Curtain falls on CoAssets crowdfund platform, but no systemic risk seen in P2P lending
The winding down of CA Funding is the latest turn of events for the troubled CoAssets Group, which had left hundreds of investors shaken.
Singapore-based crowdfunding platform CA Funding - formerly known as CoAssets - has thrown in the towel and is in the process of winding down, but there is no sign it is a harbinger of the collapse of others in the peer-to-peer lending space, said industry watchers.
Still, the episode is likely to bring to the fore issues of transparency and investor education, which could impact how crowdfunding is carried out in the future, they added.
The winding down of CA Funding is the latest turn of events for the troubled CoAssets Group, which had left hundreds of investors - mostly promissory note holders - shaken in December after it was revealed that it had transferred US$30 million of receivables to debt recovery firm Sunfits. Hong Kong-based Sunfits had said it could not recover the debt, which means investors are likely to lose the money put in.
To be clear, these notes were issued by subsidiaries of CoAssets Group, and not CA Funding itself.
CA Funding is a wholly-owned subsidiary of the CoAssets Group, and is regulated by the Monetary Authority of Singapore (MAS) with a capital markets service licence. The crowdfunding platform is the intermediary, not the issuer of securities listed on the platform.
When asked what plans are in place for investors, CA Funding's CEO Getty Goh declined to comment. He also declined to reveal the number of investors and the total value involved.
In an email sent to MAS in May 2020 seen by BT, former chief operating officer of CoAssets Lawrence Lim alleged that crowdfunding projects that were put up on the platform are fronted by special purpose vehicles set up by related parties based in Hong Kong that CoAssets have lent money to. The risks associated with such projects and how beneficiaries were commercially related to CoAssets were not revealed to investors, he added.
Mr Lim said he left CoAssets in March 2019 due to irreconcilable differences in business direction and management with company founders, namely Mr Goh and Seh Huan Kiat.
MAS had earlier said that it does not disclose its dealings with regulated financial institutions, but will review and take necessary action if CA Funding - the regulated entity - has breached regulations.
Shaun Leong, Partner, Dispute Resolution and Litigation, Withers KhattarWong said: "Whether investors (on the crowdfunding platform) stand to lose their investments completely could very well depend on how the assets were structured."
"For example, it is possible that investors may not lose their investments completely if their funds were held in a trust structure."
Varun Mittal, Global Emerging Markets Fintech Leader, EY, said crowdfunding platforms usually just play the role of a matchmaker between borrowers and receivers.
As such, they do not have liability if issuers go under, he said. "The winding down of the platform itself doesn't mean the money won't come back - the question is what's the underlying asset quality," he said.
Nithi Genesan, compliance specialist Argus Global's Director - Compliance, said that crowdfunding platforms such as CA Funding will usually have investor funds handled by escrow agencies.
Loan agreements in place cannot be dissolved and a reputable agency will typically be assigned to fulfil the services duties, with a debt recovery agency usually appointed to recover the debts, he said.
"Licensed crowdfunding platforms need to ensure there are appropriate default procedures in place to handle issuer defaults," he said, adding that "there is no guarantee if the investors will recover their investments".
Before cessation of the business, however, licensed entities are required to provide regulators with an auditor's certification that the licensee has fully discharged all customer obligations and ensure that customer assets and monies have been accounted for and returned to customers before ceasing its business, he noted.
Moreover, checks must be done to ensure that investors are knowledgeable, especially for small offers. Under this "small offers exemption", offerors can raise personal offers of securities to investors of up to S$5 million within any 12-month period, without a need for a prospectus, subject to certain conditions.
On top of that, MAS has also mandated that crowdfunding operators are to disclose key risks to investors and obtain investors' acknowledgement.
The risks will be laid out in these statements, explaining to investors that there is a high risk that they may lose all their money on such investments.
Industry watchers told BT that the regulatory safeguards are already in place, but investor education may need to be stepped up. This comes as some investors rely on licensing by regulators as a form of endorsement without conducting due diligence.
Withers KhattarWong's Mr Leong said: "MAS would not be in a position to advise investors on the financial viability of the platforms, or whether such platforms present a good investment opportunity for potential investors."
He pointed out that the episode "may not necessarily be symptomatic of a wider, systemic issue", as securities-based crowdfunding is "generally accepted as part of the broad diversity of the financing ecosystem and fintech landscape".
But at the same time, it is inherently risky given that investors are funding debtors with a riskier default profile that banks may not ordinarily fund, he said.
"Ultimately, the investors have a part to play as well by taking a serious look at the legal terms that they sign on to even as they are enthusiastic about the potential financial rewards that come with the investment," he added.
Bart Zhou Yueshen, Assistant Professor of Finance at INSEAD, said that part of the function of crowdfunding platforms is to have investors contribute to the candidate projects' evaluation, using their own judgment, experience and preference.
