EBAC Sustainable Business Network (ESBN) Task Force on Digital Economy ESCAP Business Advisory Council (EBAC)

Enabling Equity Crowdfunding Opportunities for SMEs and Entrepreneurs in Asia and the Pacific

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Disclaimer United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) was not directly involved in the design, development and publication of this working paper, which was the sole activity of the ESCAP Sustainable Business Network (ESBN) Task Force on Digital Economy. The opinions expressed in this paper are those of the authors and do not necessarily reflect the views of the United Nations. This document has not been formally edited.

Acknowledgements The preparation of the paper would not have been possible without the valuable contributions of Bernie Chan, Benjamin Twoon, Chris Fung, Junxian Lee, Michelle Tang, Khailin Chua and other members of Fundnel Limited. I would also like to thank Barbara Meynert, Masato Abe and members of the ESBN Task Force on Digital Economy for their insightful comments. I also thank Robert Oliver for editing the manuscripts.

Sam Ng ESCAP Sustainable Business Network (ESBN)

Task Force on Digital Economy October 2016

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Introduction As the global economy undergoes a period of correction and large corporations look to scale down on regional operations and refine expansion plans, the role that small and medium-sized enterprises (SMEs) and entrepreneurs play in the new growth model for Asia and the Pacific becomes ever more significant. SMEs are widely recognized by policymakers as the backbone of the region’s economies, contributing to employment, innovation, economic growth and ultimately progress of the region. 1 The Asian Development Bank (ADB) reports that SMEs account for more than 96 per cent of total enterprises in Asia-Pacific countries and employ 62 per cent of total labour force in the region.2 Depending on the stage of the business life cycle that they are in, SMEs have specific and different financing needs.3 From working capital, to expansion, and even restructuring, the access that SMEs have to capital or financing is a key determinant of the fate of the SME. Yet a poignant conclusion that comes from ADB’s research, one that corroborates with other research in the domain, is that the major barrier to the survival and growth of SMEs is the limited access to bank credit. This is exacerbated by the reliance on a bank-centred financial system in Asia and the Pacific. According to ADB’s research, only 18.7% of total bank lending were to SMEs in 2014 and this has been a decreasing trend since the global financial crisis of 2008. In South-East Asia and the Pacific has approximately nine million of formal SMEs do not have sufficient access to finance. What this implies is that there is an unserved market and funding gaps that are not met, with many SMEs still looking for financing outside traditional funding sources to address the lack of access to bank lending.4 What about entrepreneurs and startups? A number of industry experts have found that the success rates of startups are low, and the lack of financing has been identified as one of the major causes of startup failure.5 The reality is that many startups have no access to traditional sources of financing, having to resort to family and friends along with limited seed and venture funds, to tide them through the initial years of setting up and growing the business.6 However, the advent of technologies and alternative financing models has redefined the way SMEs and entrepreneurs view fundraising, presenting a new solution that taps the wealth of the masses: crowdfunding. Crowdfunding is by definition, “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the internet.”7 Crowdfunding can be broken down into four broad categories: (i) donation-based; (ii) lending; (iii) rewards-based; and (iv) equity crowdfunding. 8 Donation-based crowdfunding is executed to support business non-profiting individuals. Lending is a risk lending between individuals, commercial entities or nonprofits. Rewards-based crowdfunding is where contributions are exchanged for current or future

1 Abe, et al. (2012). Policy Guidebook for SME Development in Asia and the Pacific. Bangkok: ESCAP. 2 ADB (2015). Asia SME Finance Monitor 2014. Mandaluyong City, Philippines: Asian Development Bank. 3 Abe, et al. (2012). 4 ADB (2015). 5 Graham, P. (2007, August). How not to die. Retrieved from http://www.paulgraham.com/die.html; CB Insights (2015, 13 December). 146 Startup Failure Post-Mortems. Retrieved from https://www.cbinsights.com/blog/startup-failure-post-mortem/. 6 Abe, et al. (2012). 7 Oxford Dictionary (n.d.). Crowdfunding. Oxford Dictionary. 8 Massolution (2015). 2015CF Crowdfunding Industry Report. Massolution.

