The Financial Services Authority (Otoritas Jasa Keuangan - OJK) has finally enacted the much anticipated equity crowdfunding legal framework. The new regulation sets out the "rules of the game" for this tech-based alternative fundraising activity, which essentially aims to provide certainty and protection to all players involved in the activity (whether providers or users (i.e., issuers and investors)).
What's in the Equity Crowdfunding Rule?
OJK Rule No. 37/POJK.04/2018 on Equity Crowdfunding (Equity Crowdfunding Rule) defines equity crowdfunding as a share offering service that is utilized by companies/issuers to sell their shares directly to investors through an open electronic system network (Platform).
|What are the Products?||Platform for offering of shares (whether conventional or sharia-based shares)|
|Who are the Players?||
|How to be an eligible Provider?||
Is it a Public Offering?
The Equity Crowdfunding Rule describes the activity of equity crowdfunding as part of financial services activity falling under the capital market sector. As such, certain capital market issues are specifically addressed in the Equity Crowdfunding Rule.
The Equity Crowdfunding Rule specifically stipulates that the offering of shares by Issuers through the Platform does not constitute a public offering as described under Law No. 8 of 1995 on Capital Market (Capital Market Law) if all of the following items are fulfilled:
- The offering of shares is conducted by a licensed Provider.
- The maximum offer period of an offering of shares is 12 months.
- The total amount of funds collected through the offering is not more than IDR 10 billion, unless determined otherwise by OJK.
Furthermore, an Issuer is not a public company as described under the Capital Market Law if both of the following criteria are fulfilled:
- The number of shareholders of the Issuer is not more than 300 parties.
- The paid-up capital of the Issuer is not more than IDR 30 billion.
The Equity Crowdfunding Rule sets out the entire legal framework for Providers, Issuers and Investors, as well as the fundraising mechanics through the Platform. Below are some of the highlights:
Providers. A party can only obtain a license as a Provider from OJK if it is a legal entity (whether a limited liability company or a cooperative) having a minimum amount of capital of IDR 2.5 billion. It must also be registered as an electronic system provider at the MOCI. A complete list of licensing processes is set out in the Equity Crowdfunding Rule.
Providers are prohibited to carry out other business activities, except for activities as: (i) IT based service providers registered at or licensed by OJK, and (ii) if they are licensed securities companies, underwriters, brokers and/or investment managers. In carrying out the activities, Providers should really be mindful of the applicable restrictions, e.g., providing investment advice, providing financial assistance for Investors to invest in a certain Issuer listed in its Platform or having an affiliation relationship with Issuer.
Under the Equity Crowdfunding Rule, Providers are required to comply with the following standard:
- conduct review on the Issuer
- maintain confidentiality, integrity and availability of personal data, transaction data, and financial data
- use an escrow account to receive funds collected from the offering
- utilize a data center and disaster recovery center that are located in Indonesia
- fulfil the minimum standard of information technology system, information technology safeguard, disruption and failure of the system and transfer of information technology system management
- implement the basic principles of Users' protection, as follows:
- fair treatment
- data confidentiality and security
- simple, fast and affordable Users' dispute resolution through the functions of internal dispute resolution and external dispute resolution
Providers are required to submit periodic reports to OJK, including mid-year reports, annual reports and incidental reports.
While it is not specifically regulated, from the application documents listed under the Equity Crowdfunding Rule, it seems that a Provider can be owned by foreign entities. The Equity Crowdfunding Rule nevertheless is silent on the limitation of foreign ownership.
Issuers. Issuers must be in the form of limited liability companies. They cannot be (i) companies that are controlled directly or indirectly by a business group or conglomerate (ii) public companies or subsidiaries of public companies and (iii) companies with total assets of more than IDR 10 billion, not including land and building assets.
The Issuers must register the share ownership of the Investors in the shareholders register. The issuers must also submit to OJK an annual report that includes the realization of the use of offering proceeds.
Investors. The Equity Crowdfunding Rule provides the following criteria for Investors:
- Investors with income of up to IDR 500 million per year may purchase shares through the Platform in a maximum value of 5% of their total income per year.
- Investors with income of more than IDR 500 million per year may purchase shares through the Platform in a maximum value of 10% of their total income per year.
The Equity Crowdfunding Rule however exempts the above criteria for institutional Investors with sufficient investment experience in the capital market proven by ownership of a securities account for at least two years before the offering.
Equity Crowdfunding Agreements. There are two underlying agreements governing equity crowdfunding activities, i.e.:
- agreement between Provider and Issuer (Provider-Issuer Agreement)
- agreement between Provider and Investor (Provider-Investor Agreement)
(together ECF Agreements)
For Provider-Investor Agreements, the terms can be made standard where Investors can express their consent electronically.
Provider-Issuer Agreements should include at least the following provisions: (i) commission and fee amount (ii) penalty (as applicable) (iii) amount of funds that will be collected and shares offered (iv) rights and obligations and (v) dispute resolutions.
Provider-Investor Agreements could include a provision giving power of attorney to the Provider to act as a proxy for Investors as shareholders of certain Issuers, including attending General Meetings of Shareholders and for execution of certain deeds and other related documents.
Offering through a Platform. An Issuer can only conduct share offerings with one Provider at the same time and the maximum funding collection obtained through the Platform is limited to IDR 10 billion within a period of 12 months. Within that period, the offering can be done more than once with an offering period of 60 days for each offering.
The Equity Crowdfunding Rule provides avenue for Issuers to set a minimum target funding during an offering. If the minimum target funding is not achieved during an offering period, the offering will be cancelled and the Issuer must return the collected funds to the Investors.
The purchase of shares is done by Investors transferring funds to the agreed escrow account stated in the relevant Provider-Investor Agreement. The Provider should transfer the funds to the Issuer at the latest 21 days after the end of an offering period. After receiving the funds, the Issuer will have five days to distribute the shares to the Provider, where the Provider will have ten days after receiving the shares to redistribute the shares to Investors. The distribution of shares can be physical delivery (for scrip shares) or electronic delivery through a custodian by opening a securities account (for scriptless shares).
Secondary Market in a Platform. Providers could set up a system in the Platforms for Investors to trade the shares purchased through the relevant Platforms. The system could provide a fair market value as a point of reference, as well as communication tools for Users to communicate in the trading. The actual trading in this secondary market, however, can only be conducted between Investors registered with the same Provider.
Transition Period. Providers that have been operating their Platforms before the enactment of the Equity Crowdfunding Rule are required to apply for licenses to OJK at the latest six months after the Equity Crowdfunding Rule comes into effect.
Sanctions. OJK may impose administrative sanctions for violation of the Equity Crowdfunding Rule (i.e., warning letters, fines, limitation of business activity, suspension of business, revocation of business license, cancellation of approval and cancellation of registration).
The issuance of a series of regulations in recent years, and finally this new rule, indicates that OJK is improving the fintech market in breadth and depth. With more sound and secure funding alternatives available, startups can (and should) take this opportunity to grow.