Financial pundits around the world are beginning to view Singapore as the pre-eminent financial hub of the future.
Pre-Brexit reporting suggests that Singapore sits behind only London as the world’s leading financial hub, citing “superior technology, low taxes and efficient transport and infrastructure systems” as key levers for Singapore’s ascension.
At the core of this emergence has been Singapore’s strong SME ecosystem and a regulatory willingness to support an environment of sustained growth. In particular, Singapore’s stance on Equity Crowdfunding (ECF) offers insight into how regulators believe it will catalyse this economic growth. In this blog, we explore the Singaporean SME environment, its ECF regulatory framework and compare our observations to several of its neighbours within the Asia region.
The Singaporean SME Environment
SMEs form a significant segment of the Singaporean economy. According to recently issued statistics from the Singaporean government, SME entities account for 99% of all its registered enterprises. These SMEs account for 48% of the country’s economic output and employ more than 65% of the Singaporean population.
The Singaporean Minister of State for Trade and Industry, Teo Ser Luck, has enforced this reliance on SMEs. In several speeches to the Singaporean government, it has been urged that policies catch up with the challenges that SMEs in Singapore face now and in the foreseeable future.
Singaporean Equity Crowdfunding Regulatory Environment
MAS has demonstrated a keen commitment to providing support to SMEs through initiatives such as the Fintech Office and the International Technology Advisory Panel which provides advice to fintech companies on government grant applications and funding schemes. Furthermore, the Panel provides a forum for reputable and experienced business leaders to give commercial advice to start-up fintech companies. MAS has recently committed $225m over the next 5 years to growing the fintech segment of the start-up and SME ecosystem.
Internationally, MAS has formed bridges between both the UK and Australia. On 11 May 2016, MAS announced its first ever FinTech Bridge with the UK - an agreement to help co-source regulatory information between regions, allowing Singaporean regulators to refer fintech firms to their UK counterparts.
Additionally, MAS has signalled interest in bilateral arrangements between Australia. On 16 June 2016, the MAS announced the Innovation Functions Cooperation Agreement which was set up to enable fintech companies in Singapore and Australia to seek initial advice on licensing in each other’s markets.
In response to the requests of the equity crowdfunding (ECF) and SME community, MAS has issued a consultation paper which prescribes several key legislative changes, conducive to the ECF environment in Singapore.
The Regulatory Framework
From the SME’s perspective, prospectus requirements have traditionally been a time-consuming and cost-intensive barrier within the capital raising process. Under the regulatory changes issued by MAS, these requirements have been lifted for SME capital raises which meet one of the specific sets of criteria:
a. Small Offers Exemption - Under section 274A, an offeror or a specified delegate may make personal offers of securities, up to $5 million within any 12-month period, without a prospectus. Such offers must be made to a pre-identified individual or entity.
b. Private Placement Exemption - Under section 274B, offers of securities to no more than 50 persons within a 12-month period may also be exempted from the prospectus requirement.
Exempted Offer Requirements
Offers which are exempted from the prospectus requirements are required to comply with the under Sections 272A, 272B and 275.
These requirements are significantly reduced in comparison to the requirements associated with a prospectus.
a. Communication to qualified persons – Communications containing only factual information may only be issued to qualified persons.
b. Platform design - Offers of securities must be made through a platform which is access-restricted to qualified persons.
c. Publicising a platform - A platform operator may publicise its platform by providing information about its services and past offers. However, the operator is unable to call attention to any open offer or to any intended future offer.
Further to these exemptions, MAS has eased financial requirements for intermediaries that deal in securities, by lowering the base capital requirement from $250,000 to $50,000 and removing the requirement to maintain a security deposit of $100,000 with MAS.
The lowered requirements only apply where the Dealing Licensees serve accredited and institutional investors, do not handle or hold customer funds, assets or positions, and do not act as principal against customers. Requirements for servicing retail investors is comparatively restricting, given ECF platforms are required to maintain a $500,000 deposit to operate in this market. Guidance on adhering to these requirements is publicly available online.
Equity Crowdfunding Environment in Neighbouring Jurisdictions
Across East Asia, the volume in alternative finance came to $412 million in 2015, representing a 334% increase since 2014. This popularity of alternative finance highlights the continent’s funding gap, with only 18% of all bank lending going to SMEs in the continent.
In order to appreciate Singapore’s regulatory framework, it is worth briefly analysing the regulatory and investment landscapes across a few Asian developed countries with similar regulatory/investment landscapes.
Hong Kong is a major international financial centre, comprising of effective and transparent regulations, low taxation and a strong emphasis on the rule of law and free market. With a population of just over 7m and an SME ecosystem that accounts for 98% of total business units and employs 46% of the population, the lure for an ECF provider appears to be inevitable in Hong Kong. However, ECF regulations have not yet been clarified to the market and this may be part of why there are no ECF platforms operating in Hong Kong. Observers of regulatory activity are no clearer as to when ECF legal clarity will be announced despite discussions on the topic taking place. Recently, the Financial Services Development Council has called for a research report in order to better understand international ECF frameworks.
Japan has adopted an ECF friendly framework much earlier than its neighbours. As of 30 May 2014, Japan amended the Financial Instruments and Exchange Act (FIEA) with the objective of enhancing the overall attractiveness of Japan’s financial and capital markets. However, similar to Singapore, restricting protections have been given to retail investors, preventing ECF platforms from entering the Japanese marketplace.
In mid-2015, the Korean National Assembly announced regulatory changes which would legalise ECF. This move was to recognise a need to facilitate funding for SMEs and start-ups. Over the past year, the ECF industry has gained momentum.
While there is room for more regulatory changes, the Financial Services Commission of Korea has hinted at the possibility of raising the investment ceiling for retail investors in an attempt to widen the investor pool and grow the ECF industry.
As described above, Singapore regulators have shown a willingness to facilitate ECF as an alternative financing method. Its unique and complementary regulatory framework is expected to have a catalytic effect on the significant SME segment of their economy.
As has been the case in many of the Asia regions, ECF providers have been restricted by the measures its regulators have taken to protect retail investors from these alternative securities. Despite these restrictions to date, ECF providers are beginning to open opportunities for investors into markets which were only available to a select few. If the trends continue (and there is evidence to suggest that they will) these investment opportunities will become completely and globally democratised.