Malaysia vs Singapore: An inside analysis of crowdfunding regulations

Published in May 2016. Original Link.

Talk to those engaged in crowdfunding (CF) and inevitably the issue of regulation will emerge.

This is probably the single largest ‘risk’ for the future of a promising platform operating in an unregulated environment.

Regulators have to try to balance the potentially immense benefits of CF and the real threat of abuse of this people-powered phenomenon. In this article, I share own personal views based on my unique experience of being involved in the startup of three platforms, all based in Singapore and focused on deals from Asia-Pacific.

The CF industry has incredibly broad applications, from charity to equity, from music to real estate.

Regulations apply more to investment-type crowdfunding. The most common type is debt (commonly termed peer-to-peer or P2P), followed by equity and today increasingly also the emergence of revenue-sharing and profit-sharing deals.

On one side, we have the light and adaptive approach, exemplified by the UK and New Zealand while on the other, we have regulatory intervention with the introduction and implementation of new rules and guidelines, sometimes with licensing requirements as the case is in the US and many European nations.

Industry Comparison: Malaysia VS Singapore

Singapore is a global financial centre, and today also as a vibrant hub for venture capital and startup innovation. Out of six to seven ‘unicorns’ in Asean, three are from Singapore.

Malaysia is one of the global leaders in Islamic Finance, which continues to grow strongly. It too has spent considerable resources on encouraging and developing startups, with encouraging results.

Malaysia is well-placed to host and develop Islamic Fintech startups and initiatives.

Singapore Market CF first came to Singapore about four years ago, and last year its platforms raised/matched an estimated S$15 million to S$25 million.

Quite a few of these platforms are regional and some already have projects in Malaysia.

These are some of the main players, in alphabetical order: Capital-Match.com, Crowdo.com, CoAssets.com, EthisCrowd.com, FundedHere.com, FundingSocieties.com, Fundnel.com, GoStartEm.com, InvestaCrowd.com, KapitalBoost.com, MoolahSense.com & NewUnion.com.

The Monetary Authority of Singapore (MAS) has adopted the famed ‘regulatory sandbox’ approach. This allows fintech startups to experiment and innovate within the existing laws of the country.

However, when platforms reach a ‘meaningful scale’, then MAS will step in to regulate. This intervention, it is promised, will be ‘proportional’.

In Malaysia, the Securities Commission Malaysia (SC) became the first country in the region to introduce equity crowdfunding (ECF) licenses last year, which was awarded to a pioneer group of six platforms: AlixGlobal.com, Ata-Plus.com, CrowdPlus.asia, Equity.PitchIn.my, Eureeca.com and Crowdo.com.

Industry hearsay is that more than 20 platforms from around the world applied for the ECF license last year.

The six ECF platforms have had mixed performance, with half having launched campaigns, two of which had excellent crowdfunding success while one failed to reach its funding goal.

The SC also recently announced the opening of submissions for the P2P license, and I expect a similar or greater number of applicants for this.

ECF involves investing in shares of private companies while P2P is temporary financing for projects.

Malaysia’s more cautious approach can be viewed as heavy-handed by the external observer.

For the P2P license application, there is most notably a requirement to incorporate a local company with MYR5 million paid up capital. Indeed, this will deter new startups and there will be a trade-off in terms of the number of innovative CF/P2P platforms in the country.

Opinion on Singapore’s approach

Firstly, EthisCrowd.com (which I founded) can exist largely because of the MAS’s approach. We started as an idea, with a $200 static website two years ago.

If there were specific regulations, requirements or licenses, we would definitely not have gotten off the ground.

The fact that more than 10 crowd-investing platforms are thriving in Singapore attests to the effectiveness of this approach.

Conversely, being so open and startup-friendly exposes the entire industry to risk of fraud and scams.

China’s recent billion-dollar P2P fiasco exemplifies this risk. Having low barriers to entry will allow

entrepreneurs to start on the next big platform, but it is potentially a double-edged sword.

Existing players need to quickly gain market share and self-impose standards and establish strong corporate governance so as to create intangible barriers to entry.

Such protocols need to be shared with the crowd, so as to develop a level of understanding and sophistication and deter irresponsible platforms from entering the market.

Singapore is a savvy and hyper-connected country, and the strong outreach and growth of its platforms has already created a sub-culture of investing online in alternative investments. I believe the road ahead will come with potholes, but the CF industry is moving so fast, its momentum will barely be affected.

Opinion on Malaysia’s Approach

Such high barriers to entry will ensure that only the strong and established platforms apply. The regulators have the enviable task of filtering, selecting and approving the best platforms to operate in Malaysia.

Being the first issuer of crowdfunding licenses in the region has garnered Malaysia significant publicity, which has in turn attracted global players to its shores.

The creation of the crowdfunding industry here has been and will continue to be in a controlled and planned environment.

Initial traction may be slower, but I firmly believe this approach works better given the fact that online investing is a culture that is only just starting to develop in Malaysia.

The Malaysian public is thus introduced from the onset only to regulated Crowdfunding, which creates an environment of trust and credibility. This to me is the way Malaysia needs to start.

Conclusion

The two neighbours have vastly different approaches to regulating Crowdfunding and P2P. This is largely due to the different environments and cultures of its peoples.

The Singapore approach has been highly beneficial to my own startups, and at the same time I look forward eagerly to being part of the Malaysian approach, where all platforms are forced to have specific standards of Corporate Governance and acquire regulatory approvals.

Umar Munshi founded EthisCrowd.com (Islamic real estate crowdfunding) and co-founded two other platforms, KapitalBoost.com (Islamic SME CF), and GoStartEm.com (Asian tech CF, now in Alpha-launch). He is also the chairman of the newly-formed Islamic Fintech Alliance.

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