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SEC readies rules on crowdfunding

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By Madelaine B. Miraflor

The Securities and Exchange Commission (SEC) sought to regulate the increasing number of crowdfunding activities in the Philippines — which are valued to millions — with a set of well crafted rules and regulations that will be out soon.

SEC Chairperson Teresita Herbosa said the agency is set to release the draft of SEC Rules and Regulations Governing Crowdfunding for public exposure and comment.

According to her, this initiative is in response to recent financial innovation of raising funds for a venture of projects or start-ups performed through internet platforms.

Crowdfunding generally refers to a method of fundraising whereby money is sourced from a large number of individuals usually through an online platform.

This method allows investors to obtain access to investment opportunities and enables business start-ups and small and medium-sized enterprises (SMEs) to access a new source of funding for their investment and operations through the internet.

SEC explained that typically, the crowdfunding model involves three parties: the entrepreneur (or the project initiator): The individual who proposes the business or the project; the supporters: Individuals or groups of individuals, who are willing to fund or support the idea or the project and; and the platform (or a moderating organization): A virtual marketplace that brings the parties together for launching the project.

“Supporters of the idea or project make their contributions or donations via online platforms. Thereafter, the platforms coordinate and administer the fundraising activities,” SEC explains.

Identified forms of crowdfunding activities are through  donation, reward, lending, and equity.

In donation-based crowdfunding, individuals pool their resources to support a charitable cause, while reward-based crowdfunding allow individuals to give money to a company in return for a “reward”, usually a product produced by the company.

Lending-based crowdfunding, on the other hand, sees individuals lend money to a company and receive the company’s legally-binding commitment to repay the loan at pre-determined time intervals and interest rate.

In Equity-based crowdfunding, individuals invest in shares sold by a company and receive a share of the profits in the form of a dividend or profit distribution, subject to the company’s discretion.

SEC said the Rules Governing Crowdfunding (CF) Market will require registration and full disclosure of the issuer, intermediary (e.g. registered persons, funding portal), and platform.

CF provides threshold as to the amount of funding to be raised through crowdfunding, prohibitions on advertising terms of offering, measures to reduce risk of fraud and manipulation, requirements with respect to transactions, and conditional safe harbor.

It will also require investor qualification, provides instructions on the provision and educational materials to investors, instructions on maintenance and transmission of funds, instructions on completion of offerings, cancellations and reconfirmations.

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