Crowdfunding as a fund-raising method began in the United States, when a computer programmer and musician from Boston, Brian Camelio, created the ArtistShare program in 2003, by which music enthusiasts can participate in funding their favorite musician to be able to record their songs.

In Indonesia, this kind of fund-raising was used several years ago, most famously in the ‘Coins of Justice, Free Prita’ project when she was charged with defamation of the doctors who treated her in RS International OMNI. This case marked the first well-known use of Article 27 paragraph 3 of Law No. 11 of 2008 on Electronic Information and Transactions.

Definition of crowdfunding

Various articles divide crowdfunding into 4 types:

1. Equity Based Crowdfunding:Investors receive a stake in the company.
2. Donation Based Crowdfunding: Contributions go towards a charitable cause.
3. Lending Based Crowdfunding:Investors are repaid for their investment over a period of time.
4. Reward Based Crowdfunding:Investors receive a tangible item or service in return for their funds.

There are many definitions of crowdfunding in internet, among others:

• “Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture. Crowdfunding makes use of the easy accessibility of vast networks of friends, family and colleagues through social media websites like Facebook, Twitter and LinkedIn to get the word out about a new business and attract investors. Crowdfunding has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists.”
• “(Crowdfunding is) The practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet: musicians, filmmakers, and artists have successfully raised funds and fostered awareness through crowdfunding.”
• “Crowdfunding is method of financing projects or business units involving the public at large.”

This concept of crowdfunding began to be adopted with the rising number of computer and mobile application program start-up companies, which rely for financing on community fund-raising via the internet. Crowdfunding as the fund-raising method has now been widely used for various purposes in Indonesia.

The concept of crowdfunding under the law and regulations in Indonesia

The Indonesian Financial Services Authority (Otoritas Jasa Keuangan or OJK) may actually categories this fund-raising method as a public offering within the definition in Article 1, paragraph 15 of Law No. 8 of 1995 concerning Capital Markets (“Capital Markets Act”), which states:

Public Offering means an offer of securities by an Issuer to sell stock to the public based on the procedures regulated in this Act and its implementing regulations.

Article 1 paragraph 5 of the Capital Markets Act shows that security has a very broad definition, and it is very possible that the transaction scheme of a crowdfunding offer could be considered as an offer of securities, the implication being that it comes within the category of a Public Offering:

Security means a negotiable instrument, i.e., an acknowledgement of indebtedness, commercial paper, share, bond, debenture, collective investment agreement participation units, security futures contract, and any security derivative.

The elucidation of Article 1, paragraph 15 of Capital Market Law reads as follow:

A Public Offering in this item includes an Issuer’s offer of Securities conducted in the territory of the Republic of Indonesia or to Indonesian citizens using mass media or offered to more than 100 (one hundred) Parties or sold to more than 50 (fifty) Parties within certain limits of time and value. A Securities Offering in the territory of the Republic of Indonesia includes a domestic or foreign Issuer’s offer of Securities to Indonesian or foreign investors conducted in the territory of the Republic of Indonesia through fulfillment of the principle of Transparency. The conditions of a Public Offering also apply for domestic Issuers who make a Public Offering abroad to Indonesian citizens. This is necessary in order to protect Indonesian citizens making investments in Securities offered by that Party outside the territory of the Republic of Indonesia. An Offering of Securities to more than 100 (one hundred) Parties applies irrespective of whether the offering is followed by purchases of the Securities, while the sale of a Security to more than 50 (fifty) Parties emphasizes the realization of the sale of the Securities regardless of whether the sale was done through an Offering. In this elucidation, “mass media” means newspapers, magazines, films, television, radio, and other electronic media, and letters, brochures and other printed goods distributed to more than 100 (one hundred) Parties. The numbers 100 (one hundred) Parties for Offerings of Securities and 50 (fifty) Parties for sales of Securities as contemplated in this item may change in accordance with Capital Market developments. Such changes will be determined by Bapepam.

Article 70 paragraph 1 of the Capital Market Law states:

Only Issuers who have delivered a Registration Statement to Bapepam for an offering or sale of Securities to the public and whose Registration Statement has become effective may make a Public Offering.

A breach of Article 70 above will be charged under Article 106 paragraph 1 Capital Market Law as below:

Any Party who commits a breach of the provisions contemplated in Article 70 shall be liable to a maximum term of imprisonment of 10 (ten) years and a maximum fine of Rp. 15,000,000,000, (fifteen billion Rupiah).

However, Statement of the Chairman of the Capital Market Supervisory Board No. KEP-46/PM/1996 on offerings which are not public offerings states that a stock offer is not a public offering when the total value of offer is less than Rp 1,000,000,000 (one billion rupiah).

Moreover, Law No.9 of 1961 (UU 9/61) on the raising of funds or goods basically states that the raising of funds or goods needs the permission of the authorized officials (i.e., the Minister of Social Welfare, or local government official like a governor or mayor). Only the raising of funds or goods required by customary law or conducted in a limited area does not need permissions.

Article 8 of UU 9/61 states that raising funds or goods without permission from the authorized officials will be liable to 3 months of confinement or a maximum fine of Rp 10,000 (ten thousand rupiahs).

Conclusion and suggestion

Given the information above, we can say that crowdfunding should wait for a clear regulation from OJK, as it is subject to punishment. However, the regulations from OJK should refer to the above law.

Crowdfunding is expected to enlarge the development of small and medium enterprises in Indonesia, as most of them have limited access to banks but make great contributions to Indonesian economic growth. Therefore, a clear regulation on crowdfunding should be issued and applied as soon as possible.