Brace yourself for the stormy weather. Although well-intentioned, the recently announced regulatory requirements by MAS is causing plenty of pain. Firstly, investors are unable to participate in more loans, until platforms obtain their regulatory clearance. Secondly, some p2p platforms will face a serious revenue issue. With the curb in lending activities, it will be tough going for several months. Finally, borrowers that have been refinancing their maturing p2p loans on different platforms could be in a dicey position. This is rough weather and we’ll be eager to find out which platforms will emerge stronger from this storm.
Regulation by MAS is positive for investors…
To understand the issues fully, we’ll need to re-examine the regulation by MAS. In its announcement last month, MAS has clarified that:
- Securities-based crowdfunding platform (this means both equity and debt-based crowdfunding platforms) are required to obtain CMS license from MAS in order to operate.
- The base capital requirements for crowdfunding platforms will be lowered to $50,000. Minimum operational risk requirement is also lowered to $50,000.
- The use of promissory note exemption to consolidate multiple loans is not allowed.
- MAS will make it easier for crowdfunding activities without the need to register a prospectus, using the “Small Offer Exemption” where investors just need to demonstrate knowledge, experience or suitability to qualify.
- Other prospectus exemptions are: private placements (made to no more than 50 persons), institutional investors or accredited investors.
Separately, Let’s Crowd Smarter also wrote to MAS several months ago and proposed several measures (standardization of ‘default’ definition, transparency of underwriting track record, disclosure of key financial information, etc…) that enables investors to make an informed decision. MAS’ reply: “thanks for your feedback”.
In any case, MAS regulation of the crowdfunding industry is positive news for investors. A number of crowdfunding defaults have surfaced recently. While default is inevitable the lending business, there was a case with a police report. Is there foul play involved? Hopefully, with the increased regulatory scrutiny, investors can have better protection.
But lending curb is causing some pain
To meet the regulatory requirements, a number of p2p platforms have temporarily curbed mass lending activities while they apply for CMS licenses. A private placement (offers made to no more than 50 persons) is still possible, but there is also a limit to how many such deep-pocket investors there are tap on. Obtaining CMS license will take several months. In the meantime, most retail investors won’t be able to participate in new p2p loans.
Platforms face business disruption
But the biggest pain must be felt by the platforms themselves. Most platforms are startups with less than 3-4 years of operating history. They have employees to feed. With loan volume greatly curbed, it must be very tough going for the next several months.
Some platforms are less affected. Those that have cultivated the relationships with the wealthy investors in the past will probably be able to tap into their funding, which easily qualify under private placement exemption.
Business model plays a part too. New Union lends to borrowers directly before matching with investors’ funds. Even if there is a temporary curb at the investors’ side, New Union can still lend using its own capital. For CoAssets, a large chunk its revenue come from organizing events so they will be less impacted. CapitalMatch made a timely shift to invoice financing recently. This move must be now paying off. Unlike p2p lending, MAS is silent on p2p invoice financing.
What about MoolahSense, which probably has one of the largest investor base? MoolahSense is taking an unusual approach. To work the “private placement exemption”, it will impose an “unlock fee” feature. The first 50 investors that pays a $1,000 “unlock fee” will be able to see the loan details and participate in the offered loan. This “unlock fee” is rebate-able only if the investors invest.
Needless to say, this feature is generating plenty of discussion in MoolahSense and Let’s Crowd Smarter forum. This feature may work for MoolahSense – meaning it could “encourage” the first 50 investors to fully fund any p2p loans. But from an investors’ perspective, it is a negative development because the “unlock fee” is very costly and the unlocked loan details may still be ugly. We will be attending MoolahSense session this week to find out more.
Merry-go-round p2p loans may be in a dicey position
Finally, what about the borrowers that have been always refinancing maturing loans with new loans in another platform? Can they tap on “private placements” to bridge this 3-4 months of lending curb? Our best guess is that the credible SMEs with good payment record will have no problem. Those borderline cases and the irresponsible borrowers (like this beauty salon and spa company that defaulted again on its restructured loan) will have a hard time.
The weather’s getting rough. Brace yourselves for the ride. And we’ll soon find out which are the platforms and borrowers that will emerge stronger from this regulatory storm.