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n the past few years, startups have been growing exponentially in Indonesia as one of the ripple effects of technological progress and an increasing number of creative people. However, the early-stage companies struggle to get capital, because they hardly succeed in attracting venture capitalists or angel investors — as the typical funding sources of early-stage companies — because of the level of risk of the business.

The issuance of Financial Services Authority (OJK) Regulation No. 37/2018 on equity crowdfunding, effective as of Dec. 31, 2018, gives startup owners an alternative source of capital. For comparison, the United States enacted similar regulation back in 2012 under the Jumpstart Our Business Start-ups Act, later updated in 2015. Essentially, crowdfunding is the practice of funding a private company by raising small amounts of money from a large pool of investors, in exchange for capital ownership in the company.

Since this mechanism allows the private company to offer and sell shares in a way that is similar to an initial public offering (IPO), the OJK attempts to control the crowdfunding practice and ensure that the consummation of crowdfunding will not alter its objective, especially through the criteria for providers, investors and issuers (the three main parties involved) and disclosure requirements.

A business providing crowdfunding services must be registered as a limited liability company or a service-based cooperative with minimum capital of Rp 2.5 billion (US$175,750). It needs to secure 2 licences, both from OJK and the communications and information minister to conduct the business.

A licensed securities company could also be the provider, and it benefits from expertise in managing share offerings through IPOs.

With regard to the investor, it is worth noting that the OJK does not restrict investors by type or country of origin, provided the investor has the capability to buy the issuer’s shares and handle the associated risks.

An individual with annual income up to Rp 500 million can subscribe to a stake valued at up to 5 percent of their income. If the individual’s annual income exceeds that threshold, he or she is allowed to subscribe to a stake valued at up to 10 percent of the income. These limitations do not apply to legal-entity-type investors or experienced investors accustomed to investing in the capital market, as evidenced by 2-year-ownership of a securities account.

The third party, being the startup company as an issuer, can only raise up to Rp 10 billion during a 12-month period through a single share offering or series of offerings within fewer than 60 days. Since crowdfunding is not an IPO, the issuer may not be a public company or a public company’s subsidiary.

The number of shareholders is limited to 300 parties and the amount of capital issued is capped at Rp 30 billion. A company will only be eligible as the issuer if its assets are worth less than Rp 10 billion (excluding land and buildings) and it is not indirectly or directly controlled by a business group or conglomerate.

After being declared as an issuer, it must also provide an annual report to the OJK and announce this on its or the provider’s website at the latest six months after the end of the financial year. Beyond containing information required under the Indonesian Limited Liability Law, the reports must also describe the use of funds obtained through crowdfunding, until the funds are entirely used.

Undoubtedly, these disclosure requirements function as a transparency tool that may help investors make informed decisions. On the flip side, the issuer must realize that, to a certain extent, these will change its nature as a “private company” as it needs to disclose lots of information to the public, granting access to internal affairs like shareholdings, capital structure and business strategy.

This regulation also heavily regulates other matter, emphasizing investor protection.

The provider must fulfill many obligations, such as ensuring the completion of crowdfunding until all rights and obligations of the investors and the issuer are completed, providing online communication facilities between the investors and the issuer, providing a complaint service mechanism and itemizing various risks faced by the investors, including business, investment and liquidity risks.

Since the provider acts solely as an intermediary, it is also prohibited from giving investment advice or recommendations and financial assistance to the investors, which may affect their decision on making the investment.

Irrespective the ample safeguards provided in this OJK regulation, the investors, particularly novices who would like to diversify their investment portfolio, must still keep in mind that putting investment in an early-stage company may involve very high risks, and therefore thorough research is crucial.

Research by many US institutions shows that nine of 10 startups fail, unlike the later-stage companies or public companies that have already built a reputation and proven significant growth in business and profit.

Often, the shares may not be as liquid as shares listed on the main stock market, where investors can easily trade shares if the price changes. Indeed, OJK regulations state that the provider may create a system for the investors to trade their shares. However, this is not an “obligation” for the provider and limited only to trading between investors listed by the provider.

Investors may face uncertainty with regard to the valuation of shares as well. The investors buy the shares pursuant to a price mechanism determined by the issuer. Still, it is difficult to value the shares of a startup company, which typically has not generated much profit yet. This situation differs from a public company, where the market price for the shares has been determined through the market system. Eventually, the investors may end up overpaying for shares they buy.

For those reasons, it is important for the issuer and the provider to work on their respective roles to create a secure environment for small investors.

As envisioned by the OJK, the provider must support this crowdfunding business so as to improve financial literacy and inclusion in Indonesia. Simultaneously, the startups that intend to be issuers will also find a way to enlarge their scope and have a positive social impact through their unique approach or business idea.
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