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goods or services. 9 Equity crowdfunding is where the crowd exchanges money for equity or equity-linked securities, with an expectation of financial return. Each of these securities come with their own sophistication, returns and appeals to the mass market of investors. This paper focuses on equity-based crowdfunding (ECF). ECF holds the revolutionary potential that leads us to explore how ECF can benefit the startups and SMEs in Asia and the Pacific as many cannot afford debt or access debt capital in the way that their larger and more established counterparts can. Given the regulatory progress and the unserved market, we seek to explore ECF and how viable it is for SMEs and entrepreneurs in the region, focusing also on the factors that facilitate its adoption. By providing insights into select case studies that have surfaced in recent times, we highlight the impact that ECF has created for businesses in the world. We also share the key drivers of ECF adoption, while presenting findings on internet penetration, access to capital and regulatory environment. Lastly, we assess the findings and conclude on how ECF can positively benefit SMEs and entrepreneurs in Asia and the Pacific, highlighting limitations and challenges that Asia-Pacific countries have to address in order to tap on the potential that ECF may bring.

Evolution of Equity Crowdfunding ECF is a method of financing whereby private companies raise funds by selling a specified amount of equity to: (i) accredited investors; and (ii) the public retail investors through an open call for funding on internet-based platforms.10 The modern crowdfunding platform leverages the power of internet and utilizes web-based technology in determining the project or company to be funded. The traditional method of fundraising and investing in a startup is a disjointed process that involves coordinating emails, calls and pitch meetings. As fundraising online looks to carry on its impressive growth trajectory, early stage venture capital is being disrupted and moving online in a more public way. This essentially catapults the traditional practice of startup investing into the new digital age. The first US-based equity crowdfunding platform, ProFounder, was launched for startups to raise investments online in 2011.11 It was, however, shut down in 2012 due to regulatory reasons. ECF started to grow in prominence in the SME and entrepreneurial capital markets in the United States when President Barack Obama passed the Jumpstart Our Business Startups (JOBS) Act in 2012.12 The Act, and the revisions that came, allowed startups and SMEs to sell securities through open platforms online, reaching out to both retail and accredited investors. The implication of this: startups and SMEs can circumvent the onerous regulatory requirements and inhibitive costs of accessing public capital markets, and instead leverage the ubiquity of the internet to reach out to a wider investor audience in a more efficient and effective manner. So far we have witnessed an exponential growth of ECF activities in the United States and Europe, a growth which has fueled a large number of SMEs with expanded capital. With a respective 239%, 182%

9 Bock, A.J., Kinder, T. Koeck, B. (2014). Exploring entrepreneurial legitimacy in reward-based crowdfunding. Retrieved from http://www.tandfonline.com/doi/abs/10.1080/13691066.2014.916512. 10 Ahlers, G. C., Cumming, D., Günther, C., & Schweizer, D. (2015). Signaling in Equity Crowdfunding. Entrepreneurship: Theory & Practice. 11 Leena. R (2012).. Fundraising Platform For Startups ProFounder Shuts Its Doors. Retrieved from https://techcrunch.com/2012/02/17/startup-fundraising-platform-profounder-shuts-its-doors/. 12 Jumpstart Our Business Startup Act (2012). United States Government.

