27 September 2018
On 23 August 2018, the Monetary Authority of Singapore (“MAS”) issued Circular No. CMI 27/2018, “Controls and disclosures to be implemented by licensed securities-based crowdfunding operators” (“Circular”). The Circular sets out the measures that MAS expects licensed securities-based crowdfunding (“SCF”) operators to implement to enhance their practices and controls regarding due diligence conducted on issuers, the management of defaults, and disclosures to investors. The measures are also aimed at improving transparency to enable investors to make more informed investment decisions on SCF offers.
- The new Circular sets out MAS’ expectations of licensed SCF operators in five areas: due diligence checks on issuers, management of issuer default, management of SCF platform cessation, disclosure of interest and default rates, and governance and management of auto-allocation tools.
- Existing licensed SCF operators should review their policies and processes against the measures in the Circular, and take actions to address any gaps arising from the review by
23 February 2019. All licensed SCF operators should, by 9 March 2019, provide MAS with an attestation from the chief executive officer that the gaps identified from the review have been fully remediated.
MAS streamlined the rules applicable to capital markets services licensees offering SCF in June 2016. These rules were aimed at striking a balance between improving access to capital for start-ups and small and medium enterprises, and protecting investors’ interests.
The publication of the Circular follows MAS’ review of licensed SCF operators over the past year.
Due diligence checks on issuers
The Circular provides that MAS expects licensed SCF operators to disclose to investors the scope of due diligence that they have performed on issuers. This will allow investors to determine if they are satisfied with the due diligence conducted before committing to invest in the SCF securities.
Lending-based SCF operators should also generally not allow a borrower to take up a new loan to pay off an existing overdue loan. They should assess whether there are legitimate reasons to extend a new loan to the same borrower before an existing loan is repaid. Additionally, the total outstanding loans of the borrower and the reasons for extending the new loan should be disclosed.
Management of issuer default
Licensed SCF operators, especially lending-based operators, should institute policies and procedures to handle issuer defaults. In particular, they should spell out the circumstances under which various options, such as closer engagement with the issuer, using a debt collection agency, and commencing legal proceedings, will be pursued. Licensed SCF operators should also disclose to investors the different recovery options, and the costs to be borne by investors under each option. Investors’ consent should be sought before any costs which are to be borne by the investors are incurred.
In the event of an issuer default, licensed SCF operators should immediately notify this to MAS, and, within three business days of the default, provide to MAS the information prescribed in the form set out in Annex A of the Circular.
Management of SCF platform cessation
Licensed SCF operators should implement a proper business cessation plan. Examples of areas to be included in the plan are arrangements for handling investors’ monies and loan agreements kept on behalf of investors, liaison with borrowers and investors on future interest and principal repayments, recovery actions in the case of issuer default, and the procedures for communication with investors regarding the business cessation.
Licensed SCF operators should disclose the arrangements and the communications which they will make in the event of business cessation before investors make an SCF investment.
Disclosure of interest and default rates
All SCF operators should disclose information on interest rates and non-performing loan rates in a consistent manner to enable investors to effectively compare different SCF offers and better understand the potential returns on their investments. Further details and illustrative examples are set out in the Circular.
In addition, licensed SCF operators should ensure compliance with the requirements on advertisement under the Securities and Futures (Licensing and Conduct of Business) Regulations, which among other things prescribe the manner in which a product advertisement may appear in any electronic mail or website and require senior management approval before the advertisement is disseminated or published.
Governance and management of auto-allocation tools
Licensed SCF operators that offer auto-allocation tools should have a proper governance and management framework over the design, monitoring, testing and operation of the tools. They should ensure that each tool is robustly tested, and that measures are in place to mitigate the risk of erroneous allocation before rolling it out to investors. Licensed SCF operators should also highlight to investors the limitations of the tools and educate them on the functionalities before use.
The Circular states that MAS expects the Board and senior management of licensed SCF operators to be responsible for delivering fair dealing outcomes to investors and to exercise effective oversight of their operations. Existing licensed SCF operators should review their policies and processes against the measures in the Circular, and take actions to address any gaps arising from the review by 23 February 2019. In addition, all licensed SCF operators should, by 9 March 2019, provide MAS with an attestation from the chief executive officer that the gaps identified from the review have been fully remediated.
Entities that intend to apply for a capital markets services licence to operate SCF platforms should satisfy MAS that they are able to implement policies and processes consistent with the measures in the Circular.
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