Proposed regulations and rules on crowdfunding in the Philippines

By Leia Clarissa Veronica R Veracruz, ACCRA Law Offices
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Crowdfunding (CF) platforms are a popular way to solicit charitable donations and raise funds for projects or business ventures. With CF platforms, access to funds has expanded for start-up companies and for micro, small, and medium-sized enterprises (MSMEs).

CF refers to the financing method of pooling small amounts of money from a large number of people to finance charitable causes, campaigns, projects or business ventures.

Leia-Clarissa-Veronica-R-Veracruz-ACCRA-Law-Offices
Leia Clarissa Veronica R Veracruz
ACCRA Law Offices

In line with this developing innovation, the Securities and Exchange Commission (SEC) released proposed rules and regulations on CF for public feedback. The proposal to regulate CF in the Philippines is consistent with countries such as the US, Canada, and Singapore, which have already established regulations on CF transactions.The SEC rules attempt to strike a balance between the dual responsibilities of the SEC to encourage capital formation, and to protect investor interests.

To encourage capital formation, and in view of the limited character of the public offering through CF, the rules grant exemption for securities sold or offered through CF from the registration requirement under section 12 of the Securities Regulation Code (SRC). To protect investor interests, the SEC incorporated disclosure requirements, registration requirements for intermediaries and funding portals, a regulatory framework for intermediaries, and post-registration requirements for issuers and intermediaries in the rules.

DISCLOSURE REQUIREMENTS

Those looking to raise funds (issuers) will be required to disclose, among others, the nature of their businesses, financial condition, historical reports of operations, the business plan with respect to the CF offering, the risk factors of investing in its projects, the procedures on how to return funds if the target offering is not met, and the procedures to complete or cancel investment commitment.

REGISTRATION REQUIREMENTS

Entities that facilitate transactions involving the offer or sale of CF securities through online electronic platforms will be required to register as a funding portal.

An applicant funding portal, which should be registered with the SEC as a corporation and have at least PHP50,000 (US$950) equity, must submit: (1) a registration statement with information on the principal place of business, legal status and disciplinary history, business activities and types of compensation received by the funding portal, and website address; (2) account opening and disclosure rules; and (3) business conduct rules.

Entities that mediate in the offer or sale of CF securities must file an application with the SEC, and register as intermediary.

Only securities brokers registered under section 28 of the SRC, investment houses as defined under the Investment Houses Law, and funding portals registered in accordance with section 30 of the rules are eligible to file an application with the SEC and engage as an intermediary in CF transactions.

To register as an intermediary, eligible entities must signify their intention to conduct the activities of a CF intermediary and must be able to satisfy criteria set out under the rules.

FRAMEWORK FOR INTERMEDIARIES

Under the rules, intermediaries will be required to: (1) provide investors with educational material; (2) take measures to reduce the risk of fraud; (3) provide communication channels for discussions about offerings on the platform; (4) comply with maintenance and transmission of funds requirements; and (5) comply with completion, cancellation and reconfirmation of offerings requirements.

REPORTING REQUIREMENTS

Issuers will be required to file with the SEC an annual report on all CF transactions, and the relevant CF forms within five business days: (1) after the issuer reaches 50% and 100% of the target offering amount; (2) after the Issuer accepts proceeds in excess of the target offering amount; and (3) after the offering deadline, a disclosure on the total amount of securities sold in the offering.

Intermediaries will be required to maintain records of CF transactions, which include information related to investors and issuers, records of all communications that occur on or through its platforms, and all daily, monthly and quarterly summaries of transactions effected through the funding portal.

As opposed to traditional, exempt, private placement transactions, which require a one-time submission of form 10.1 (notice/confirmation of exemption) with the SEC, issuers in CF offerings have to comply with the ongoing reporting requirements.

Considering the heavier regulatory burdens and higher compliance costs, in conjunction with the PHP10 million cap on the amount that can be raised through CF, the rules may create an unintended consequence of disincentivizing companies from using CF.

Understandably, the SEC has placed the above-mentioned requirements to protect the interests of ordinary investors. However, the rules may have to be revisited to achieve the original intention of providing simple and alternative financing access to start-up companies, without sacrificing investors’ interests.

LEIA CLARISSA VERONICA R VERACRUZ is an associate of the corporate and special projects department at ACCRA Law Offices

ACCRA Law OfficesManila office: ACCRALAW Tower, 2nd Avenue corner, 30th Street, Crescent Park West, Bonifacio Global City

1635, Taguig City, Metro Manila, Philippines

Contact details:

Email: crveracruz@accralaw.com

Tel: +632 830 8000

www.accralaw.com