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rowdfunding has been touted as a revolutionary way to connect ordinary individuals with the innovative projects they support. Arguably, it could spur innovation and encourage the next generation of small and medium enterprises (SMEs) to unleash their entrepreneurial spirit.

Even nowadays, it is possible for retail investors to become “venture capitalists” and, probably, own shares in the next giant tech company. Credit goes to the new method of raising capital online in exchange for equity ownership in, mostly, start-ups, the equity-based crowdfunding, or equity crowdfunding.

However, this unique method of raising money might face some challenges in Indonesia. First, Crowdfund Insider, the leading news website about crowdfunding, claims that Indonesians have trust issues with money transactions carried out over the internet. Second, there is a lack of crowdfunding education among retail investors.

The government needs to undertake supervisory and regulatory functions to respond to the problems. It should regulate, at least, two stakeholders in equity crowdfunding — entrepreneurs and intermediaries — with a broker acting as an intermediary in equity-based crowdfunding activities.

Nevertheless, a regulator should not impose burdensome regulations on the stakeholders in equity crowdfunding. If so, it would be difficult to make a considerable change to the market behavior and make use of this advanced fundraising method.

In September 2015, the Financial Services Authority (OJK) said that it would announce a regulation covering crowdfunding. It created a positive buzz as equity crowdfunding could ease the SMEs’ access to the capital market. It is expensive for SMEs to access the capital market because the requirements are too cumbersome for newly establish companies. However, to date, the OJK has not enacted any relevant regulation.

In the US, a regulatory framework that allows equity crowdfunding practices came into force on May 16. The Securities Exchange Commission (SEC) has adopted the crowdfundingregulation to implement the Title III of the Jumpstart Our Business Startups Act of 2012. The crowdfunding regulation allows an entrepreneur to conduct an equity offering of up to US$1 million within a 12-month period through an intermediary, without filing a registration statement to the SEC. It may, substantially, help SMEs to reduce the cost of equity offerings.

The crowdfunding regulation provides less demanding filing requirements to the issuers of securities, compared to other types of exempted securities offerings in the US. However, some critics said that it would still overburden entrepreneurs with complex applications. For instance, if the targeted offering amount is more than $500,000, the entrepreneur is still required to file independently audited financial statements with the SEC.

Most startups would barely consider having a certified financial audit report at the early stage of business – unless venture capitalists are interested in acquiring their businesses.

But setting the level of requirements is a matter of policy that has to be decided by the regulator. At the end of the day, the imposition of duties on entrepreneurs is for investment protection and to build the investors’ trust.

The SEC mandates that the equity crowdfunding be done through an intermediary. An intermediary could be in a form of a broker-dealer or the so-called “funding portal” (also known as the crowdfunding platforms). AngelList, EarlyShares and CircleUp are the examples of funding portals. Their function is similar to the well-known Kickstarter, but instead of promoting rewards, here the object is equity ownership.

Funding portals are different from broker-dealers. They are brokers in securities crowdfunding activities that could not, inter alia, purchase, sell, or offer the securities displayed on their platforms or handle investor funds or securities.

Funding portals hold a pivotal role in equity crowdfunding as they have the responsibility to prevent fraud and become the medium between investors and entrepreneurs.

Advance supervisory systems and recordkeeping technology are prerequisites for a funding portal. It might suffer from a costly infrastructure development, but the policy wants to prevent “two-penny” platforms operating as intermediaries in equity crowdfunding.

Funding portals also take a substantial part in educating investors. They must explain the risks associated with equity crowdfunding – including illiquidity and dilution risks.

One should realize that the secondary market is still very limited for the shares purchased from crowdfunding. Moreover, by having a large group of investors, equity becomes diluted among many investors. Those are the examples of problems that investors should become aware of before deciding to make an investment.

A sufficient crowdfunding education might prevent sloppy investments and immeasurable losses by investors.

The future Indonesian crowdfunding policy should be more than about a mending the existing statutory limitations. Even if there is no specific regulation about crowdfunding in Indonesia, the donation-based, reward-based and loan-based crowdfunding has spread across the nation. For equity crowdfunding, as of the writing of this article, there has not been any self-claimed equity crowdfunding platform. There are, at least, two statutory limitations that limit the implementation of equity crowdfunding.

First, without filing registration statements to the OJK, entrepreneurs can only raise less than Rp 1 billion within a one-year period through an equity offering. The amount is relatively too low. A newly established company would not be able to compete with global or even, perhaps, local markets if it only relies upon such exemptions.

Second, there is a restriction for a crowdfunding platform to transmit the offered shares to the investors and capital to the entrepreneurs. An institution is not allowed to conduct securities transactions on behalf of investors unless it is registered with the OJK as a broker-dealer.

The regulator should be clear on the crowdfunding platform’s authority in transmitting capital and securities – under the crowdfunding regulation a funding portal shall engage a qualified third party (e.g. banks or registered broker-dealers) to proceed with the transfer of funds and securities.

The OJK could increase the limit of raised funds and set things clear on the crowdfunding platform’s domain in transmitting funds. Still and all, minor changes in existing laws would not solve the trust and educational issues as addressed.

Indonesia might adopt certain provisions under the crowdfunding regulation with some adjustments. The OJK should determine reasonable requirements for the entrepreneurs and funding portals. The future equity crowdfunding policy in Indonesia must be able to accommodate the investment protection aspect, but should not intimidate entrepreneurs, especially startups, with a burdensome ‘laundry list.’
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The writer is a graduate student at the University of Washington School of Law.