Not in with the crowd

Crowd­fund­ing plat­forms may be all the rage in the West but Hong Kong has yet to offf­fer an at­trac­tive play­ing fi­field for lo­cal hope­fuls. Luo Weit­eng re­ports.

China Daily (Canada) - - FRONT PAGE - In Hong Kong

There is cer­tainly strength in num­bers. As the new­est growth driver in the global crowd­fund­ing in­dus­try, eq­uity crowd­fund­ing vol­ume bal­looned to $1.1 bil­lion last year — an eye-pop­ping 182 per­cent jump from 2013 and mark­ing a ban­ner year of growth.

But de­spite the hype, the past few years have seen Hong Kong new­com­ers strug­gle to fit into the global eq­uity crowd­fund­ing scene — which em­bod­ies a new way for star­tups to fi­nance their growth — with the roll­out of a hand­ful of plat­forms.

At least four lo­cal eq­uity crowd­fund­ing web­sites are known to be op­er­at­ing amid the bur­geon­ing lo­cal crowd­fund­ing scene, but of­fi­cial fig­ures are un­avail­able.

Hav­ing strug­gled to sur­vive and thrive for two to three years, Fund2.Me and Colony88, two of the four head­line­mak­ing lo­cal eq­uity crowd­fund­ing sites, ended up hav­ing to close down.

Regular re­ward-based crowd­fund­ing, the va­ri­ety made popular by global crowd­fund­ing sites Kick­starter and Indiegogo, has made its mark as a fundrais­ing chan­nel for char­i­ta­ble causes, cre­ative projects, and con­sumeror­i­ented tech­nol­ogy prod­ucts.

By con­trast, eq­uity crowd­fund­ing of­fers in­vestors a piece of the com­pany and hope­fully a re­turn on their in­vest­ment.

Appedu (Hold­ing) Ltd, an e-learn­ing plat­form for stu­dents to link up with tu­tors for one-on-one in­stant on­line classes, was among the first batch of star­tups in the ter­ri­tory to turn to eq­uity crowd­fund­ing for sourc­ing cap­i­tal.

How­ever, its cam­paign to find share­hold­ers on Fund2.Me turned out to be a fail­ure, with the com­pany only man­ag­ing to raise 10 per­cent of its tar­geted $1.5 mil­lion.

Appedu founder Ti­mothy Yu Yauhim de­cided against an­other at­tempt at an eq­uity cam­paign, choos­ing rather to fall back on the tra­di­tional fundrais­ing chan­nel of an­gel in­vestors.

Yu pointed out that eq­uity crowd­fund­ing, a fea­si­ble route to cap­i­tal though it may be for other star­tups, has proved to be a less than sen­si­ble choice for soft­ware-ori­ented new­com­ers like Appedu.

While sell­ing off com­pany shares to in­vestors un­der eq­uity crowd­fund­ing, the star­tups also give out some of their di­rec­tor­ship po­si­tions. Yet, the na­ture of crowd­fund­ing is such that in­vestors usu­ally come in large num­bers with rel­a­tively tiny in­vest­ment size, which means star­tups have to re­port to a crowd of share­hold­ers and it can re­ally amount to a lot of work, said Yu.

What star­tups would pre­fer, said Yu, is a hand­ful of share­hold­ers who in­vest in tidy sums, which is some­thing that tra­di­tional fundrais­ing chan­nels rather than eq­uity crowd­fund­ing can of­fer.

Still, it may be too early to ar­gue over how well eq­uity crowd­fund­ing could work for the city’s young firms.

“So far, crowd­fund­ing is a new thing in Hong Kong, not to men­tion eq­uity crowd­fund­ing, which seems an even more dis­tant propo­si­tion for the ter­ri­tory,” ob­served Jackie Lam, direc­tor of Big­col­ors.

Once among the afore­men­tioned at­ten­tion-grab­bing eq­uity crowd­fund­ing plat­forms in Hong Kong, Big­col­ors has ad­justed its busi­ness model since its 2013 launch, repo­si­tion­ing it­self as a startup fund.

Lam said this is not be­cause Big­col­ors is bear­ish on the city’s out­look for eq­uity crowd­fund­ing. It is just that the re­sources at hand make Big­col­ors more suited to be­com­ing a startup fund.

The high-fly­ing world of in­vest­ment will cer­tainly em­brace the ex­cit­ing pro­jec­tion from crowd­fund­ing ad­vi­sory firm Mas­so­lu­tion that eq­uity crowd­fund­ing may grow at a com­pound an­nual rate of 114 per­cent over the next few years.

Yet, Hong Kong ap­pears ill-equipped to jump on the bandwagon.

“With­out a hand­ful of suc­cess­ful star­tups, a bunch of pro­fes­sional an­gel in­vestors with exit (strat­egy) ex­pe­ri­ence, ven­ture cap­i­tals with a clear vi­sion and track record, and a cul­ture that en­cour­ages and praises peo­ple who choose to ex­plore a path on their own, cur­rently I can­not see mar­ket op­por­tu­ni­ties in the city for eq­uity crowd­fund­ing,” said an­gel in­vestor Kyle Lam Ching-hao, CEO of Big Bloom In­vest­ment.

