We got a Full CMS Licence. So, what’s the big deal?
We got a Full CMS Licence. So, what’s the big deal?
By Lawrence Yong, Chief Executive Officer
On 16 February 2015, Monetary Authority of Singapore (MAS) issued a consultation paper proposing measures to facilitate the access by start-ups and small and medium enterprises (SMEs) to more sources of funding. MAS proposed to facilitate securities-based crowdfunding (“SCF”) from accredited and institutional investors (“AIs” and “IIs”) by relaxing certain financial requirements for capital markets intermediaries that deal in securities and clarifying the application of certain exemptions from prospectus requirements.
This meant that MAS had only originally proposed to relax SCF opportunities to high networth investors, i.e. people with $3 million of networth or annual income of $300,000.
We were passionate to provide our response in the context of SME financing, as we observed that the allocation of capital to SMEs was disproportionate to their importance and inhibited their potential for growth. At the same time, fixed income opportunities for the everyday investors were limited and we thought that crowdlending would be helpful in marrying the capital needs of SMEs and returns desires of investors.
Limiting SCF access to only Accredited Investors was problematic because…
1. It threatens the viability of Debt-based Crowdfunding
The AI pool is too tiny and represents only 5% of our population. In the U.S., there are 8.6 million AIs. A critical mass cannot be attained in a small market like Singapore. A small funnel of investible funds will suppress the development of a vibrant market, resulting in an imbalance of demand and supply, leading to fewer transactions and higher transacted rates. This intervention would undermine the attractiveness of Debt based Crowdfunding for small businesses.
2.It deprives opportunities for everyday investors to earn attractive yields by supporting local businesses
Crowdlending serves a broader investor base. Traditionally, AIs get access to many investment options. Sometimes to an extent of being overwhelmed with options. This group of investors get direct access to a wealth of opportunities through financial advisors and banks and earn decent yields.
On the flip side, the everyday investor has limited access to investments and sometimes ends up chasing risky options that could cost them dearly. The lack of attractive accessible options in investment products for everyday investors has nudged preference towards highly levered real estate investments. Ironically, non-AIs are legally not prevented to make these property investments characterised by high leverage and lack of liquidity. While some buyers are being priced out, it is quite different from the market judging accessibility to the government prohibiting access as a matter of law.
Therefore, restricting retail investors from investing in local businesses for a decent yield seems unjustified.
3. It denies SMEs access to additional financing options
SMEs are a key source of domestic employment and contribute significantly to national income. However, their share of loans from the traditional banking sector constitutes less than 20% of the banking system’s loan portfolio, and 80% of these loans require collateralisation.
The many government grants that exist to help SMEs prove the point that there is enough friction or inertia in private sector financing. However, the government’s role as a potential lender of first resort in private sector financing is not only unsustainable but questionable in the long-term. While the co-sharing of risks with traditional financial institutions are intended to resolve the practical problem of financing SMEs, it poses a potentially contentious issue of the state’s subsidies of profit-driven private sector financial institutions. Since these loan options are pulled from public funds, perhaps they may be better allocated elsewhere to benefit society at large, such as in healthcare and transportation.
The lack of financing options could result in entrepreneurs selling out equity too early, too cheaply. This, in turn, lowers the incentives for an entrepreneur and works against the current policy focus of MTI to promote entrepreneurship.
Embracing diverse opinions
As a part of this initiative, we engaged with several Trade Associations and Chambers of Commerce to articulate and champion the needs of SMEs. In extending their support, members of these organisations concur with our views and also provided feedback on the challenges and the ground realities that our SMEs faced.
The mainstream media such as The Straits Times, Today, Asiaone.com and other blogs shared stories which echoed the views presented by MoolahSense. This raised significant awareness which garnered valuable responses from the public.
The Big Deal – the movement that shaped the outcome
As responses were being collated, marketplace lending platforms operated within relevant limitations and began raising funds for SMEs. Retail investors embraced these platforms to diversify their portfolios and gained returns on their investments.
Several success stories were featured in the mainstream media:
The Business Times: S’pore’s first P2P lending campaign gets big response
The Business Times: Crowdlending provides new financing option for SMEs
The Straits Times: Getting a business loan in two hours
The Straits Times: How long it took this SME to raise S$150,000? 45 mins
On the MoolahSense platform, we saw a campaign getting funded within two minutes. We not only saw our investor base growing but SMEs came to us for repeat loans since crowdfinancing at MoolahSense became a feasible option for them to address their cash flow needs.
We are heartened that MAS considered our responses to the consultation paper, saw the opportunities for SMEs and recognised the need to open doors to platforms like MoolahSense which operate within the set regulatory framework.
A robust future awaits
On 11 November 2016, we were awarded the Full CMS Licence by the MAS. Although it is a significant milestone for our business and the team, this reflects something bigger – Singapore’s progress in the Fintech sector.
SMEs can now grow their businesses using crowd-sourced loans and retail investors can earn attractive returns on their investments. This eco-system can help provide creditworthy Singapore SMEs additional financing support, especially in the face of challenging and uncertain times. This to me is the big deal.
Singapore is transforming into a SMART Nation. In realising this vision, the nation’s Fintech sector is creating a progressive environment for its people and businesses. It gives me immense pride that our government is embracing the new waves within the Fintech space.
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