Equity crowdfunding hits Asia

IFR Asia 827 - January 11, 2014 | By Daniel Stanton

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Equity crowdfunding hits Asia

Asian companies will be able to sell shares to the public using the crowdfunding system US website Kickstarter made popular on a new Swedish site, calledFundedByMe, which was launched in Singapore late last year.

FundedByMe, one of the first of its kind in Asia, allows the public to enter the risky world of venture capital for the first time.

Crowdfunding allows people to invest in a specific project in return for a reward, such as company shares. Since the introduction of the JOBS Act in the US in 2012, equity crowdfunding has enabled investors to back entrepreneurial companies, rather than just specific projects, in return for shares – a form of angel investing.

While equity crowdfunding is popular in the US and is covered under specific legislation there, the industry falls in a grey area in Asia.

The JOBS Act introduced regulations specifically covering equity crowdfunding and allowed sites to register with the Securities and Exchange Commission, leading to an explosion of new platforms in the US.

Rules proposed under the act last October would allow US companies to raise up to US$1m through crowdfunding over a 12-month period.

Elsewhere, regulators are still to catch up. Singapore’s authorities have yet to clarify if such platforms can operate without a licence. Venture capital and angel investments are not regulated in Singapore, but, typically, these are private transactions limited to a handful of professional investors aware of the high risks involved.

“Depending on the actual form or method of fundraising, entities that raise funds through a crowdfunding platform may be deemed to have made a securities offering,” a spokesperson for the Monetary Authority of Singapore said in an email.

“Under the Securities and Futures Act (Cap 289), entities that make an offer of securities to investors in Singapore will be required to lodge and register a prospectus with MAS, unless an exemption applies.”

“In addition, where the platform facilitates any securities offerings or provision of advice relating to the securities offerings, it may be deemed to be dealing in securities or advising on corporate finance and, consequently, may be subject to licensing requirements under the SFA,” the spokesperson said.

The SFA appears to exempt offerings of up to S$5m (US$3.9m) within a 12-month period as long as they are not advertised. Since crowdfunding sites generally require investors to join as members, even though there may be no membership fee or eligibility requirement, it could be argued that distributing a message to a closed membership group does not constitute advertising.

A source at Hong Kong’s Securities and Futures Commission said there were no specific rules on equity crowdfunding, but any offering of investment products to the public needed to be regulated.

Risky business

As with all early-stage investments, the risks are high. Shares cannot be listed or traded after the initial investment, meaning investors can exit only if the company does an IPO or new investors bought them out in a later round of funding. There is also a risk that companies may fail, or turn out to be fraudulent.

Crowdfunding sites make it very clear that the onus is on investors to assess risk and detect fraud. However, FundedByMe founder and CEO Daniel Daboczy said the nature of crowdfunding means companies were subject to the scrutiny of a large audience, making it hard for them to conceal bad news.

“We had a case where the crowd instantly flagged that one guy was not a fraudster, but he doesn’t pay his bills,” Daboczy said. “If someone does commit a fraud, they are burned in social media forever.”

Unlike Kickstarter, which focuses on supporting single projects, ranging from films to gadgets, FundedByMe focuses on companies. The firm screens potential applicants and allows only about 8% of companies to raise funds. Participating companies have the choice of giving investors shares or rewards. The largest fundraising size FundedByMe permits is US$1m, and the typical investment amount is about US$1,000–$5,000.

Like other crowdfunding platforms, FundedByMe does not handle the funds raised. Instead, investors use a third-party payment portal and participating companies pay FundedByMe a 6% cut of the funds raised. If companies do not reach their fundraising targets, no money is collected.

In Hong Kong, a platform called SeedAsia was launched last year with a minimum fundraising investment of about US$2,000 per person.

SeedAsia allows investors to buy shares in a special purpose vehicle, which, in turn, invests in a start-up company, rather than allowing investors to take a direct interest. Start-up companies can sell securities, including shares or convertible notes.

SeedAsia did not respond to an email from IFR, and there was no sign from its website that any equity raisings had been launched on its platform.

Investors need to show they are qualified investors in their home countries before they are accepted as members of SeedAsia. FundedByMe will be open to retail investors.

Singapore first

FundedByMe began in Sweden in 2011 and launched its equity crowdfunding portal the following year. Participating companies not only have to pay the site a 6% cut of funds raised, they also need to hire their own legal and financial advisers to deal with the implications of taking on more shareholders.

Each funding campaign has three stages: pre-round, in which entrepreneurs gauge feedback, decide whether or not to proceed, and in which investors can make commitments; open round, during which investors can buy shares and those who committed in the pre-round are automatically given allocations; and closed round, when a campaign hits its funding target and closes. Typically, the pre-round lasts up to 45 days, and the open round lasts 45 days.

Daboczy said FundedByMe chose Singapore as its first Asian hub because of its status as a financial centre, the stability of the government and the city state’s high usage of social media and technology.

“The next step will be to get an exemption from the MAS, but our model works with or without,” he said.

In the first half of this year, FundedByMe will try to attract Asian investors, including European expats based in Singapore, to European companies on the platform. The next step will be to bring early-stage Asian companies to an international audience.

FundedByMe also plans to expand into crowd lending, in which investors would buy convertible notes that companies issued.

Having spread into eight countries in Europe already, where companies have raised €4.2m so far, China, Hong Kong, India and Australia are the next likely locations for expansion if the Singapore venture goes well.