Lam be­lieves the lo­cal startup ecosys­tem is not ma­ture enough for eq­uity crowd­fund­ing to catch on in the city, where in­vestors are un­fa­mil­iar with star­tups and gen­er­ally con­ser­va­tive, and would rather put money into more sta­ble in­vest­ment like stocks and prop­erty.

Also, com­pared with for­eign eq­uity crowd­fund­ing plat­forms like the US-based An­gelList, what lo­cal sites lack are syn­di­cates, or pro­fes­sional in­vestors form­ing a mini fund with a track record for peo­ple to con­duct due dili­gence.

“The big pic­ture is that it is hard for lo­cal sites to work, even if they are on the same com­pe­tency level as, or even bet­ter than, their for­eign coun­ter­parts,” Lam said.

The lo­cal legal en­vi­ron­ment stands as an­other hur­dle, with not many in­vestors get­ting ad­mis­sion tick­ets to the game.

Un­der Hong Kong’s reg­u­la­tory frame­work, only pro­fes­sional in­vestors with at least $1 mil­lion to chip in can par­tic­i­pate in cam­paigns for eq­uity crowd­fund­ing.

More­over, such sites need to be ac­cred­ited af­ter meet­ing a long list of cri­te­ria, and must also be li­censed by the Se­cu­ri­ties and Fu­tures Com­mis­sion (SFC).

And the hard fact is there are no spe­cific reg­u­la­tions or guide­lines on eq­uity crowd­fund­ing adopted by the SFC that lawyers can re­fer to, said Simon Deane, part­ner for fi­nance and in­sol­vency at Hong Kong’s old­est and largest in­de­pen­dent com­mer­cial law firm, Dea­cons.

Deane re­called that sev­eral clients, in­clud­ing one from the Chi­nese main­land, want­ing to launch crowd­fund­ing plat­forms in Hong Kong came to him for legal ad­vice.

All of them, who could hardly be­lieve that start­ing a crowd­fund­ing plat­form in global busi­ness hub Hong Kong could be so dif­fi­cult and the pro­ce­dure so un­clear, ended up be­ing scared away by the strin­gent reg­u­la­tions, said Deane.

“We don’t think the SFC has granted ap­proval to a col­lec­tive in­vest­ment scheme in­volv­ing crowd­fund­ing yet,” he said.

Although rules around eq­uity crowd­fund­ing are still be­ing ham­mered out across the globe, the game was or is be­ing made pos­si­ble in many coun­tries in­clud­ing the US and UK, and even the Chi­nese main­land.

The US Congress pro­mul­gated in 2012 the “Jump­start Our Busi­ness Star­tups Act” to al­low small en­ter­prises to raise funds from gen­eral in­vestors, while the amend­ment rules re­lat­ing to eq­uity crowd­fund­ing in the UK came into force last year, al­low­ing com­pa­nies to raise funds from re­tail in­vestors.

And on the main­land, at this year’s Na­tional Peo­ple’s Congress an­nual meet­ing in March, the cen­tral gov­ern­ment pro­posed the le­gal­iz­ing and reg­u­lat­ing of eq­uity crowd­fund­ing.

He­len Fok ka-man, coun­sel at the global law firm Clif­ford Chance, told China Daily it may be more ap­pro­pri­ate to reg­u­late eq­uity crowd­fund­ing us­ing the ex­ist­ing reg­u­la­tory frame­work, rather than cre­at­ing new ones.

As an al­ter­na­tive to eq­uity crowd­fund­ing, what the gov­ern­ment can con­sider to en­cour­age star­tups is to re­lax the rel­e­vant li­cens­ing re­stric­tions and al­low li­censed ven­ture-cap­i­tal fund man­agers to mar­ket in­vest­ments op­por­tu­ni­ties in star­tups to cer­tain high net-worth or so­phis­ti­cated in­vestors, noted Fok. In her view, there is no real short­age of cap­i­tal avail­able for in­vest­ment, whereas very of­ten the prob­lem is the lack of ex­pert in­ter­me­di­a­tion be­tween sources of cap­i­tal, and the huge va­ri­ety of po­ten­tial star­tups.

The gloomy land­scape has made the founders of some lo­cal sites feel that crowd­fund­ing in the city is mainly con­fined to public wel­fare and cre­ative projects.

Yet, Jackie Lam from Big­col­ors be­lieves eq­uity crowd­fund­ing is a needto-have for Hong Kong, even though it re­ally needs some “fine tun­ing” along the way, set­ting clear guide­lines for in­ter­ested par­ties, pro­mot­ing in­vest­ment ed­u­ca­tion and cre­at­ing an en­vi­ron­ment con­ducive to star­tups.

As a world-renowned fi­nan­cial cen­ter, Hong Kong has what it takes to spark a boom for eq­uity crowd­fund­ing, Lam noted. “Oth­er­wise, promis­ing com­pa­nies lack­ing fi­nan­cial in­come streams may vote with their feet and mi­grate to Sil­i­con Val­ley, Sin­ga­pore or some other com­mu­nity that pro­vides nec­es­sary tools for star­tups to be fi­nanced and thrive,” she said. Con­tact the writer at sophia@chi­nadai­lyhk.com

PHOTO PRO­VIDED TO CHINA DAILY

Kyle Lam Ching-hao, CEO,

Big Bloom In­vest­ment US-based plat­forms such as Kick­starter (left) and Indiegogo have pop­u­lar­ized the re­ward­based va­ri­ety of crowd­fund­ing.

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