Start-ups. here is your crowfunding service

Keeping up with technology, OJK on 31 December 2018 issued regulation No. 37/POJK.04/2018 on IT Based Equity Crowdfunding Service, which became effective on the same date (“New OJK Regulation”).

The New OJK Regulation is predominantly about direct shares (or any other equity-based securities as stipulated later by OJK) offering to investors by means of electronic system, which is termed as “crowdfunding service”.  Start-ups, using the crowdfunding service, can now sell their shares through an online platform to investors.

Things to be paid attention to

If you are interested in this opportunity, the following are several points that you need to know:

1. Triangular Relationship of Crowdfunding

The crowdfunding service pertains to the relationship between Investor and Issuer that is conducted through a medium of Provider. Provider is a party that provides, manages and operates an online platform through which an Issuer offers and sells its shares to Investors. Issuer shall be regarded as a party whose shares are offered to Investors and Investor is a party that purchases Issuer’s shares through the Provider’s platform.

Note that start-ups could not initiate directly the offering of their shares online to public, as it needs to be conducted through a Provider that is licensed by OJK.

2. OJK standards requirements for Provider

A Provider must either be limited liability company (perseroan terbatas) or cooperative (koperasi) and subject to requirements that can be quite a lot compared to those apply to an Issuer and an Investor.  This should not be surprising given a Provider will be responsible in providing, managing and operating the online platform through which Issuer’s shares are offered and sold to Investors.

The requirements include that a Provider must (i) be registered as an electronic system provider with Ministry of Communication and Informatics, (ii) have business license from OJK to carry out equity crowdfunding services, (iii) have at least IDR2.5 billion as its paid-up capital, (iv) have experts in operating the service, (v) have and utilize data center and disaster recovery center that are located in Indonesia and (vi) file periodical reports with OJK.

Note that the New OJK Regulation is silent as to the limit of shares that can be held by foreigners in a Provider. Please also note that an implementing regulation might from time to time develop operational requirements that needs to be complied with by Providers in particular.

3. OJK standards requirements for Issuer

An issuer, as the party whose shares are offered and sold to Investors, does not have to be licensed by OJK, but it needs to make sure that it is not: (i) a company that is controlled by a business group or conglomerate, in direct or indirect manner, (ii) a public company or subsidiary of a public company and lastly (iii) a company whose assets are valued more than IDR10 billion – excluding land and building.

It appears that the New OJK Regulation does not have industry nor operational requirements on Issuers. Hence, any limited liability company that is just established should be able to sell its shares through the Provider’s online platform regardless of its industry.

Note that Issuers are bound to reporting requirements by the New OJK Regulation.

4. Investor’s investment is restricted by annual income

If you are an investor who would like to purchase shares through the crowdfunding service, then you are subject to the following restrictions:

  1. if your annual income is up to IDR500 million, then the maximum shares that you could purchase is limited to the amount that is equivalent to 5% of your annual income;
  2. if your annual income is more than IDR500 million, then the maximum shares that you could purchase is limited to the amount that is equivalent to 10% of your annual income.

What if the value of the shares goes up? if in the scenario (a) above, when one made the purchase, the purchased shares is at the equivalent of 5% of the income, but then the shares value is on the rise making its value becomes beyond the threshold, can we argue that the Investor should not be considered breaching this restriction, given the determining value is when the purchase is made in the first place?

Note that the above restrictions do not apply if you are a legal entity and have adequate investment experience.

5. Crowdfunding Service – How it is done

Shares Offering

Below are several procedures and requirements for the pre-shares Offering stage:

  1. A Provider must enter into a crowdfunding agreement with an Issuer (Issuer Agreement).
  2. A Provider, on its website, must upload the Issuer’s legality documents and make sure that it has statements that OJK does not either approve or disapprove the securities, and the Provider together with Issuer are liable for any information stated therein.
  3. An Issuer can only offer its shares through one Provider at the same time.
  4. The maximum limit for fund-raising through an online platform by each Issuer within 12 months is IDR10 billion. This means that the restriction is not on the number of fund raising that can be conducted by an Issuer, but more on the total fund raised within 12 months. Note also that the maximum period for each shares offering is 60 days.
  5. There is no limitation either on the number of Investors or on the share percentage to be offered to Investors.
  6. An Issuer can set the target of minimum funds that must be acquired during the shares offering through the platform in accordance with the Issuer Agreement. If the target is not achieved, then the shares offering is considered null and void, which means that the relevant Provider is required to return all the monies remitted by the Investors previously.

Share Purchase

Under the New OJK Regulation, a Provider must enter into a crowdfunding agreement with an Investor (Investor Agreement). The Investor shall remit the purchase price to an escrow account as stipulated in the Investor Agreement.  Once the payment is made, the Provider shall transfer the purchase price made by the Investor to the Issuer at the latest 21 business days after the shares offering period ends.

The Issuer then shall deliver shares to the Provider to be distributed to the Investor at the latest 5 business days after Issuer receives the payment. Subsequently the Provider is in charge to distribute shares to the Investor (either electronically via collective custody or physically via delivery of share certificate) at the latest 10 business days after receiving the shares from the Issuer.

Finally, the Issuer is to annotate the Investor’s ownership over shares in the shareholder register.

Important thing to note is that the crowdfunding under the New OJK Regulation will not be considered a Public Offering if: (i) the offering is conducted by means of licensed Providers, (ii) the offering is conducted within a maximum of 12 months and (iii) the total fund raised through the offering is in the maximum of IDR10 billion.

6. Secondary Market

The New OJK Regulation allows Providers to provide system for the trading of Issuer’s shares that have been sold through the online platform.

The trading may only be conducted between the Investors that are registered with the Provider. The system may provide (i) market price as a reference for the purchaser and seller and (ii) communication system for the users (i.e. Issuers and Investors) to purchase or sell shares.

7. Provider to be cautious

In carrying out the crowdfunding service, Providers must not, among other things:

  1. perform any business activities other than crowdfunding service, save for (i) business activities as securities underwriter, securities trading broker and/or investment manager if a Provider is a securities company and (ii) operator/ provider of IT based services that has been registered and/or that has a license from OJK;
  2. have any affiliation whatsoever with an Issuer that employs the crowdfunding service;
  3. provide any investment advice/recommendation to Investors or prospective Investors;
  4. accept and/or keep Investors’ monies; and
  5. charge Investors for any claims submission.

Furthermore, any unlicensed Providers must submit their license application to OJK no later than 6 months after the enactment of the New OJK Regulation. They are prohibited from entering into any new contract with any Issuer until they have obtained license from OJK.

Closing Remarks

Despite further clarifications from OJK might be necessary (e.g. foreign shareholding limitation), the New OJK Regulation is a positive development showing that OJK is willing to keep up with technology advances.  For start-ups, it can be an alternative for fund raising while for public – investors, it can be an alternative for investment. Existing unlicensed Providers should also observe the New OJK Regulation and its development as it may affect their practices.