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and 129% growth in 2013, 2014 and 2015,13 ECF is currently the fastest growing type of crowdfunding. Referring to Figure 1, money raised through ECF globally is estimated to hit US$2.52 billion by 2015. Figure 1: Equity crowdfunding volume by year US$ million

Source: Massolution (2015) 2015CF Crowdfunding Industry Report. Meanwhile, the average campaign size of ECF globally has surged from US$84,000 to US$275,000 between 2011 and 2014 (refer to Figure 2) while other crowdfunding types such as lending and reward-based crowdfunding recorded a mere average size of US$103,000 and US$3,100 respectively in 2014.12 ECF’s proven ability to raise more capital per company attracted increasing interests among entrepreneurs, which ultimately contributed to establish ECF’s rapid growth and allowed it to be one of the fastest growing crowdfunding type in the past four years (refer to Figure 3). This placed ECF solidly in the spotlight as a viable form of capital raising.

13 Massolution (2015). 2015CF Crowdfunding Industry Report. Massolution.

116

394

1,110

2,520

0

500

1,000

1,500

2,000

2,500

3,000

2012 2013 2014 2015E

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Figure 2: Average campaign size of equity crowdfunding by year US$ thousand

Source: Massolution (2015) CF Crowdfunding Industry Report. Figure 3: Growth rate of total volume of each crowdfunding type by year (2013 -2015)

Source: Massolution (2015) 2015CF Crowdfunding Industry Report.

84

190

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275

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100

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2011 2012 2013 2014

34%45% 47%

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239%

182%

129%

0%

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250%

300%

2013 2014 2015E

Donation-based Reward-based Lending-based Equity-based

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Crowdfunding, including ECF, has as well rapidly expanded across the regions in the past few years. Asia was the driver of growth. Referring to Figure 4, Asia only accounted for a mere 1.3% of the total volume in 2012, while their contribution is estimated to reach 20.9% in 2014, surpassed Europe and ranked second among all regions. From 2011 to 2015, Asia gave rise to at least 60 “unicorns”, companies valued over one billion dollars.14 Asia has also witnessed an increase in unicorn companies, with 4 in 2013, and 19 and 29 unicorns in 2014 and 2015 respectively. With ECF the main financing tool for seed and early stage companies, the technology boom also gave rise to Asian ECF. Figure 4: Volumes of crowdfunding by year (2012-2014)

In 2013, whilst ECF was still in its nascent stage, World Bank has considered ECF a suitable capital raising tool for high-growth startups in the Asian developing worlds (refer to Figure 5).

14 Lie, T. (2016). From Singapore to China, here’s a list of Asian unicorns born in the past 5 years. Retrieved from https://www.techinasia.com/talk/from-singapore-to-china-heres-a-list-of-asian-unicorns-born-in-the-past-five-years-infographic

60.40%35.50%

1.20%2.90%

0.05%

0.01%

2012 US$2.7bn

North America Europe

Asia Oceania

South America Africa

63.50%22.30%

13.30%

0.40%0.40% 0.10%

2013US$6.1bn

North America Europe

Asia Oceania

South America Africa

58.30%

20.10%

20.90%

0.30% 0.40% 0.10%

2014US$16.2bn

North America Europe

Asia Oceania

South America Africa

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Figure 5: Suitability of crowdfunding models for the developing world

Most suitable project type

Average funding sought (US$)

Suitable for exploration in Developing world?

Suitable for high-growth innovative start-ups?

Donation-based Crowdfunding Arts < $10,000 Yes

No, if capital requirements are > $10,000

Reward-based Crowdfunding Project, Product < $100,000 Yes

Yes, as a testing ground for proof of concepts

Lending (Microfinance)

Micro development < $1,000 Yes

No, if capital requirements are > $1,000

Lending (Social Lending)

Micro development < $50,000 Yes

Only if capital requirements are > $50,000

Equity Technology Innovation < $250,000 Yes, with the right

infrastructure Yes

Source: Adopted from The World Bank (2013) Crowdfunding’s Potential for the Developing World.

