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.
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 firstname.lastname@example.org
Kyle Lam Ching-hao, CEO,
Big Bloom Investment US-based platforms such as Kickstarter (left) and Indiegogo have popularized the rewardbased variety of crowdfunding.