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The Procedure of Equity Crowdfunding without Initial Public Offering

“Financial Services Authority (OJK) has officially regulated Equity Crowdfunding services by issuing OJK Regulation No. 37/POJK.04/2018. A company can legally increase its capital by issuing its shares to the public without actually being a public company.”

One of the types of financial technology that has been making its territory is Equity Crowdfunding. The main distinction of an Equity Crowdfunding is that unlike in Initial Public Offering, the company issuing its shares (“Issuer”) still constitutes a private company. Despite having its shares owned by outside parties, the Issuer does not satisfy the qualifications of being a public company. To ensure the legality of Equity Crowdfunding services, Financial Services Authority (Otoritas Jasa Keuangan or “OJK”) stipulated OJK Regulation No. 37/POJK.04/2018 concerning Equity Crowdfunding (“Crowdfunding Regulation”). Within such regulation, an Equity Crowdfunding refers to the implementation of shares offering services conducted by Issuers to sell shares directly to investors through an open electronic system network.

For the Equity Crowdfunding services provider (“Organizer”), OJK stipulates that it must first obtain permission from OJK. On the other hand, the Issuers are limited into companies which are not:

a. a company that is controlled, either directly or indirectly, by a business group or conglomerate;
b. a public company or a subsidiary of a public company; and
c. a company with assets of more than IDR 10 billion, excluding land and buildings.

Pre-Implementation Phase
Before being registered in the Organizer’s website, an Issuer must first submit its legality documents to be reviewed by the Organizer. Aside from the legality documents on its status as a business entity, Article 35 of the Crowdfunding Regulation stipulates that the Issuer must also submit multiple information related to its business conduct, e.g. the Issuer’s main risks, financial statements, dividend policy, and mechanism for stock pricing.

During this stage, the Issuer must have envisioned the form of trading that it intends to conduct through the Equity Crowdfunding services. Similar to Initial Public Offering, Equity Crowdfunding may take form of a scripless trading, where the shares are distributed electronically without a physical certificate. In the event the Issuer chooses this form, the Issuer must initially make an agreement with the Depository and Settlement Institution.

The terms regarding the Equity Crowdfunding services must also be determined before the implementation. Within Article 44 of the Crowdfunding Regulation, the Issuer must enter into a Crowdfunding Service Agreement (“Service Agreement”) with the Organizer. Amongst other things, the Service Agreement must contain the amount of funds to be raised and the shares to be offered. It must also contain the amount of commission and fees of the Organizer, provision regarding fines, dispute resolution mechanism, and settlement mechanism in the event the Organizer cannot continue its operational activities.

Implementation Phase and Termination
According to Article 5 of the Crowdfunding Regulation, the shares offering must be conducted within a maximum period of 12 months, and the total funds collected through which must be no more than IDR 10 billion. The shares offering itself may be made in one bid or more, each one lasting for a period 60 days.

Throughout the offering period, the funds collected from the investors must first be deposited in an escrow account. The Organizer is supposed to transfer such funds to the Issuer upon the termination of the offering period, which is a result of one of two things, namely:

a. the offering has reached the specified date of termination; or
b. all of the shares offered have been subscribed.

Although the Crowdfunding Regulation has stipulated the conditions terminating the shares offering, it allows Issuers to cancel the shares offering itself at any given time. However, such cancellation is subject to an amount of fine that has been established in the Service Agreement to the investors and the Organizer.

Post-Implementation Phase
Within 21 business days after the conclusion of the shares offering period, the Organizer must transfer the funds deposited in the escrow account to the Issuer. Subsequently, within five business days after the receipt of the funds, the Issuer must transfer the shares to the Organizer to be distributed to the investors. As has been mentioned previously, the distribution may be conducted electronically through collective deposit at custodians. Consequently, the Issuer is obliged to register its shares in the custodian agreed under the Service Agreement. Alternatively, the distribution may also be conducted physically through the delivery of a share certificate.

Once the investors receive their shares, the investors become official shareholders of the Issuer. Therefore, the Issuer must register the share ownership of the investors in the list of shareholders, which is in line with the provisions contained in the Law of Republic of Indonesia No. 40 of 2007 concerning Limited Liability Company (“Company Law”). The investors who have obtained shares from Equity Crowdfunding services must not be regarded differently than the existing investors, which means that all shareholders retain the same rights over votes, dividends, and other rights stipulated in the Company Law.

In the event the shares offering has been rendered null and void due to the insufficient amount of funds collected, the Organizer is obliged to return the funds along with all benefits derived from the fund to the investors within two business days. Such obligation lies on the Organizer’s side because the funds collected from the investors are first deposited in an escrow account. Therefore, the Issuer is only able to collect its funds after the shares offering has concluded in the right manner stipulated by the Crowdfunding Regulation.

Author: Yohana Veronica Tanjung

Gaffar & Co., Indonesian Boutique Law Firm which specializing and focus on commercial law areas e.g. Capital Market & Financial Services.

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