"They direct their money to 'good' projects and as such the platform serves as a venue of information gathering and aggregation," he said. "The quality of such aggregated information depends a lot on how much effort investors choose to spend in evaluating the projects."
"Any explicit or implicit regulator protection would destroy such an incentive, resulting in investors taking too much risk in potentially risky and bad projects, defeating the information aggregation function of the crowdfunding platforms," he added.
That being said, observers concurred that platforms operators must ensure that they are transparent and do not resort to dishonest tactics.
Assistant Professor Ruan Tianyue, Department of Finance, NUS Business School, added: "Any conduct of misleading investors should be condemned."
To her, the folding of CA Funding "raises questions about information disclosure and investor education", which she says "may impact the business model of crowdfunding in the future".
She has a less sanguine view of the fate of alternative lenders, as Covid-19 has made it more difficult for many borrowers to service their debt. "We may see a wave of restructuring among crowdfunding platforms: those with solid operations survive in the challenging times while those with poor operations or fraudulent practices wind down," said Prof Ruan.
On the other hand, INSEAD's Prof Zhou noted that CA Funding only contributes to a "negligible fraction" of the total market share of the crowdfunding business: "It's hard to see why it would have any market-wide impact on this industry."
Bitter wait for CoAssets noteholders as investments turn sour
It is likely to be a long-drawn affair for CoAssets' promissory noteholders to claw back their investments - if they were to get back any at all, said industry watchers.
This comes as hundreds of retail investors - mainly promissory note holders of CoAssets' various subsidiaries - stand to see their investments go up in smoke, following reports in December that the group had disposed US$30 million of receivables to Hong Kong-based debt recovery company Sunfits.
The receivables have been found to be mostly irrecoverable bad debt, with Sunfits having since filed a police report after uncovering irregularities in CoAssets' accounts. It is considering legal action, but said that it is currently focused on debt recovery. Investors have also filed police reports against CoAssets' co-founders Getty Goh and Seh Huan Kiat, and have grouped together to explore legal options.
The Business Times (BT) understands that the Commercial Affairs Department (CAD) has since called in various parties such as real estate firm DWG's director Denka Wee and CoAssets staff to help with investigations. A representative from Sunfits is also due to give a statement to the CAD.
Mr Wee took on the posts of group chief executive officer (CEO) and nonexecutive chairman in 2020, amid talks of a potential merger between DWG and CoAssets that later broke down. He resigned from the positions in December. It is unclear who is currently running CoAssets, with only nominee directors left. BT understands that the group is seeking new directors to run the company.
In a letter sent to investors in May 2020, then-group CEO Mr Goh had convinced investors to stay onboard and extended the payment deadlines for many of the promissory notes that were set to mature, claiming that the notes were contractually guaranteed by DWG and Mr Wee.
However, these guarantees were later voided, with DWG flagging several issues relating to their authenticity, such as the alleged witness not actually seeing the document signing and the lack of details and information of total debts.
Mr Wee told BT that he does "not recall signing the document".
Meanwhile, Mr Goh had denied blame for the fiasco in a Facebook post that was later taken down, giving a differing account of what transpired between DWG and CoAssets.
He remains CEO of the MASlicensed CA Funding that is in the process of winding down. He had declined to comment to queries by BT on his role in the saga.
Bart Zhou Yueshen, assistant professor of finance at Insead, noted that the investments will "likely go through a prolonged legal process before it is clear whether who will get how much, if at all". "In any case, the process for investors will likely be a slow wait," he said.
Shaun Leong, partner, Dispute Resolution and Litigation, Withers KhattarWong, said that promissory notes, which lie at the heart of the CoAssets' episode, are "essentially promises to pay the investor a sum of money at a specified date or on an occurrence of a prescribed event" and are "legally binding".
He highlighted two "pressure points" in this episode: the first is if the extension of the repayment deadlines for notes are actually backed by enforceable guarantees; and secondly, whether it could be perceived that CoAssets was getting around MAS regulations by creating multiple sister companies to issue notes to take advantage of the "small offers exemption".
He added that any dispute might involve a "classic clash between the black letter law and the spirit or policy behind the regulations".
Under this "small offers exemption", offerors can raise personal offers of securities to investors of up to S$5 million within any 12-month period, without a need for a prospectus subject to certain conditions.
This exemption is intended to make fundraising easier and less costly for startups, small and medium-sized enterprises.
"It may not necessarily be problematic to issue promissory notes through subsidiaries, but investors would expect transparency in how the funds invested are used and by whom," said Mr Leong.
He said that it is possible for the guarantees provided by DWG to be void if wrongdoing or misrepresentation as alleged is involved, but the purported "suspicious activity" would have to be sufficiently serious to void the guarantees. By law, that would effectively mean that the guarantees as contemplated did not exist in the first place, added Mr Leong.
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