Legal Considerations for Equity Crowdfunding in the Philippines

Equity crowdfunding has emerged as a popular method for startups and small businesses in the Philippines to raise capital by offering shares or equity in their company to a large number of investors, typically through online platforms. While it presents exciting opportunities for entrepreneurs and investors alike, equity crowdfunding also involves significant legal considerations. Here’s what you need to know to navigate the legal landscape of equity crowdfunding in the Philippines.

Regulatory Framework

1. Securities Regulation Code (SRC): The primary legislation governing equity crowdfunding in the Philippines is the Securities Regulation Code (Republic Act No. 8799). The SRC requires that any offer or sale of securities to the public must be registered with the Securities and Exchange Commission (SEC) unless exempted. Equity crowdfunding falls under the definition of securities, and thus, compliance with the SRC is crucial.

2. Crowdfunding Rules and Regulations: In 2019, the SEC issued the Crowdfunding Rules under SEC Memorandum Circular No. 14, Series of 2019, which specifically addresses equity crowdfunding. These rules establish the legal framework for online platforms that facilitate equity crowdfunding, as well as the obligations of issuers (companies raising funds) and investors.

Key Legal Considerations

1. Registration and Licensing:

   • Crowdfunding Platforms: Platforms that facilitate equity crowdfunding must be registered with the SEC as a Crowdfunding Intermediary and Funding Portal. These platforms are required to comply with various regulations, including due diligence on issuers, disclosure requirements, and investor protection measures.
   • Issuers: Companies seeking to raise capital through equity crowdfunding must also comply with SEC registration requirements unless they qualify for exemptions. The rules set limits on the amount that can be raised within a 12-month period and impose certain disclosure obligations on the issuers.

2. Disclosure Requirements: Issuers are required to provide potential investors with detailed information about the business, including financial statements, business plans, risk factors, and the use of proceeds from the crowdfunding campaign. Accurate and complete disclosure is critical to ensure compliance and build investor trust.

3. Investor Protection: The Crowdfunding Rules impose limitations on the amount that retail investors can invest in a crowdfunding campaign to protect them from excessive risk. There are different caps based on the investor’s income and net worth, and platforms must ensure that these limits are not exceeded.

4. Compliance with Anti-Money Laundering (AML) Laws: Both crowdfunding platforms and issuers must comply with the Anti-Money Laundering Act (AMLA) of 2001, as amended. This involves conducting customer due diligence, maintaining records, and reporting suspicious transactions to the Anti-Money Laundering Council (AMLC).

5. Corporate Governance: Companies that raise funds through equity crowdfunding must adhere to corporate governance standards, including the proper conduct of shareholder meetings, the issuance of stock certificates, and the maintenance of corporate records. Transparent governance practices are essential to maintaining investor confidence and avoiding legal disputes.

6. Tax Considerations: Equity crowdfunding transactions may have tax implications for both the company and its investors. Issuers must be aware of the potential tax liabilities arising from the issuance of shares, while investors need to understand the tax treatment of dividends and capital gains. Consulting with a tax professional is advisable to navigate these complexities.

Risks and Challenges

1. Regulatory Compliance: Failure to comply with the SEC’s crowdfunding rules and other applicable laws can result in significant penalties, including fines, suspension of operations, and criminal liability for the company’s officers.

2. Investor Disputes: Equity crowdfunding can lead to disputes between the company and its investors, particularly if the business fails to meet its targets or if there are issues with transparency and governance. Having clear terms and conditions, as well as robust dispute resolution mechanisms, is crucial.

3. Dilution of Ownership: For issuers, raising capital through equity crowdfunding may lead to the dilution of ownership and control, which could impact decision-making processes and the future direction of the company.

Conclusion

Equity crowdfunding offers a powerful avenue for raising capital in the Philippines, but it also requires careful navigation of the legal landscape. Understanding and complying with the Securities Regulation Code, Crowdfunding Rules, and other relevant laws is essential for both issuers and platforms. By ensuring full compliance, companies can take advantage of this innovative fundraising method while protecting their interests and those of their investors.