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Key Enablers of the Equity Crowdfunding in Asia and the Pacific In light of its global proliferation, we have taken a closer look at the key enables of ECF in emerging Asia-Pacific markets. It is believed that three standout factors contribute to its recent proliferation: (I) internet and social media penetration; (II) freer flow of capital; and (III) enabling regulatory framework. The presence of these factors have not only disrupted the traditional methods and processes of fundraising but also made the adoption of ECF more commonplace. Internet and social media penetration Given that the process of ECF involves individuals investing into a company via an internet platform, it goes without saying that internet penetration must be a prerequisite to ECF. Our study below measures the extent of internet penetration to influence the results of ECF and if there is a positive correlation between internet penetration and funds raised via ECF. We specifically sought to identify Internet penetration and the corresponding volume of ECF by country. Figure 615 plots selected countries with notable ECF volumes against Internet penetration. Figure 6: Equity crowdfunding volume and internet users by countries (2014)

Sources: Ernst and Young and the University of Cambridge (2015) The European Alternative Finance Benchmarking Report; World Bank (2014) Population and internet penetration statistics.

15 Internet Users by Country (2014). The World Bank. (2014); Wardrop, R., Zhang, B., Gray, M., & Rau, R. (2015). Moving Mainstream: The European Alternative Finance Benchmarking Report. Ernst and Young and the University of Cambridge.

675

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United States United Kingdom Germany France Netherlands Spain

Crowdfunding volume (US$million)Internet users (million)

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With a positive correlation between internet penetration and funds raised via ECF, we turn our focus to Asia and the Pacific. Figure 716 details the key Asia-Pacific markets, their respective internet penetration rates and the five-year average growth rate of internet penetration. Numerous Asia-Pacific jurisdictions have a high rate of growth of internet penetration, driving the perspective that the future of ECF in these countries is rosy. Figure 7: Internet penetration and internet penetration growth rate by country (2015)

Source: United Nations Statistics Division. (2016). Internet users (per 100 people). United Nations Statistics Division. On top of the internet infrastructure, social media penetration is considered one of the essentials to enable ECF. According to World Bank Crowdfunding Report (2014), social media penetration of the region is regarded as the essential component for a successful crowdfunding platform.17 Crowdfunding has a high social element which enables businesses to leverage on social network to raise capital. To further prove our hypothesis, we compared the ECF volume of the six nations to their number of social media users (refer to Figure 818) and subsequently found a positive correlation.

16 United Nations Statistics Division. (2016). Internet users (per 100 people). United Nations Statistics Division. Retrieved from http://data.un.org/Data.aspx?d=WDI&f=Indicator_Code%3AIT.NET.USER.P2 17 Crowdfunding’s Potential for the Developing World. 2013. infoDev, Finance and Private Sector Development Department. Washington, DC: World Bank. 18 Ernst and Young and the University of Cambridge (2015) The European Alternative Finance Benchmarking Report; We are Social (2015) Digital, Social & Mobile Worldwide in 2015.

93.3%89.9%

84.9% 84.6%82.1%

71.1%

52.7%50.3%

46.0%

39.3%

26.0%22.0%

4.7%2.3%

6.3%0.7%

3.9%

11.6%9.1% 5.0%

15.9%12.6%

23.8%

28.7%

0%

10%

20%

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Internet penetration Internet penetration growth rate

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Figure 8: Equity crowdfunding volume and number of social media users by countries (2014) US$ million

Source: Ernst and Young and the University of Cambridge (2015) The European Alternative Finance Benchmarking Report; We are Social (2015) Digital, Social & Mobile Worldwide in 2015. Applying it to the Asian context, the number of social media users in Asia is generally high (refer to Figure 9). With a positive correlation between ECF volume and social media users, Asia-Pacific countries have a solid potential in enabling ECF.

675

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United States United Kingdom Germany France Netherlands Spain

Crowdfunding volume (US$mm)

Social media users (mm)

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Figure 9: Social media users by countries (2016) Million

Source: Own development based on Worldometers population statistics (2016) and Social media penetration statistics of Digital in 2016., We are Social (2016) Capital market depth Depth of capital market of a country signifies its wealth and robustness of its financing and investing activities. Like traditional angel investments, ECF relies heavily on individual’s wealth and investing appetite. According to the study conducted in Figure 10,19 there is a positive correlation between ECF volume and the total market capitalization.

