Crowdfunding: The Rewards of Social Finance

Hong Kong needs to embrace new funding channels if it is to remain at the forefront of the financial markets, says Yeone Fok*.

At the recent International FinTech Symposium held at Hong Kong Science Park, Jason Best from Crowdfund Capital Advisors (CCA) predicted that, “we talk about ‘crowdfunding’ now, but I think in five years we won’t talk about it anymore, it will just be funding.”

Best, who helped push through the 2012 legislation that legalises equity and debt-based crowdfunding in the US, made a compelling push for Hong Kong to also legalise online finance for equity crowdfunding.

The last few weeks have seen the SAR play host to a number of fintech events as it positions itself for leadership in global fintech advancements. However, Hong Kong remains the one major jurisdiction in the region that has yet to introduce specific laws or regulations in relation to crowdfunding. Innovative and entrepreneurial ventures must be funded through the private capital markets, by traditional means that have not changed for the last 30 years. Or, as has increasingly been happening, such creativity and innovation simply looks outside of Asia for its crowdfunding solutions.

According to Massolution, 2014 saw US$16bn raised through global crowdfunding platforms, and that number is expected to more than double this year. By 2016, expectations are that the global crowdfunding industry will account for more funding than the venture capital industry does today. The World Bank further estimates that within the next 10 years global crowdfunding volumes will exceed US$90bn a year. This rapid growth represents significant market opportunity and a potentially game-changing boost to global entrepreneurship, job creation, innovation and investing with social impact.

Crowdfunding is the aggregation of small amounts of money from a large number of people to fund projects, causes, businesses or loans, typically via an online platform. Fundraising usually occurs within a pre-defined time period and normally with a target fundraising goal. Crowdfunding is more commonly categorised across four different types: donation, rewards, equity, and debt.

Donation-based crowdfunding involves funds raised for charitable or non-profit making causes. Rewards-based crowdfunding promises investors returns in the form of “perks” which could be physical goods, services or discounts. This type of crowdfunding is often used for the pre-sale of goods or services to launch a business idea, without relinquishing equity in the company or incurring debt. Equity crowdfunding gives investors ownership stakes in a company in return for their monetary contributions. Debt crowdfunding, which can include the better known “peer-to-peer lending”, typically aggregates funds for a larger loan and gives investors a yield on the loans they make.

Donation and rewards-based crowdfunding can be considered community-based crowdfunding that provide non-financial returns and are not regulated by securities or banking regulators. Equity and debt crowdfunding, on the other hand, seek to provide investors with a financial return and are regulated by either securities or banking regulators.

Hong Kong, and Asia more broadly, stands to benefit from crowdfunding. CCA in a 2013 survey of organisations in North America, Europe and Africa found that 39% of respondents hired an average 2.2 new people after crowdfunding and an additional 48% reported plans to create additional jobs. The study also found that crowdfunding resulted in an average quarterly increase in sales (not including the revenue raised through crowdfunding) of 24% with an average 351% increase for equity-based crowdfunding. Furthermore, 28% of respondents completed rounds of traditional angel / venture capital investment within three months of crowdfunding, and an additional 43% were in talks with institutional investors.

Crowdfunding has already been identified on the mainland as an important part of China’s “Internet Plus” strategy. Just weeks ago China’s State Council posted on the central government’s website its support for expanding equity crowdfunded projects as a “useful complement” to traditional equity fundraising for startups and small companies.

The biggest obstacle for Hong Kong, though, may not be the lack of legal clarity. With the lowest percentage of consumers in Asia who make purchases online, it is clear that Hong Kong faces an additional challenge as its investors, consumers and donors still prefer the offline world.

Crowdfunding was first popularised outside of Asia by donation and rewards-based platforms that encouraged and praised creativity and charitable giving. Perhaps what Hong Kong needs first is to build a strong online community of individuals and organisations, willing to share and exchange creative ideas, providing the virtual space for innovation to thrive. The beta launch of SparkRaise at the end of this year will test this market – a new, homegrown crowdfunding portal with mobile app to support a network of social good, creativity and innovation. SparkRaise is a Hong Kong-based hybrid rewards and donation crowdfunding platform, which is fully integrated with social networking tools to encourage and support entrepreneurs, non-profits, creators – and importantly – a culture of innovation and creativity.

Regulatory clarity around equity crowdfunding in Hong Kong is important. However, for Hong Kong to remain competitive in the future and offer innovative and disruptive solutions to the financial services and other industries, it must first continue to strengthen a culture of online social collaboration from which to grow.

* Yeone W. Moser Fok is founder and CEO of SparkRaise and a former banker at Credit Suisse, JP Morgan and Deutsche Bank.

This article was first published by International Financing Review Asia (IFR Asia).