A S$7 MILLION hit on a Singapore crowdfunding site may serve as a timely cautionary tale to the nascent industry of the high risks that can come with fast growth.
Capital Springboard (CS), which claims to have crowdfunded enough invoices to outdo any other crowdfunding platform here - its website puts the figure at S$183 million - discovered last year that it had sold S$6.9 million worth of fake invoices to investors, all from a single SME (small and medium-sized enterprise).
The company, which arranges invoice financing, allows an SME to borrow cash from investors against unpaid invoices issued to customers by the SME. These invoices on the CS marketplace have an average duration of 90 days and accredited investors can buy them for an average annualised return of 11-25 per cent, according to the CS website.
An expert team was supposed to vet every invoice that Capital Springboard sold. Still, 60 invoices worth S$6.9 million slipped through the cracks.
These were sold by Vangard Project Management (VPM) - an interior design firm owned by Choy Peiyi - incorporated in May 2016 with S$100 in paid-up capital.
VPM joined Capital Springboard in July 2016, even though CS claims it only selects SME invoice sellers that have been in business for at least one year with annual revenue of over S$100,000.
Asked by The Business Times why an exception was made for VPM, CS chief executive Roger Crook said a separate company, Vangard Project & Design (VPD), was established in 2012 with the appropriate filings and credit reports. Ms Choy was a director of VPD, which was later registered as VPM, Mr Crook said.
After the payment dates for VPM's invoices had expired and investors remained unpaid, Capital Springboard went to VPM's six purported customers to demand payment.
Five of them informed CS that they did not have any dealings with VPM.
Fish & Co Restaurants, a well-known chain of family eateries, added that the purchase orders furnished by CS were falsified documents with fake and duplicate signatures.
CS reported Ms Choy to the police for suspected fraud in April last year. She has been charged with 60 counts of cheating. A plea negotiation has been scheduled for the end of this month.
Mr Crook, who is a British citizen, declined to comment further on Vangard due to ongoing legal proceedings. However, he said VPM's invoices were "non-notified", which means that the SME did not wish to notify its customers that the SME had been tapping CS for funds.
"Non-notified factoring carries a higher inherent risk and that is reflected in the pricing of these invoices and the returns the investors receive," Mr Crook explained.
The VPM invoices were graded anywhere from A to D by CS's risk assessment team. The safest risk grade offered by the platform is A+.
Pawel Kuznicki, founder and CEO of Capital Match, another peer-to-peer invoice financing platform for SMEs, told BT that there are many ways to verify non-notified invoices: "We can check a record of communications between the seller and debtor, we can call the debtor anonymously."
At Capital Match, bad debts in 2017 are expected to make up 0.5 per cent of total invoice volume, Mr Kuznicki revealed. The firm is still collecting on three to four older outstanding debts, he said.
Rival crowdfunding startup Funding Societies has kept its default rate to below 2 per cent since 2017, according to its website.
A default is defined as all outstanding principal 60 days past due for invoice financing, or 90 days past due for unsecured term loans, said Kelvin Teo, co-founder and CEO of Funding Societies.
Capital Springboard, however, declined to disclose the level of defaults on the CS platform. Mr Crook said it was not in line with industry practice to do so.
But he did confirm that, at one point, Vangard's disputed invoices accounted for 9.7 per cent of all invoices traded since CS went live, representing S$6.9 million of S$71.2 million, as at March last year.
VPM fell behind on its payments around March last year, CS said. CS went live in June 2016. Prior to that, private investors had traded some S$80 million on its pilot platform up till May 31, 2016.
To date, CS said that more than 270 SMEs have sold invoices on its platform. Even so, checks by BT revealed that two more firms - Proway Engineering Plastic and J3 Engineering - also accounted for a large portion of invoices on CS.
Mr Crook declined to comment, saying only that J3 was a former customer, and all transactions with J3 had successfully closed. J3, which does electrical works, is now in liquidation.
Proway, a plastic injection moulding firm, went into receivership at the end of last year. As of January this year, Capital Springboard was suing Proway for S$8.9 million, an Acra report shows.
Separately, Validus Capital, a crowdfunding firm backed by Temasek's Vertex Ventures, took up an 18 per cent stake in Proway worth S$1.1 million in July last year, the report also showed. Validus declined to comment on how it came to own shares in Proway.
Meanwhile, Vangard's debts to Capital Springboard investors remain unpaid, CS said.
Observers said Singapore's SME crowdfunding market is overheated, forcing some players to take on unhealthy risks as they rush for growth.
Brian Teng, co-founder and CEO of InvoiceInterchange, said: "A lot of these businesses have pressure from their equity shareholders to grow as fast as possible, to take market share as fast as possible. And the way to grow fast is very simple. There is no shortage of SMEs and businesses out there looking for funds. All you've got to do is reduce your hurdles, and take on riskier clients."
As these platforms act only as intermediaries, it is investors who lose out when things go wrong.
Mr Kuznicki said: "We talk to other platforms informally, to identify the clients who are shopping around too much. For example, we were aware that Proway or Vangard received funds from at least two platforms. We are conscious of companies that use too many platforms."
Another problem in the nascent crowdfunding industry is that players are not held to any standardised definition of defaults or disclosure rules.
One common bad practice flagged by observers is called "loan-stacking", in which the crowdfunding platform gives additional loans to a borrower, to enable the borrower to repay its earlier loan, instead of recording the earlier loan as stressed or overdue.
Mr Teo said: "It's (like) building a house of cards, which at some point will tumble down."
He added: "The truth is that there have been a lot more defaults than (those) caught. We expect a shake-up to happen soon."
In response to queries from BT, the Monetary Authority of Singapore (MAS) said: "Capital Springboard is neither licensed nor regulated by MAS. A crowdfunding platform operator, which holds a capital markets services licence, is required to perform customer due diligence checks when it establishes business relations with any customer."
The MAS added: "Investors should also check on the extent of due diligence that the operator has conducted before allowing deals to be listed on the platform."
Paul Elliott, a retiree who had bought invoices sold by Vangard via Capital Springboard, told BT: "Financial intermediaries need to understand that statements made on their websites are relied upon by investors.
"We all should have been much more careful in undertaking our due diligence surrounding the platform mechanisms, the obligors and the potential returns. But, we relied on the statements on their website - and that was a costly mistake."