The recent fraud case whereby an interior design firm produced fake invoices to a Crowdfunding platform has placed the spotlight on it. It seems that the risk of losing one's capital is high despite screening measures by the platform offering the linkup between business and retail investors.
What is Crowdfunding?
Crowdfunding is the use of internet by entrepreneurs to tap onto retail investors for funding of their businesses. Some of these businesses get turned down by the commercial banking institutions but now have an opportunity to to appeal directly to retail investors.
This is a big step forward for both businesses and retail investors. Previously, only large entities or individuals with extremely deep pockets can reap the benefits of investing in new business start up.
Crowdfunding can take on various forms, namely:
1. Equity crowdfunding- raising of funds through project basis;
2. Debt crowdfunding-assignment of unpaid invoices by customers directly to retail investors to receive cash upfront while paying an interest to investors.
3. Donation crowdfunding- people put in money because of altruistic reasons and do not expect any returns.
In the recent Singapore case, this involves debt crowdfunding akin to factoring to banks. For this case, the retail investors will provide the funds upfront to the business in return for assignment of debts as a pledge and also an annualised ""interest" .
More details on the background:
Capital Springboard ("CS") arranged factoring of debts by SMEs to investors on its platform discovered a fraud by one of the companies. Vanguard Project Management (an interior design firm). It was reported that CS sold S$6.9Mil worth of fake invoices to investors.
Invoices pledged for factoring have an average duration of 90 days and accredited investors can buy them for an average annualised return of 11% to 25%. CS have a risk assessment team in place to review such debts and then give a rating from A to D to the debts on offer.
Another intriguing aspect from this episode was that it seems that CS was not licensed or regulated by the Monetary Authority of Singapore (MAS). Not sure why this was so but apparently, such fund raising which is quite similar to the shadow banking scheme previously in China are not regulated by MAS.
Ending Summary
The crowdfunding mechanism allows retail investors to attain access to an additional form of investment vehicle to earn returns on their spare capital at very attractive annualised interest rates of 11% to 25%. However, there is no free lunch. Also, some of these investments are not protected by MAS.
Retail investors must be mindful to do their own due diligence when deploying capital and not be distracted solely by the seemingly high returns on these crowdfunding platforms.
Invoices pledged for factoring have an average duration of 90 days and accredited investors can buy them for an average annualised return of 11% to 25%. CS have a risk assessment team in place to review such debts and then give a rating from A to D to the debts on offer.
Another intriguing aspect from this episode was that it seems that CS was not licensed or regulated by the Monetary Authority of Singapore (MAS). Not sure why this was so but apparently, such fund raising which is quite similar to the shadow banking scheme previously in China are not regulated by MAS.
Ending Summary
The crowdfunding mechanism allows retail investors to attain access to an additional form of investment vehicle to earn returns on their spare capital at very attractive annualised interest rates of 11% to 25%. However, there is no free lunch. Also, some of these investments are not protected by MAS.
Retail investors must be mindful to do their own due diligence when deploying capital and not be distracted solely by the seemingly high returns on these crowdfunding platforms.
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