19 The European Alternative Finance Benchmarking Report (2015). Ernst and Young and the University of Cambridge; Bloomberg as of 6th July 2016.

649.7

132.7

78.2 53.0 48.1 38.4 38.1 34.9

18.1 14.1 4.8 3.6 0

100

200

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China India Indonesia Japan Philippines Replublicof Korea

Thailand Viet Nam Malaysia Australia HongKong,China

Singapore

Social media users (million)

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Figure 10: Equity crowdfunding volume (2014) and total market capitalization by country (2016)

Source: The European Alternative Finance Benchmarking Report (2015). Ernst and Young and the University of Cambridge; Bloomberg as of 6th July 2016 While ECF has not been introduced in all Asian jurisdictions currently, potential of enabling it is high. Asian countries in Figure 1120 possess a deep market depth, countries such as China, Japan, India, Republic of Korea and Australia even has a market capitalization of over US$1 trillion. With a proven wealth and investing appetite, Asian countries certainly possess the ability to enable ECF. Figure 11: Total stock market capitalization by country (2016) US$ billion

Source: Bloomberg as of 6 July 2016

20 Bloomberg as of 6th July 2016.

United States UnitedKingdom Germany France Netherlands Spain

Crowdfunding volume (US$million) 675 134 36 23 14 13

Total market capitalization (US$billion) 23,303 3,040 1,660 1,767 394 589

Crowdfunding volume (US$million)

23,303

6,167 4,905

3,784 3,040 1,767 1,660 1,544 1,242 1,076 589 487 402 394 393 386 277 70

0

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Enabling regulatory framework Another factor we consider to be crucial in enabling ECF is the regulatory environment. After all, if the consequences of operating an ECF platform are criminal sanctions, then the potential of criminal indictment may outweigh any perceived financial gains obtained through operating an ECF platform. In a regulatory landscape where no laws relating to ECF exists, the default position taken by many governments has been to regard ECF in the same manner as a security offering by a company to the public. This usually requires companies to meet specific benchmarks (for example, having a certain financial record, a viable business plan or be of a certain caliber) and, at the same time, publish extensive prospectuses explaining the background of the issuer. In the context of SMEs, satisfying existing requirements are oftentimes neither practical nor possible. As a result, many ECF platforms have and continue to exist in legal grey areas. The good news for both ECF platform operators and investors is that governments and corresponding regulations are now catching up to the needs of ECF platforms. Numerous jurisdictions have begun to regulate ECF activities, while others, including Malaysia, Republic of Korea, Singapore and Thailand, have commenced public consultations. On a general average across jurisdictions, new regulations give a cautionary green light to the operation of ECF platforms, subject, however, to two typical criteria on: (i) the amount of funding a company can raise through ECF; and (ii) the amount of funding an investor may invest. As the ECF market evolves and matures, the direction is clear in that the regulatory landscape has been slowly, but surely, catching up with progress in the ECF industry. A short summary of the regulatory landscape of key jurisdictions in Asia and the Pacific are set out in Table 1 below21:

21 All currency rates are calculated as of 31 December 2015.

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Table 1: Regulatory landscape of key jurisdictions in Asia and the Pacific Jurisdiction Governing body

and applicable regulation

Restriction Additional feature

Company side Investor side

United States22

Governing Body • Securities and

Exchange Commission

Applicable Regulation • Jumpstart Our

Business Startup (JOBS) Act Title IV

• Also known as Regulation A+

Companies are classified into two tiers Tier 1 • Can raise up to

US$20million in any 12-month period with not more than $6 million on secondary sales

Tier 2 • Raise up to

US$50million in any 12-month period with not more than US$15million on secondary sales

