SEC’s crowdfunding rules
Credit to Author: KELVIN LESTER LEE | Date: Tue, 26 Nov 2019 17:02:25 +0000
In the past few weeks, I have talked about financial technology (fintech) development in a series of speaking engagements for business firms and entities, in relation to financial inclusion.
The use of fintech is consistent with our National Strategy for Financial Inclusion, which recognizes how effective access to basic financial services such as savings, payments, credit and investments could make a substantial positive difference in people’s lives.
In line with our pursuit of financial inclusion, the Securities and Exchange Commission (SEC) on July 8, 2019 issued Memorandum Circular 14, Series of 2019 (SEC MC No. 14, s. of 2019) to provide for the “Rules and Regulations regarding Crowdfunding (CF Rules).”
The SEC issued the CF Rules, which took effect on July 10, 2019, after its publication in two newspapers of general circulation, to properly implement Sections 8, 10.2, 32.2 (a), 37 and 72 of Republic Act 8799, or the Securities Regulation Code (SRC).
Crowdfunding has gained popularity over the last few years as it allows an individual to fund their products or project with the help of other people through the internet. Currently, there are many websites that offer crowdfunding platforms such as Kickstarter and Gofundme.
The SEC sees the potential of crowdfunding in encouraging investments and active public participation in the capital market, fostering good governance and ensuring the protection of investors.
To quote SEC Chairman Emilio Aquino: “With the rules and regulations governing crowdfunding in place, the commission hopes to support recent financial innovations on providing easier access to finance especially for smaller business startups or ventures while ensuring the integrity and fairness of financial systems and the protection of investors.”
So, the question now is: “How do you define crowdfunding?”
Section 2 (A) of SEC MC No. 14 s. of 2019 defines crowdfunding as “the offer or sale of securities of a limited scale usually for start-ups, micro, small and medium enterprises (MSMEs) done through an online electronic platform.”
Generally, there are four forms of crowdfunding: 1) donation-based crowdfunding, wherein the pooling of funds will support a charitable cause; 2) reward-based crowdfunding, where individuals give money to a company in return for a “reward,” usually a product produced by the company; 3) lending-based crowdfunding, wherein the money lent is paid with interest; and 4) equity-based crowdfunding, where individuals invest in shares sold by a company and receive a share of the profits in the form of a dividend or distribution, subject to the company’s discretion.
Equity-based and lending-based crowdfunding involve selling and/or offering of securities in the form of debentures and shares, and therefore subject to regulation under the SRC.
The following salient features are provided for under SEC MC No. 14, s. of 2019:
1. The CF Rules require a crowdfunding intermediary such as a funding portal, a broker or an investment house to apply and register as a crowdfunding intermediary with the SEC. Meanwhile, those who wish to issue securities should register with the intermediary and provide details such as the nature of the business, its financial situation, business plan and other details (Section 4, SEC MC No. 14, s. of 2019).
2. The limit on the number of securities that can be offered and sold by the issuer within a 12-month period shall be limited to:
a. P10 million when offered and sold to any investor; and
b. More than P10 million but not exceeding P50 million when offered and sold to qualified investors [Sec. 3(B)(i)(ii), SEC MC No. 14, s. of 2019];
3. The limit on total investments sold to any investor across all issuers in securities crowdfunding during the 12-month period shall not exceed the following limits:
a. For retail investors with an annual income of up to P2 million, a maximum value of 5 percent of their total income per year; and
b. For retail investors with an annual income of more than P2 million, a maximum value of
10 percent of their total income per year. Qualified investors are not subject to the limits set forth above, provided that they comply with Rules 10.1.3 and 10.1.11 of the 2015 Implementing Rules and Regulations of the SRC [Sec. 3(C)(i)(ii)(iii), SEC MC No. 14, s. of 2019].
4. A CF intermediary must, at all times, maintain a capital amount that exceeds its annual operational expenditure constituting all expenses and losses that arise in the CF intermediary’s normal course of business facilitating the offer or sale of securities in reliance to the CF Rules in a 12-month accounting period. The commission may require additional capital in the form of cash or insurance to cover any risky activities arising from the proposed or actual operations of the CF intermediary (Section 12, SEC MC No. 14, s. of 2019).
5. Issuers must submit annual reports and progress updates disclosing the issuer’s development in achieving the target offering amount (Sections 53 and 54, SEC MC No. 14, s. of 2019).
6. Any person or corporation currently engaged in equity-based and/or lending-based crowdfunding (e.g. crowdfunding platforms and issuers) must comply with the CF Rules within three months from their effectivity (Section 60, SEC MC No. 14, s. of 2019).
This means that existing operators of crowdfunding platforms must register as a CF intermediary with the commission in accordance with the CF Rules. Those who submit an application for registration within the three-month transition may continue their operations until the Commission has made a decision regarding their applications. Otherwise, those who fail to submit an application during this transition will be regarded as carrying on crowdfunding activities in violation of SEC rules and regulations and will be penalized accordingly.
We at the commission hope that the investing public shall be properly guided by the abovementioned CF Rules for the continuous advancement and globalization of financial markets and fundraising through internet platforms such as Crowdfunding. I advise you to check the SEC website to check the full details of SEC MC No. 14, s. of 2019.
Kelvin Lester K. Lee is a commissioner of the Securities and Exchange Commission (SEC). He is the co-chairman of the SEC Committee on Memorandum Circulars to Operationalize Revised Corporation Code Provisions. The views and opinions stated herein are his own. You may email your comments and questions to oclee@sec.gov.ph.