Business Mirror

Atty. Jose Emilio M. Teves provides a brief overview of the Rules and Regulations issued by the Securities and Exchange Commission with respect to Online Crowdfunding.

Online Crowdfunding via Securities in the Philippines:
An overview of the Rules and Regulations

By Atty. Jose Emilio M. Teves

What is crowdfunding? It is a way to fund a project or venture where money is sourced from a large number of people through a platform, typically via the Internet. It became popular in 2009, with the rise of online platforms, such as Kickstarter, Indiegogo, GoFundMe, among others. 

Crowdfunding has a huge economic impact. In 2018 a staggering $1.04 billion was raised through crowdfunding in the United States.

Acknowledging the growth of this financial innovation in raising funds, the Securities and Exchange Commission (SEC) formulated rules and regulations on crowdfunding in accordance with the Securities Regulation Code (SRC), and international practices and standards, i.e., MC 14, Series of 2019. Crowdfunding is defined in these rules as fund-raising for start-ups and micro, small and medium enterprises (MSMEs) usually conducted through an online electronic platform.

The rules are for the operation and use of equity-based and lending based crowdfunding by registered persons through an online platform. In relation to this, the rules provide for an exemption from registration of securities by the issuer, provided the requisites laid down by the rules are met.

Also, note the inclusion of “crowdfunding intermediary.” Normally, there are three entities involved in crowdfunding:

1. The Project Initiator, the party asking for capital;
2. Supporters/Investors of the Project; and
3. The Online Platform in which Supporters/Investors pledge money to.

As the rules govern the trade of securities to fund an online crowdfunded venture, the SEC rules define a “Crowdfunding intermediary,” as a registered broker, investment house, or funding portal that mediates offer and sale of crowdfunding securities through the online electronic platform.

The rules provide that no person can act as an intermediary in a crowdfunding transaction unless he is registered as a broker, an investment house or as a funding portal. Furthermore, the applicant must appoint a lead person, who shall be the contact person of the SEC. The applicant must also prepare an Operational Framework within which will guide the standards, policies and goals of the applicant, as well as its dealings with securities.

The applicant shall be responsible for the disclosure of business activities. It shall monitor and ensure compliance with the SRC, as well as immediately notify the SEC of any breach or irregularity with respect to the SRC and the Rules governing Crowdfunding.

Note that one of the responsibilities of the financial intermediary is to implement measures to reduce fraud. Before an intermediary can transact, there should be a reasonable basis for believing that an issuer seeking to offer and sell securities in reliance to these rules through the intermediary’s platform shall not commit any form of fraud. If there are reasonable grounds to deny access to the platform as provided by the rules, then the intermediary should deny the same.

An issuer of securities in relation to online crowdfunding must 
register with the financial intermediary and provide:

1. Name and other details of the intermediary;
2. Nature of its business, financial condition, historical reports of operation;
3. Business plan with respect to CF offering;
4. Risk factors of investing in its project;
5. Procedure on how to return funds if target offering is not met; and
6. Procedure to complete or cancel investment commitment.

However, the SEC can disqualify the issuer if the SEC finds that the issuer goes against the rules laid down by the Commission.

The rules also require both the financial intermediary and the issuer to keep a record, furnish copies and make reports to the SEC as its rules and regulations may prescribe. Parties must also submit yearly reports to the Commission. Furthermore, there must be a post on the intermediary’s web site of an annual report, along with disclosures and other submissions certified by the principal to be true and complete in all material respects and a description of the financial condition of the issuer.  

The creation of rules to accommodate Online Crowdfunding is a happy development. As Thomas Jefferson said, “…laws and institutions must go hand in hand with the progress of the human mind…as new discoveries are made, new truths discovered and manners and opinions change, with the change of circumstances, institutions advance also to keep pace with the times.”