commission (SC). Under normal company law, private companies can only issue shares to a maximum of 50 shareholders. But looking at the spirit of crowdfunding, the idea is, ‘the more the merrier’. So they’re definitely looking at more than 50 shareholders in the company,” he notes.

Lim also points out, “One of the earlier role of lawyers was to develop a way for companies to have more than 50 investors. In most instances lawyers, recommend that target companies – issuers – work with nominee companies to hold shares on behalf of the investors.”

Another problem that ECF platforms have to tackle is “the standard of due diligence expected [from] the issuers”, as it is a pre-listing requirement of the SC, says Lim.

He further explains, “An analogy would be a company going on an initial public offering (IPO). It’s the same requirement imposed on issuers. But the practical difficulties, these are in [the] respective [ECF] companies, which have not reached any financial thresholds or track records. They may not even have the funds to engage [in] or conduct a thorough due diligence exercise, [and] it’s very different from being listed in an IPO. We need to come up with a standard of due diligence that is acceptable and fair. It shouldn’t kill off the issuers from raising the funds.”

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MORE OPTIONS

So far, the whole idea of ECF has received different reactions from regulators and lawyers in different parts of Asia. Developing countries are taking a much more liberal approach in experimenting with this new financial service platform.

“In the case of Malaysia, the regulator has come up with a guideline. The six ECF platform operators have gone live, which means they can raise funds, and most of them have been successful so far. It’s exciting because there is a framework for the platforms. One of the main challenges [they face] is [the] education of consumers, i.e. investors and target companies. It’s very promising but most people don’t understand how it works and don’t appreciate it,” says Lim.

Emerging markets in Southeast Asia have the kind of environment and climate that allows ECF to thrive, particularly because the funding options for smallto- medium sized enterprises (SMEs) – the types of businesses needed to stimulate the economy – are limited.

“Indonesia is one of the more promising countries. Vietnam, Myanmar and even Thailand are also quite promising. If the [recently announced] regulations in Thailand work, ECF might take off in Thailand. The regulations look interesting, because they are slightly more liberal. They have expanded it to the level where slightly less sophisticated investors can get involved. That’s what ECF platforms want. The whole point of it is having a crowd of funders,” said Kao.

Meanwhile, it might take some time before ECF gains traction in Asia’s sophisticated financial hubs, such as Singapore or Hong Kong.

“From what I gathered from guidelines, the Monetary Authority of Singapore (MAS) has considered ECF, but it is not time yet. Significant changes need to be made, and MAS is still conservative. They need more disclosures as opposed to prospectus. Singapore – maybe in five years or so – might see changes. In the shorter term, ECF is not going to be high on the priority list even if they’ve been pushing to facilitate fintech. ECF might be a subset of the fintech push, but at the moment it doesn’t seem to be that significant,” says Kao.

Even if ECF secures a foothold in Asia’s financial hubs, the question of what happens afterwards remains. 

“The questions we need to think about is, ‘How are they going to exit?’” asks Kao. “And after that, would companies [even] want this kind of financing?”

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