ICOs for Thai Property Crowdfunding
The Initial Coin Offering for the crowdfunding, crowdlending, and crowdinvesting in Thai real estate.
This post discusses the financing of a Thai property acquisition through a crowd of foreigners, whereby each investor contributes a relatively small amount of money to the project. The fundraising can be carried out on one of the big crowdfunding websites, on the internet site of the crowdfunding company or offline by other means and marketing channels.
As an option, the fundraising can be accomplished through an Initial Coin Offering (ICO). Blockchain generated crowdfunding and the tokenization of crowdinvesting makes the whole structure under various aspects more attractive. A concise introduction to the subject can be found at “Blockchain & Bitcoin in Thailand“. The requirements for a “tokenization”, which means to set-up a structure linking the token with a physical asset like real estate, is described at “Seven criteria for the asset-backed token due diligence“. However, the Thai property crowdfunding structure can be accomplished without any ICO-element as well.
In Thailand, the real estate is typically acquired through a corporation (Co., Ltd.). The crowdfunding can be done as equity, as a loan (debt crowdfunding) or as mezzanine financing in between these two categories. Depending on these particularities, the terms equity-based crowdfunding, crowdinvesting, investment crowdfunding, crowd lending, etc. are used. The name is in this rather immature industry typically just a weak indication of the legal structure.
Crowdfunding into real estate offers a much easier path to investing in hotels, warehouses, office buildings, shopping centers and other commercial properties. But it also lowers the commercial barriers to the housing markets and gives private investors the buying power to participate in a wide variety of different property developments as a merely passive investment, and that means without requiring a time-consuming hands-on approach.
That way small investments enable to become (with a group of other investors) a buy-to-let landlord without a nightmare of administration, maintenance works, and red tape. Crowdfunding certainly will not in each and any case beat direct ownership. However, it could rapidly reshape the way individuals find and invest in real estate. Despite some similarities with a real estate investment trust (“REIT”), property funding offers a unique investment profile.
Legal and tax aspects of cross-border crowdfunding structures
Property crowdfunding involving Thai property typically involves cross-border structures. While the real estate is located in Thailand, the landowner is a Thai (corporate) person, the crowdfunding marketplace could be in Europe, U.S. or Australia, and certain structures might be even in an unregulated offshore jurisdiction. Restrictions under the laws of Thailand – for example for trustees and escrow agreements – can be avoided by using the laws of other countries. To optimize tax efficiency and the solidness of the overall structure, two or more jurisdictions have to be involved.
The legal design has to take into consideration the unique foreigner legislation in Thailand. Under the Land Code, certain restrictions apply for the holding of land by non-Thai individuals and corporations. The Condominium Act restricts the acquisition of legal ownership in a condominium unit by non-Thais. The Foreign Business Act and other laws and regulations limit any business activity of foreigners in Thailand. The additional legislation applies regarding residence permits and work permits of foreigners in Thailand.
The crowdfunding structure with one-tier-design results in a direct funding of the Thai entity by the (partnership of) crowd investors. The crowdfunding platform acts then as an agent or broker. However, this directly exposes the individual investor to the risks of
- a cross-border contract,
- a re-qualification under Thai laws,
- illegality under Thailand’s foreigner legislation, as well as
- the enforceability risk in an Asian country.
These risks and uncertainties might scare and discourage the microfinance investor with an investment amount too small to accomplish a cross-border due diligence. Therefore, a two-tier structure with the crowdfunding platform as the man in the middle has distinct advantages. A private investor will find it more attractive to have a domestic contractual partner, contracts in his own language and under domestic legislation.
Loan or equity could do property funding. Under the two-tier structure, this requires a corporate or contractual arrangement between the crowdfunding platform and the Thai limited company and/or its Thai or foreign shareholders. The separation from the crowdfunding agreements with the (partnership of) crowd investors gives the crowdfunding the flexibility to decide on a case to case basis whether to invest in a property project by loans, by shareholdings, by arrangements with the shareholders or by a combination of these three alternatives.
The protection mechanism for the crowd investors regarding the Thai participants
Thailand´s foreigner legislation requires the involvement of Thai citizens in many property investment structures. However, the Thai partners might not qualify as an investor in such a crowdfunding project and, therefore, their participation has to be financed by the crowd investors. As a consequence, this creates additional financial risk and the need for a flexible protection mechanism.
The design and implementation of such protection mechanism are required for each property investment, with or without crowdfunding. In fact, it is the typical character of any foreign direct investment in Thailand. Therefore, the proved and tested tools and modules should be utilized to secure the piece of paradise investment for the crown funders.
While the protection structure in regular property investments is kept confidential between the parties involved, in the case of crowdfunding there is the necessity to disclose details to the public, in brochures, and on the crowdfunding website. As a result, this aspect has a special significance for the business success of the whole project.
The crowd investor has a legitimate expectation that the loan amount will be finally returned, the interest is paid as agreed and, as the case may be, additional advantages are granted, for example when the property is sold on the market, and the investment scheme is terminated. By using a two-tier structure he has limited risks, but limited control as well. A sophisticated protection system is paramount for him.
Crowdfunding regulations in Thailand and the impact of the Thai structures on financial regulations abroad
Apart from crowdfunding platforms set-up in an offshore jurisdiction, there are typically certain regulatory requirements for this kind of business in the jurisdiction the crowdfunding company is set-up and operates.
Popular wisdom has it that this doesn’t matter, but Thailand is a highly regulated jurisdiction, and the Thai license and permissions requirements of foreign crowdfunding for Thai real estate have to be carefully analyzed and met. The Thai REIT legislation and regulatory framework have to be carefully screened whether this results in additional requirements and limitations.
Thailand’s crowdfunding platforms are regulated under Chapter 3 clause 12 and 13 of the notification TorChor 7/2558. This requires a Thai company with a minimum paid-up capital, the application of Form 35-FP with the Stock Exchange Commission Office as well as additional tasks to be fulfilled. Other relevant regulations include TorChor 8/2558 and KorChor 3/2558.
The structure and profile of the Thai project might be relevant for foreign regulatory requirements as well. Typically aspects are the investment value and the holding time of the property.
Any mortgage lien or other protection mechanisms which are passed through to the crowd investor might result, as the case may be, in a suppression of the subordination clause of the crowdfunding loan. This might result in a reclassification of the crowdfunding into a deposit business which requires additional licenses.
Professional services to the crowdfunding developer and the crowdfunding platform operator
PUGNATORIUS Ltd. is a Bangkok-headquartered specialist provider of bespoke transactional legal and tax advice in the corporate and property legal and taxation industry sectors. The law firm offers the following professional services for developers of crowdfunding platforms and companies:
- Commercial design and structuring of the whole project
- Tax planning and optimization of tax-efficiencies
- Legal study regarding the feasibility of the crowdfunding project
- Design and preparation of the contracts and supporting documents
- Formation of landholding project companies as a Thai Co., Ltd.
- Legal support and assistance in the land acquisition including due diligence
- Legal support and assistance regarding the marketing of real estate by lease and service agreements
- Comprehensive legal project management in Thailand
Thai property crowdfunding gives the investor an exciting opportunity to make money from carefully curated Thai property projects. Ask PUGNATORIUS Ltd. for a specific consultancy offer for your property crowdfunding project. #crowdfunding