MAS Circular Controls And Disclosures To Be Implemented By Licensed Securities-Based Crowdfunding Operators

The Monetary Authority of Singapore (MAS) recently issued a circular No. CMI 27/2018 on “Controls And Disclosures To Be Implemented By Licensed Securities-Based Crowdfunding Operators”.

This Circular sets out requirements on licensed Securities-Based Crowdfunding (SCF) operators in 5 areas:

  1. Due diligence checks on issuers.
  2. Management of issuer defaults.
  3. Management of SCF platform cessation.
  4. Disclosure of interest and default rates.
  5. Governance and management of auto-allocation tools.

Due diligence checks on issuers

Licensed SCF operators are to disclose to investors the scope of due diligence that they have performed on issuers.

Lending-based SCF operators should generally not allow a borrower to take up a new loan to pay off an existing overdue loan. Steps should be taken to ascertain if there are legitimate reasons to extend a new loan to the same borrower before repayment of an existing loan. Lending-based operators should disclose the total outstanding loans of the borrower and the reasons for extending the new loan, so that investors can make an informed decision on whether to invest in the new loan.

Issuer defaults

Licensed SCF operators, particularly lending-based operators, are to have policies and procedures to handle issuer defaults. These include the circumstances under which licensed SCF operator will pursue different options (e.g. closer engagement with issuer, using a debt collection agency, commencing legal proceedings).

Licensed SCF operators should disclose to investors the different recovery options, and the costs to be borne by investors under each option. Operators should seek investors’ consent before incurring any costs which are to be borne by investors.

Licensed SCF operators should notify MAS immediately in the event of an issuer default, and provide information to MAS using Annex A of the Circular within 3 business days of the default.

SCF platform ceasing

Licensed SCF operators are to put in place a proper business cessation plan.

Things to be included in the plan are:

  • arrangements for handling investors’ monies and loan agreements kept on behalf of investors
  • liaison with borrowers and investors on future interest and principal repayments
  • recovery actions in the case of issuer default
  • procedures for communication with investors regarding the business cessation.

Licensed SCF operators should disclose the arrangements and the communications which they will make in the event of business cessation before investors make an SCF investment.

Disclosure of interest rates and default rates

All SCF operators are to disclose information on interest rates and non-performing loan rates in a consistent manner to enable investors to effectively compare different SCF offers and better understand the potential returns on their investments.

Auto-Allocation Tools

Licensed SCF operators that offer auto-allocation tools should have a proper governance and management framework over the design, monitoring, testing and operation of the tools.

Auto-allocation tools allow investors to set their investment parameters and preferences, such as the investment amount per deal, investment frequency (e.g. consecutive campaigns, weekly basis) and specific industries to be included or excluded from investment. The tool will automatically invest an investor’s funds into companies that meet the parameters set.

Operators should ensure that each tool is robustly tested, and measures are in place to mitigate the risk of erroneous allocation before rolling it out to investors. It is important that licensed SCF operators highlight to investors the limitations of the tools and educate them on the functionalities before use.

Action Needed

SCF operators are to review and take action to address any gaps in relation to the matters raised in the Circular by 23 February 2019. All licensed SCF operators should furnish MAS, by 9 March 2019, with an attestation from the Chief Executive Officer that the gaps identified from the review have been fully remediated.

Entities that intend to apply for a CMS licence to operate SCF platforms should satisfy MAS that they are able to implement policies and processes consistent with the measures in this circular.

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