Eq­uity re­wards to en­er­gize fi­nanc­ing op­tions for star­tups

China Daily (Canada) - - FRONT PAGE - By QI­UQUAN­LIN

The other day a friend of mine asked me whether I knewany­thing about eq­uity-based crowd-fi­nanc­ing and how it works. Her ques­tion was cer­tainly in­ter­est­ing, con­sid­er­ing that eq­uity-based crowd-fund­ing was a rel­a­tively new and in­no­va­tive fi­nan­cial tool de­signed to help star­tups and small busi­nesses.

My friend’s rea­sons for gain­ing more knowl­edge about the sec­tor were gen­uine, con­sid­er­ing that she had re­cently re­ceived a job of­fer from an eq­uity-based crowd-fund­ing com­pany. My friend was at a cross­roads of sorts as she was con­sid­er­ing a job change af­ter work­ing for 12 years as the news editor of a lo­cal tele­vi­sion sta­tion. “I need to know if the eq­uity-based fi­nanc­ing busi­ness is le­gal be­fore I take a fi­nal de­ci­sion,” she said.

Her con­cern about the le­gal sta­tus sounds rea­son­able, as I am­still one of the in­creas­ing num­ber of peo­ple who still can­not tell the dif­fer­ence be­tween illegal fund-rais­ing and eq­uity-based crowd-fund­ing, with In­ter­net fundrais­ing busi­ness boom­ing in some key cities like Bei­jing, Shang­hai, Guangzhou and Shen­zhen less than a year ago.

Illegal fundrais­ing in­volves pri­vate in­di­vid­u­als who set them­selves up as money­len­ders and then in­vite “in­vestors” to con­trib­ute to the prin­ci­pal fund, on the un­der­stand­ing that the ex­tremely high rates of in­ter­est the bor­rower is charged will bring them huge prof­its.

“It seems that eq­uity-based fundrais­ing is some­what sim­i­lar to the illegal fundrais­ing, which fo­cuses on bring­ing huge prof­its to in­vestors,” saidmy friend.

How­ever, my wor­ries were eased af­ter I chanced upon a re­port on China’s eco­nomic and so­cial de­vel­op­ment plan, which was re­leased ear­lier this year by the State Coun­cil. Ac­cord­ing to the re­port, China will launch tri­als of eq­uity-based crowd-fund­ing later this year to boost public cap­i­tal-rais­ing.

Un­like illegal fundrais­ing, crowd­fund­ing is sub­ject to rel­e­vant laws gov­ern­ing the cap­i­tal rais­ing busi­ness. For ex­am­ple, a pro­ject pro­moted on the eq­uity-based crowd­fund­ing plat­form needs to have in­vest­ment from a lim­ited num­ber of in­vestors, as the Cor­po­rate Law states that a lim­ited li­a­bil­ity com­pany should be es­tab­lished by no more than 50 share­hold­ers who make cap­i­tal con­tri­bu­tions.

Ac­cord­ing to the China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion, eight In­ter­net com­pa­nies have formed an in­dus­trial al­liance and been given per­mis­sion to con­duct eq­uity-based crowd-fund­ing busi­ness.

Yu Xiaoli, deputy gen­eral man­ager and co-founder of Yun­chou.com, a do­mes­tic In­ter­net plat­form for the cap­i­tal-rais­ing busi­ness, said the ap­proval gives the com­pany a le­gal sta­tus to con­duct eq­uity-based crowd-fund­ing.

Ac­cord­ing to Yu, the busi­ness pro­vides fi­nance for projects with a cer­tain por­tion of eq­uity as the re­ward and of­fers in­cen­tives to in­vestors by giv­ing them a piece of the pie in a bud­ding startup busi­ness.

The Shen­zhen-based com­pany has so far raised 100 mil­lion yuan ($16.12 mil­lion) for more than 30 startup projects since it was es­tab­lished a year ago, ac­cord­ing to Yu.

Since the sec­ond half of 2014, e-com­merce giants such as JD.com, Alibaba GroupHold­ing Ltd and Sun­ing Corp have also mapped out strate­gies to en­ter the boom­ing eq­uity-based crowd-fund­ing busi­ness.

Ac­cord­ing to cai­jing.com, an In­ter­net fi­nance por­tal, China has de­vel­oped 32 com­pa­nies en­gaged in eq­uity-based crowd-fund­ing busi­ness by the end of last year, help­ing raise more than 1.3 bil­lion yuan for startup and small com­pa­nies.

In ad­di­tion to giv­ing the nod for eq­uity-based crowd-fund­ing, the CSRC said plans of launch­ing busi­ness tri­als are cur­rently at the ap­proval stage.

More mea­sures should be is­sued to reg­u­late the online cap­i­tal-rais­ing busi­ness, asmy friend has de­vel­oped more con­cerns on a long-term de­vel­op­ment of the in­dus­try.

“For ex­am­ple, mea­sures like how to pro­tect in­vestors’ rights if the pro­ject fails, or does not scale up as promised, need to be in­cor­po­rated,” she said.

Like the busi­ness it­self, the eq­uity-based crowd-fund­ing maybe to­tally a newarea formy friend.

“I will grow with the busi­ness,” she said, point­ing to a dish of boiled fish with pick­led cab­bage and chili which we had as din­ner a few weeks ago.

“The fish dish looks all red with chili, sym­bol­iz­ing a re­cent bullish run of the stock mar­ket. But some­times you also need cab­bage, sym­bol­ized by the green color, which looks like the fall­ing per­for­mance of the stock mar­ket,” she said.

“I will in­vest, not in the stock mar­ket but rather in a new­fi­nanc­ing plat­form with pos­si­ble re­wards.”

She will, as I wish, find more chances to suc­ceed in her fu­ture job. And prob­a­bly I will in­vest some in the eq­uity-based fi­nanc­ing busi­ness in the near fu­ture, given that I am ap­pre­hen­sive of the cap­i­tal mar­ket fall­ing. Con­tact the writer at qi­uquan­lin@chi­nadaily.com.cn

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