• Formal audits and annual reporting required

There are no restrictions for Tier 1 offerings, i.e. non-accredited investors can invest freely in Tier 1 offerings Non-accredited investors can purchase in a Tier 2 offering of no more than 10 percent of the greater of the investor’s annual income or net worth

22 Securities and Exchange Commission. (2015). Jumpstart Our Business Startup Act Title IV. Securities and Exchange Commission

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United Kingdom23

Governing Body • Financial

Conduct Authority

Applicable Regulation • FCA Rules

Limited promotion to retail clients who are certified as high net worth investors or are certified or self-certify as sophisticated investors Crowdfunding platforms have to clearly presenting the risks of the private investment activities

Retail investors who are neither “sophisticated” nor “high net worth” must certify that they are not committing more than a tenth of their net investable assets, excluding their home, pensions and life insurance After making 2 investments, investors can self-certify themselves as sophisticated investor

Investors are entitled to the Enterprise Investment Scheme 1. Income Tax Relief • 30% of the

cost of the shares

• Maximum tax relief - £300,000

• Shares must be held for at least 3 years

2. Capital Gain Tax Exemption • Must have

qualified for income tax relief, i.e. if the shares are sold within 3 years, capital gains are still subjected to tax charge

3. Loss Relief • Investors can

elect the amount of loss and set it against income

Malaysia24 Governing Body • Securities

Commission of Malaysia

Companies may only raise up to RM 3million (~US$697,000) in any 12 month period and RM 5

Retail investors can only invest a maximum of RM 5,000 (~US$1,160) in each company and no more than an

CMSB imposes a six-day cooling off period, within which investors may withdraw the full amount of

23 Financial Conduct Authority. (2015). A review of the regulatory regime for crowdfunding and the promotion of non-readily realisable securities by other media. Financial Conduct Authority. 24 Securities Commission Malaysia. Capital and Markets Service Bill 2015. Securities Commission Malaysia

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Applicable Regulation • Capital and

Markets Service Bill 2015 (CMSB).

Developments • Six ECF

platforms are expected to commence operations pursuant to the bill in late 2015 to early 2016.

million (~US$1.16million) in total through ECF platforms.

aggregate of RM 50,000 (~US$11,600) each year. Angel investors can only invest a maximum of RM500,000 (~US$116,000) within a 12-month period There are no restrictions on sophisticated investors.

their investment.

Thailand25 Governing Body • Thailand

Securities and Exchange Commission; Capital Market Supervisory Board (“SEC”)

Applicable Regulation • Capital Market

Supervisory Board No. TorChor. 3, 7 and 8/2558 (May 2015).

Developments • Since SEC

published the new rules relating to ECF which went effective in May 2015,

For offerings to retail investors, the funds raised must not exceed THB 20 million (~USD$555,000) within 12 months from the initial offering, or THB 40 million (~US1.11million) in aggregate. For offerings to non-retail investors, there is no maximum of the offering.

Retail investors can only invest up to THB50,000 (~USD$1,390) per offering of each issuer, and a maximum of THB500,000 (~USD$13,900). No restriction on an amount a professional investor can invest.

25 Capital Market Supervisory Board (2015). TorChor. 7/2558 regarding regulations on offer for sale of securities through electronic system or network; TorChor. 8/2558 regarding rules, conditions and procedures for offering for sale of shares by shareholders of limited companies; KorChor. 3/2558 regarding exemption from filing of registration statement for securities offered through provider of electronic system or network. Capital Market Supervisory Board.

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there is no active ECF operator in Thailand

Singapore26 Governing Body • Monetary

Authority of Singapore (MAS)

Applicable Regulation • Securities and

Futures Act (Cap. 289)

Company is restricted to advertise the offer.

Investors must be “institutional investors” or “accredited investors” which includes individuals with personal assets in excess of S$2million (~US$1.42million), or such investors income is not less than S$300,000 (~US$212,600) in preceding 12 months.

