Published 19 July 2019, The Daily Tribune
The Roman Emperor Marcus Aurelius once said “the object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane.” In today’s tech-driven world, where the ability to adapt and innovate spells the difference between death and survival of business, perhaps it may not really do well to simply have “great” ideas; the ideas should indeed be “insane” enough to capture a sufficient market and resonate with them long after the product has hit the market.
But assuming that you have an “insane” idea, a market-shifting one as you describe it, how do you get that idea off the ground and into the consumer market, not to mention the high probability of your product’s mortality within the next five years? Traditionally, Juan dela Cruz would have gone to a bank and presented his idea. Chances are, Juan dela Cruz would leave the bank’s premises empty-handed for lack of sufficient credit history and/or collateral to protect the bank in taking a business risk. Another would have been to get funding from a limited number of friends and relatives. But just how far could that amount take to make Juan’s idea a reality? Maybe not that far. Lastly, Juan dela Cruz could call on high heavens and wait for the stars to align so that the following day he could bump into an angel investor who is equally “insane” enough to buy his idea. But what are the chances? Fortunately, these are things of the past.
With today’s ubiquitous technologies, one could reach a far wider audience to ask for help and get the funding necessary for one’s cause, be it commercial or non-commercial in nature. Simply, the internet has not only helped democratize ideas but even an ordinary individual’s access to available funds to make some of those ideas a reality. Thus, the idea of crowdfunding. Through an internet platform, one could fund someone’s medical or even legal needs, or support a social endeavor. One could also fund a promising project, or a creative or inventive product expecting nothing in return, except perhaps a sample of the finished product. The former is called donation-based crowdfunding, where the funds are essentially given in gratis. The latter is called rewards-based crowdfunding, where the backer/funder’s expectation is essentially just a token consideration as may be agreed upon. Since the backers/funders do not really expect to profit in these kinds of activities, these are not the “risky” endeavors that would require government intervention. For all we know, it could be purely out of charity or plain curiosity that the funds in these activities were doled out.
On the other hand, there are crowdfunding activities where backers/funders expect something more valuable in return like a high-yielding interest or a stake in the company. And this seems perfectly human nature. Psychologists even call this the Rule of Reciprocity. It is in these kinds of crowdfunding activities that the Securities and Exchange Commission (“SEC”) decided to intervene as regulator and supervisor of the securities market. Thus, the new crowdfunding rules, SEC Memorandum Circular No. 14 (Rules and Regulations Governing Crowdfunding [CF]), govern only “equity-based” and “lending-based” crowdfunding.
According to the SEC’s press release, lending-based crowdfunding is where individuals lend money to a company and receive the company’s legally-binding commitment to repay the loan at pre-determined time intervals and interest rate, while equity-based crowdfunding is where individuals invest in shares sold by a company and receive a share of the profits in the form of a dividend or distribution, subject to the company’s discretion.
The crowdfunding rules defined the term crowdfunding as “the offer or sale of securities of a limited scale usually for startups, micro, small and medium enterprises, done through electronic platform” [Whether the subject of the offering is a “security” or not however is not covered by this article]. If the crowdfunding is not done through the electronic online platform, the crowdfunding rules would not apply.
Unlike in the United States, where a federal law [the Jumpstart our Business Startups Act (JOBS Act of 2012)] compelled the US SEC to create its current crowdfunding regulation, in the Philippines, the SEC appears to have taken a more proactive approach in issuing the crowdfunding rules. The rough counterpart of the JOBS Act of 2012 in the Philippines, which is the Innovative Startup Act, is yet to be signed by the President, reportedly since April 2019. It is quite noticeable though how the JOBS Act of 2012, and the JOBS Act Title III equity crowdfunding rules of the US SEC influenced our own crowdfunding rules. (To be continued)
For comments and questions, please send an email to cabdo@divinalaw.com.
