Thailand: New debt crowdfunding regulations

Thailand is advancing its economic development agenda with new regulations aimed at expanding the range of fundraising options available to startups and small and medium-sized enterprises (SMEs). In May 2019, the Thai Securities and Exchange Commission (SEC) introduced an updated framework for debt crowdfunding based on public consultations that took place at the beginning of the year.

One of the main objectives is to encourage investment in sectors such as high technology, biofuels and robotics, which form a crucial part of Thailand 4.0, the country's ambitious plan to reshape its traditionally agrarian and export-reliant economy into a hub of innovation.

It is a bold and forward-thinking move by a country that could be on the cusp of transformation, offering small enterprises more flexible fundraising opportunities to propel their development while improving protection for investors. However, Thailand is attempting this metamorphosis in a highly competitive southeast Asian economy and could struggle to stand out, particularly if the implementation process is not as smooth as is being promised.

Debt crowdfunding – sometimes known as peer-to-peer (P2P) lending – is a relatively nascent concept in Thailand. Fundraisers invite direct investment through an approved online funding portal, then repay the funds with interest, much like a bank loan or other types of debt instruments, such as bonds or debentures. It differs from equity crowdfunding, wherein investors gain shares in the company.

As of 2018, the global P2P lending market is worth an estimated $15 billion. This is expected to increase nearly threefold by 2024, jumping to $44 billion as more countries, such as Thailand, introduce legislation that regulates and promotes the funding model.

The SEC's new regulations for debt crowdfunding are designed to bring it in line with the existing framework for equity crowdfunding – in which investors purchase shares in the company.

Core elements of the new regulations include:

• The fundraiser must be a company registered in Thailand with a clear business plan.

• Crowdfunding must take place through an approved funding portal. These will play a critical role in screening applications and overseeing compliance.

• Fundraisers must report offering results to the SEC.

In an effort to minimise risk, there are also limits in place on how much capital an enterprise can raise through debt crowdfunding and how much investors can contribute to a single business:

• from retail investors, THB20 million ($654,000) in the first 12 months and THB40 million in total, for equity and debt combined; or,

• from non-retail investors, such as venture capital funds, private equity trusts, institutional and other qualified investors, there is no cap on the amounts that can be raised.

• THB100,000 per retail investor, equity and debt combined.

• There is no investment cap for non-retail investors.

To understand why these regulations have been introduced, you first need to understand Thailand's objectives for development as contained in its existing economic model: Thailand 4.0.

As the name suggests, Thailand has already been through three stages of development. Each of these was focused on advancing a particular industry or set of industries and thereby supporting the country's economic growth:

• 1.0: Agriculture;

• 2.0: Light industry (food, textiles, consumer products). This was instrumental in progressing Thailand from a low-income economy into a middle-income one; and,

• 3.0: Heavy industry (steel, energy, manufacturing, and so on).

While these economic models have helped Thailand move from being a low-wage and low-income economy, they have also created challenges of their own. Thailand is now stuck in a 'middle-income trap', meaning that its progress has temporarily plateaued, and it requires an injection of innovation to compete with more highly developed economies.

This is what Thailand 4.0 is designed to do. It focuses on smart industry – high technology, innovation and creative professions – and is designed to propel the country from being a middle-income economy to a high-income one. The Thai government is even offering 'smart visas' to leaders working in one of Thailand 4.0's ten core industries:

• Biochemical and biofuels

• Digital economy

• Medical hubs

• Automation and robotics

• Aviation and logistics

• Agricultural and biotechnology

• Smart electronics

• Affluent medical and wellness tourism

• Next-generation automotive

• Food for the future

These are all industries in which startups and SMEs have a vital part to play. New crowdfunding regulations are therefore intended to make capital accessible to companies of any size.

Crowdfunding has enormous potential in Thailand 4.0's target sectors. The majority of companies that this funding model is designed to support are not listed enterprises; they do not have access to The Stock Exchange of Thailand and the funding associated with it. Nonetheless, they require capital to develop and become the propeller of economic growth it is hoped they will be.