Retail investors are not allowed to invest via ECF platform.

26 Monetary Authority of Singapore (2016). MAS to Improve Access to Crowd-funding for Start-ups and SMEs. Monetary Authority of Singapore. Retrieved from http://www.mas.gov.sg/News-and-Publications/Media-Releases/2016/MAS-to-Improve-Access-to-Crowdfunding-for-Startups-and-SMEs.aspx

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Republic of Korea27

Governing Body • Financial

Services Commission

Applicable Regulation • Crowdfunding

regulation has only been recently introduced through the passing of the Financial Investment Services and Capital Markets Act (the “Act”) on July 6 2015. The Act will be enacted on January 2016.

Startups can raise no more than 700 million won (~USD$640,000) per year through crowdfunding portals

Each individual can invest no more than 5million won (~USD$4,570) per company per year.

n/a

Countries above are developing different crowdfunding rules suitable for their own countries, which signifies the first step of governmental recognition towards ECF. The involvement of retail investors also enables high capital flow on the platforms, which eventually bolsters the ECF industry among these countries.

27 Financial Service Commission (2015). Crowdfunding to be Introduced. Financial Service Commission. Retrieved from http://www.fsc.go.kr/downManager?bbsid=BBS0048&no=98550.

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Case Studies of the Equity Crowdfunding As ECF continues to evolve, there are a couple of cases that are worth looking into. Each of them significantly influenced and created different milestones for the ECF industry. Enabling equity injection for non-chain restaurants – EquityEats (United States) Traditionally, equity financing is extremely difficult for non-chain restaurants due to its limited scalability and slow profitability. However, EquityEats enabled equity crowdfunding for restaurants and allow the general public to invest in restaurants they like. Launched in 2014, they have so far raised over US$4.3million from 860 investors.28 Their example indicates the ability of ECF to help raise funds for B2C businesses that were traditionally unable to gain access to equity financing. ECF project with successful exit – E-Car Club (United Kingdom) E-Car Club, a pay-as-you-go rental car company, has raised £100,000 from 63 investors on CrowdCube in 2013.29 Two years later, its acquisition by Europcar has created multiplied returns for its investors.30 As a breakthrough for ECF operators worldwide, E-car’s acquisition has demonstrated the profitability of alternative forms of investments. Largest ECF project in Asia – Atzuche (China) Atzuche, an online-to-offline car rental company, has raised RMB 95million31 on JD.com in 2016. The deal is the largest ever equity crowdfunded transaction in China and was fully subscribed within 3 minutes. Like other equity crowdfunding projects, the crowdfunding round was led by private equity and venture capital firms, including Binfu Capital Partners which invested RMB 15million. This transaction signifies the potential of co-investment opportunities between VC/PEs and the general public. The speed of the fundraise also indicated the high investing appetite of ventures in China, a case which could be explored in other countries in Asia.

28 EquityEats. (2014). Press room - Successfully funded projects. EquityEats. Retrieved from https://www.equityeats.com/pressroom. 29 Crowdcube. (2013). CASE STUDY: E-Car Club. Crowdcube. Retrieved from https://www.crowdcube.com/pg/case-study-e-car-club-82. 30 Alois. J.D. (2015). Funded on Crowdcube, E-Car Club Delivers Early Investors a Successful Exit as EuropCar Acquires Company. Crowdfund Insider. Retrieved from http://www.crowdfundinsider.com/2015/07/70874-funded-on-crowdcube-e-car-club-delivers-early-investors-a-successful-exit-as-europcar-acquires-company/. 31 EastMoney.com (2016). Retrieved from http://finance.eastmoney.com/news/1354,20160429619783037.html.

