This is Part 2. Last Sunday, we published Part 1.

RobsonLee5.16cRobson Lee, a partner at Gibson, Dunn & Crutcher LLP which has 1,200 lawyers in 18 offices in the US, Europe, South America, the Middle East and  Asia. NextInsight photo.

Q: There is an increasing trend of crowdfunding platforms in the market such as Fundnel, Kickstarter, etc. Do you think it is necessary for the regulators to implement benchmark standards for incumbents and upcoming platforms to adhere to?

Robson Lee: Absolutely. These platforms are essentially facilitators for public fundraising exercises. Any entity that engages or is involved in raising funds from members of the public, whether they are charitable organisations, investment banks, public companies or stock/commodity exchanges, should be regulated and held to certain benchmark standards to ensure that members of the public are adequately protected.


Q: From an investor’s perspective, what kind of legal protection may be sought in the event that a start-up defaults?

It is important for investors to understand the risk involved in crowdfunding. That being said, in the event of a potential default or fraudulent campaign, are there regulations in place to ensure a company’s accountability to investors? Ultimately, who owes investors the contractual liability?

Robson Lee: The flexibility of crowdfunding makes this a difficult question to answer. It very much depends on the nature of the default and type of crowdfunding campaign undertaken by the start-up.

Take the example of a rewards-based campaign, where backers make donations to a start-up on the promise of receiving a product before an agreed deadline. The start-up runs out of cash before it can commercialise its product, and backers do not receive the product as promised. In this situation, the backers may have a contractual claim against the start-up, depending on the offer made by the start-up and the conditions of the campaign. More relevant will be the fact that pursuing a claim against an insolvent company is unlikely to yield returns. Unfortunately, no law can prevent businesses from failing and investors must understand the dangers of early stage investing.

Laws and law enforcement agencies already exist that can deal with cases of fraud or criminal behaviour. An area of law that may develop together with the rise of crowdfunding platforms may determine if crowdfunding platforms owe investors a duty of care, and if platform operators should be held responsible for fraudulent campaigns carried out on their platform. 

Q: Do you perceive crowdfunding as a form of alternative investments or a new dimension that will eventually disrupt the conventional fund-raising entities such as banks and financial institutions?

Robson Lee: My view is that crowdfunding will continue to be an alternative platform for small fund raising exercises by private enterprises. It offers an interesting alternative to raising funds from the traditional early stage investors like angel and venture capital funds and, to an extent, democratizes fundraising for start-ups by shifting some power from the banks and funds to founders.

Crowdfunding is unlikely to bring about significant disruption to the operations of investment banks, private equity funds and stock exchanges in large deals for mature businesses. As a medium for fundraising, crowdfunding is inherently limited as it cannot guarantee certainty of funds or raise large amounts (due to factors such as prospectus requirements, access to wealthy or sophisticated investors), which will not be attractive to mature businesses.

However, crowdfunding platforms can offer a different value to big business: Publicity. Large corporations can use crowdfunding campaigns to test demand for new products, engage their customers to create excitement and get feedback on prototypes and design decisions.

Q: What legal issues should companies consider before launching a crowdfunding campaign? 

robson1 6.14Robson Lee:  "
I think companies should carefully consider the offers they make in their campaign. They have to be very clear on what they are offering and the conditions to the rewards to ensure that their obligations are clearly defined and understood.

"Start-ups should be especially careful about launching equity-based campaigns. While it may feel like a cheap way to raise funds, as opposed to bearing the cost of rewards or interest payments, founders must be aware that they are letting large numbers of shareholders into the equity of their company; potentially forever. Also, a Singapore company with more than 50 shareholders is a public company, which brings with it more regulation, such as audit requirements, general meetings and the regulation of the Singapore Code on Take-overs and Mergers. A company with so many shareholders will be less nimble, and will be more difficult to exit.” 

NextInsight file photo)

Q: In May 2016, the SEC launched Title III of JOBS Act, which opened up equity crowdfunding for non-accredited investors in the US. Is Singapore ready for equity crowdfunding and can these international best practices apply to our country?

Robson Lee:The MAS recently announced regulatory measures aimed at the equity and debt based securities crowdfunding (SCF) space. So it is clear that the authorities in Singapore see value in developing this area and do not want to be left behind its competitors in the rise of SCF. The strongly worded risk disclosure statement prescribed by the MAS is a good place to start in terms of making investors alive to the risks inherent in SCF.


Q: In the event that the start-up which had raised funds through crowdfunding, will the investors rank pari-passu in their claims? If not, which class of investors will have priority? 

Robson Lee:It depends on the mechanism for investment. Generally, claims in an insolvency situation rank in the following order: secured creditors, followed by unsecured creditors, with shareholders ranking last.

A debt-based investor will likely rank as an unsecured creditor, while an equity-based investor will rank as a shareholder. The situation is much less clear for a backer that participates in a rewards or donation based crowdfunding campaign.

A backer’s claim in this type of situation will be determined by the terms of the contract between the backer and company. If a claim exists, the backer is likely to rank as an unsecured creditor.

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