Equity crowdfunding is slowly gaining traction in Asia as countries begin enforcing new regulatory measures amid a pronounced start-up boom.
The practice, essentially a group of investors pooling funds to buy shares in start-ups via crowdfunding sites, is sometimes hailed as the democratization of finance and the next leg in funding for small-to-medium enterprises (SMEs).
More than $16 billion was raised through global platforms last year, and that’s expected to double in 2015, according to a report by research firm Massolution earlier this year. By 2016, global equity crowdfunding could account for more funding than today’s entire venture capital (VC) industry, the report added.
As bank lending in several Asian economies begins to slip, governments are increasingly betting on this alternative financing channel to boost entrepreneurship and innovation.
Malaysia became the first country in Asia-Pacific to legislate equity crowdfunding, approving six operators earlier this year. Thailand, meanwhile, only released an operating framework this year.
Speaking at the second annual Crowdfunding Asia summit in Singapore on Monday, Thailand’s Securities Exchange Commission director Sarica Apiwatthakakul addressed the intricate challenges regulators face.
“We don’t want the rules to be too burdensome for entrepreneurs so we don’t want to regulate them in the same way we do initial public offerings (IPOs),” Sarica said.
Indeed, equity is much more complicated than other forms of lending, such as peer-to-peer (P2P), echoed Gerben Visser, director of the Singapore FinTech Consortium.
“You need to find additional value apart from just providing money, plus how are you to going manage social relationships with your investors? You cannot apply IPO regulations to this,” Visser said.
Among the rules Thailand has implemented, portals must undertake due diligence of companies seeking to raise cash and make the necessary disclosures to investors, Sarica said. Retail investors meanwhile must take a knowledge test and if they pass, they are given investment limits per company.
Tech-savvy Singapore is also making strides on developing the practice. In January, the local stock exchange established a partnership with venture capital firm Clearbridge Accelerator to develop an equity crowdfunding platform that links accredited investors with start-ups.
In nearby Indonesia however, equity crowdfunding remains a very small part of overall financing so there isn’t much focus on formalizing guidelines, noted Iggi Achsien, an independent commissioner at Bank Muamalat Indonesia, a shariah-compliant lender. For now, he believes regulators are more concentrated on P2P lending. Once rules there are in place, it will be easier to move on equity crowdfunding, he said.
Overall, the region is undoubtedly well behind North America. Last week, the U.S. introduced new laws allowing companies to raise a maximum of $1 million in a one-year period from individuals with a net worth under $100,000. In the past, only accredited investors — or those with annual incomes of at least $200,000 or a net worth of $1 million — were allowed to participate.
But the different types of portals complicate the picture for lawmakers globally.
OurCrowd is widely touted as the leading equity crowdfunding platform, having raised more than $130 million for 70 portfolio companies since its 2013 launch.
“We’re not about the man on the street. We’re exclusive, we’re like Goldman Sachs. You have to be an accredited investor to work with us,” said CEO Jon Medved.
OurCrowd’s entry point is $10,000, a sum affordable for what Medved calls “the mass wealthy.”
He’s catering to the world’s billionaires, who are becoming increasingly shut off from hot start-up deals. “I’ll take anybody to dinner who can get into Sequoia Capital. They don’t need your money,” he remarked. “Today, funds are closed…the process is oligarchical and closed off to outsiders.”
Outside OurCrowd’s “exclusive” ethos, there’s KoreConX, a free platform that bills itself as more “open and democratic” by streamlining all the players involved in capital raising, from regulators, lawyers and portals.
“Every equity portal is facing two problems right now: one, every company that comes to them, almost 99 percent, are turned away because they’re not due-diligence ready. Secondly, when companies have raised money, they get scared at managing all their shareholders,” said CEO Oscar Jofre.
He’s hoping KoreConX will solve that by helping companies conduct due diligence, including shareholder administration and communication
“OurCrowd is beginning background checks on investors, so if you don’t qualify, you don’t get to participate…It’s not just an accredited investor, it’s a special type of accredited investor….OurCrowd’s VC-esque model looks good in the beginning, but it’s just not sustainable.”