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Conclusion The potential that ECF presents, as evidenced by the case studies in both the West and in Asia and the Pacific, are the synergies of collective wisdom and the power of collaborative capital. What was perceived as “too-risky” for traditional funding sources such as financial institutions, private equity funds or even venture capitals, can instead be supported by smaller commitments and ticket sizes from the crowd, powered by a combined intelligence harnessed on a common platform. This also reduces the maximum capital outlay required of each investor and limits the capital at risk to an amount that each investor is amenable to, lowering the barriers to entry to private investments, thereby increasing the probability of a company securing the financing it requires. With internet as a technological enabler acting as a bridge between SMEs/entrepreneurs and investors, the previously opaque and inaccessible domain of private investments is now liberated and democratized; quintessentially, individual investors now have access to and the power to decide upon which companies deserve capital allocation. This, in principle, should unveil a new wave of capital that is available to SMEs and entrepreneurs in Asia and the Pacific; especially important for companies that would have no access to traditional forms of finance due to the nature of their industry or company lifecycle. Yet, this potential is not without practical challenges, as countries in developing Asia and the Pacific might not have the required infrastructure and knowledge on how to ride on the benefits that the ECF brings. With some Asia-Pacific countries (Thailand, Indonesia, Philippines and India and many others) hovering below the average global internet penetration rate of 45 per cent32, the inability to access the internet precludes society from leveraging ECF platforms. Also, the benefits of ECF might not be apparent to SMEs and entrepreneurs in countries that have lower knowledge of financial literacy, preferring to tap the trusted and traditional sources of financing from banks. Adoption of this new model of finance will require a combination of basic access to the World Wide Web, and a process of educating SMEs and entrepreneurs about ECF and the benefits it brings33. Furthermore, there is the important conversation on regulations; how financial watchdogs can monitor this ecosystem and protect investors. At one end of the spectrum, some countries in Asia and the Pacific (Republic of Korea, Malaysia and Thailand) have allowed the mass market to access ECF investments, while at the other end, Singapore has only allowed this for accredited investors.34 Given that different countries in Asia and the Pacific are at different stages of developing their regulatory frameworks, with country-specific regulations, this could see different levels and rates of adoption, limiting the impact that ECF brings to the region as a whole, especially when adopted as a cross-market funding tool. There are also other factors worth exploring which, as the development of ECF in the Asia-Pacific region progresses, would be meaningful to observe. One of them is the level of financial literacy of investors35 in the country, and how that impacts their view of ECF. The other factor is that of social media penetration, and as a natural extension of internet penetration, the mechanics that drive the marketing and promotion of ECF opportunities on the internet.

32 Miniwatts Marketing Group (2015). Internet Usage Statistic. Retrieved from http://www.internetworldstats.com/stats.htm. 33 Crowdfunding’s Potential for the Developing World. 2013. infoDev, Finance and Private Sector Development Department. Washington, DC: World Bank. 34 Monetary Authority of Singapore (2016). MAS to Improve Access to Crowd-funding for Start-ups and SMEs. Monetary Authority of Singapore. Retrieved from http://www.mas.gov.sg/News-and-Publications/Media-Releases/2016/MAS-to-Improve-Access-to-Crowdfunding-for-Startups-and-SMEs.aspx . 35 The European Alternative Finance Benchmarking Report (2015). Ernst and Young and the University of Cambridge; Bloomberg as of 6th July 2016.

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Notwithstanding these limitations, ECF is ultimately a tool and platform where all investors - retail, accredited and institutional - can leverage the ubiquity of technology to reach out to unchartered territories and identify investment opportunities all around the world. More than just a form of disruptive technology, it is a technology-driven enabler that improves the efficiency and proliferation of capital allocation in support of SMEs and entrepreneurs, helping them to be identified and funded by investors that believe in the business. We are at the cusp of a new model of financing that could plug the funding gap that SMEs and entrepreneurs face. Coupled with the vantage point we have obtained from the case studies and enablers in this paper, there is strong collective belief that if harnessed correctly by respective governments, ECF is capable of supporting the tremendous growth of SMEs and entrepreneurs in Asia and the Pacific.

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