SEC moves to regulate crowdfunding as local startups sniff around for cash

The Securities and Exchange Commission (SEC) is set to regulate crowdfunding activities in the country to protect the investing public from any abuses in fundraising innovations typically designed for startup companies.

Crowdfunding refers to a method of fundraising by tapping a large number of individuals, usually through an online platform. This method allows investors to obtain access to investment opportunities, while also enabling startups and small- and medium-sized enterprises (SMEs) to access new sources of funding.

In a press statement, the SEC said it would release the draft rules and regulations to solicit comments from the public. The framework would include measures to reduce risk of fraud and manipulation.

The SEC’s proposed rules would govern lending-based and equity-based crowdfunding. Under the proposed framework, the SEC would require registration and full disclosure of the issuer, intermediary (registered persons, funding portal) and platform. It would also prescribe disclosure requirements for issuers, general requirements for intermediaries and registration of funding portals.

The rules would also set a threshold on the amount of funds to be raised, proposing a P10-million cap within a 12-month period.

The SEC planned to limit to qualified investors access to crowdfunding activities. The qualifications would have to be defined by the framework.

The rules would also require parties to provide educational materials to investors, instructions on maintenance and transmission of funds and instructions on completion of offerings, cancellations and reconfirmations.

Typically, the crowdfunding model involves three parties: the entrepreneur or the project initiator who proposes the business or the project; the supporters, defined as individuals or groups of individuals who are willing to fund or support the idea; the platform or a moderating organization which is a virtual marketplace that brings the parties together for launching the project.

There are four identified forms of crowdfunding:
• Donation-based, which allows individuals to pool their resources to support a charitable cause.
•Reward-based, whereby individuals give money to a company in return for a reward, usually a product produced by the company.
•Lending-based, whereby individuals lend money to a company and receive the company’s legally binding commitment to repay the loan at predetermined time intervals and interest rate.
• Equity-based, whereby individuals invest in shares sold by a company and receive a share of the profits in the form of a dividend or profit distribution.