Peer-to-peer lending is a flexible and attainable fundraising channel that could be instrumental in championing the short and long-term progress of startups and SMEs. Making investment more accessible will also ensure that the best talent can be attracted to and nurtured in Thailand, helping the country to build an essential domestic skills and knowledge base.

It is not all about the startups. A robust regulatory environment provides much-needed assurance for lenders as they navigate a relatively new investment model. The risk level, from the lenders' point of view, is actually three-fold, as they are investing in: early-stage businesses, emerging sectors, and nascent funding models.

Introducing these new regulations, particularly the use of approved funding portals that are responsible for vetting fundraisers, serves to safeguard investors against multiple risk factors.

This is a pivotal time for economies across southeast Asia. The continuing US-China trade war has created instability in the region's single biggest recipient of foreign investment. Many international fund managers and private equity firms, and some of the larger family offices, are therefore looking at opportunities elsewhere, causing less high-profile investment destinations to make upgrades to their regulatory environments.

Thailand is no exception. The legislation covering debt crowdfunding is the latest in a long line of initiatives pursued by the Thai government over the last few years to facilitate the ease of doing business for both foreign and local companies. Notably, it has gained an edge over close competitor Vietnam, which has not yet developed a robust system for P2P lending.

This is undeniably a bold move by Thailand, and one that positions it as a forward-thinking economy built with the needs of small, innovative enterprises in mind. But the effectiveness of new regulations can only be judged by how easy they are for all actors involved to navigate. Thailand's bet on P2P lending still has a few hurdles to conquer before its predicted success or failure can be judged.

On a global scale, there is concern that investors do not adequately understand the risks involved in debt crowdfunding. In Thailand, the concept is just getting off the ground. There will be plenty of need for educating investors, both as a means of reassurance and minimising negative outcomes for those who may be underinformed.

There is one notable difference in debt crowdfunding in Thailand as compared to other Asian markets: the minimum paid-up capital requirement for approved funding portals. This existed before the new regulations were introduced and is set at THB5 million (approximately $0.15 million), which is substantially lower than other countries in Asia and around the world. In Taiwan, for example, the minimum capital required for a crowdfunding platform is NT$50 million ($1.6 million).

While this is clearly intended to reflect the needs of smaller enterprises, the relatively low capital requirement has led to some concern that many crowdfunding platform businesses will fail to get off the ground due to the lack of financing being required.

In strengthening its regulation for P2P lending, Thailand has joined a growing legion of economies in southeast Asia attempting to stimulate growth in high-tech and emerging sectors, including China, Indonesia, Malaysia, Taiwan and Singapore. It is worth noting that the majority of these are upper-middle income or high-income economies, with the exception of Indonesia.

Amid a growing regional fintech market and the US-China trade war, all of these countries are trying to stake a claim as the next innovation hub and attract higher levels of investment in their startups and SMEs. This has huge potential for both domestic and foreign investment, but it remains to be seen whether it can measure up to countries with more developed economies.

It could also set a precedent for more middle-income countries, such as Vietnam or the Philippines, to focus on alternative funding models for small enterprises in innovation-led sectors. This would be positive for the southeast Asia region as a whole and put Thailand under pressure to continue improving its regulatory environment and incentives for investors in order to remain competitive.

In updating its debt crowdfunding regulations, Thailand has broadened the playing field for investment opportunities and taken steps to mitigate risks for all involved parties in an emerging funding channel. This is undeniably a step in the right direction in terms of achieving its Thailand 4.0 objectives, giving smaller operations in emerging sectors the improved access to capital they need in order to reach their full potential.

However, like all new ideas, the greater opportunities often come hand-in-hand with heightened risk. While it is probably too soon to make concrete predictions about the future of crowdfunding in Thailand, it is certainly a promising time for innovation.

Troy Schooneman