Crowdfunding & Singapore Startups

In Asia, the concept of crowdfunding is still relatively new and in its early stages of development. But the crowdfunding scene in Singapore appears to have taken root and is growing fast in popularity.

With the fast growth of social media, the influence of such media has grown beyond being a mere marketing tool. In fact, this influence has also extended to business funding through the phenomenon of crowdfunding. This portmanteau takes after the original “crowdsourcing” and is used to refer to the collective effort of a large network of individuals who each contribute a small amount of capital to finance a new speculative business venture.

What Is Crowdfunding?

The practice of crowdsourcing is a broader concept of obtaining needed services, ideas or content by soliciting and leveraging small contributions from a large group of people, rather than from traditional employees or suppliers. Crowdfunding applies this concept to the collection of funds from parties to finance a wide variety of projects and ventures.

Crowdfunding has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised to a global audience, and beyond the traditional circle of owners, relatives and venture capitalists. It makes use of the easy accessibility of vast networks of friends, family and colleagues through websites and online communities like Facebook, Twitter, Google+ and LinkedIn to get the word out about a new business and attract potential investors.

Importance for Startups

Beyond securing seed money, crowdfunding offers a wide variety of non-financial benefits by tapping into the wisdom of crowds. These are especially useful to start-ups as they offer several effective, low-cost ways of receiving market feedback and word-of-mouth marketing:

  • The success of a crowdfunding campaign serves as a good indication of the viability of the business idea and a test for initial market reaction, because people are likely to contribute to a business proposal only if its product or service is compelling enough for them as consumers to want to support and actualize. Similarly, an unsuccessful campaign can provide valuable market feedback.
  • Leveraging social media allows a more intimate audience engagement. This structure develops a deeper sense of participation amongst individuals, and consequently a deeper sense of consumer loyalty.
  • Start-ups are able to disseminate information and publicity campaigns more efficiently through online communities
  • Businesses may continue to gather feedback from contributors by offering pre-release access to contents, services or products as a part of the funding incentives, thus providing businesses with instant access to an on-going market testing capability.

Crowdfunding in Singapore

Singapore’s crowdfunding scene

In recent years, established US-based crowdfunding platforms such as Kickstarter and Indiegogo have proved to be important sources of finance for entrepreneurs in the United States and Europe. They have successfully aiding start-ups to reach a large audience of potential investors who have funded their businesses.

In Asia, however, the concept of crowdfunding is still relatively new and in its early stages of development. But the crowdfunding scene in Singapore appears to have taken root and is growing fast in popularity. There are several Singapore-based online sites that have appeared on the scene, such as ToGather.Asia, Crowdonomic, and Cliquefund.

As of late 2013, the track records of some of the Singapore-based projects have confirmed the  potential of this mode of funding:

  • Project Silverline, which aims to provide senior citizens with second-hand smartphones armed with healthcare and personal safety apps, raised US$36,000 with four days remaining in their campaign on Indiegogo, and successfully raised a total of US$54,001 at the end.
  • Bamboobee’s campaign on Kickstarter raised a total of US$63,879, which was almost 60% more than the initial pledged US$40,000 goal. More impressively, the project, which is a business venture to produce handcrafted bamboo-made bicycles, received US$39,000 with more than 2 weeks to go in their 33-day long campaign.

Equity-Based Crowdfunding

What is equity-based crowdfunding?

Traditional crowdfunding platforms treat funds as donations, but entrepreneurs are increasingly looking to crowdfunding as a good way of securing investments. Selling investments via crowdfunding, or equity-based crowdfunding, is a mechanism that enables broad groups of investors to fund start-up companies and small businesses in return for equity. Investors give money to a business and receive ownership of a small piece of that business (in the form of equity). The value of their ownership can increase or decrease, depending on whether the business succeeds.

Risks associated with this type of crowdfunding

The crowdfunding process is very similar to a public offering process, where a company offers securities for public ownership and trading. This similarity extends to the risks involved.

In most jurisdictions, there are many regulatory requirements surrounding a public offering (such as requiring the issuing company to publish a prospectus detailing the terms and rights attached to the offered securities, as well as information on the company and its finances). Soliciting investments from the general public is most often illegal, unless the opportunity has been filed with an appropriate securities regulatory authority (such as the Securities and Exchange Commission in the US). Indeed, the act of crowdfunding thus brings up the possibility of getting ensnared in various securities laws.

US legislation to allow equity-based crowdfunding

In the US, there have been notable developments in this area. In April 2012, the JOBS Act (Jumpstart Our Business Startups Act) was enacted, which lifted restrictions on companies from selling shares to the general public via crowdfunding platforms. Among other things, the legislation mandates funding portals that offer crowdfunding services to register with the US Securities and Exchange Commission (SEC) as a broker or a “funding portal”. In essence, the JOBS Act enables equity-based crowdfunding when such fundraising is conducted by a licensed broker-dealer or via a funding portal that is registered with the SEC. Since the enactment of this legislation, many crowdfunding services have been launched to fill this rapidly evolving role.

Singapore’s position on equity-based crowdfunding

In Singapore, there is a risk associated with equity-based crowdfunding,  as it could trigger an “offer of securities”, which must then comply with the regulations set forth by the Singapore Securities & Futures Act (Cap. 289). There is no law that allows or disallows equity-based crowdfunding, and it is not completely clear whether equity-based crowdfunding does in fact violate the Securities & Futures Act. Nevertheless, this risk appears to have been circumvented by Singapore crowdfunding platforms, which prohibit the offer of equity in return for the financial contributions from the public. In most cases, the Terms of Use for these platforms specifically exclude securities from the ‘rewards’ that can be offered to the public. Some examples are elaborated below.

It appears that for most of the Singapore-based platforms, the crowdfunding system is rewards-based, and they help start-ups raise funds from the public by rewarding their supporters in various ways that do not include the issuance of equity in the business. For instance, if someone decides to support a particular start-up, they could be granted specific privileges in return for their support, such as early access to the next release of a popular game or a new product or service, promotional material, invites to launch events, etc. It is up to the start-up to determine what they can offer to make their solicitation of funds attractive to the public.

How Singapore crowdfunding services have circumvented the “offer of securities” risk

A policy on “rewards” has been adopted by ToGether.Asia, which was the pioneer platform to introduce crowdfunding services in Singapore. Under ToGether.Asia’s Terms of Use, it is stated that the product creator (or start-up) “may only offer non-monetary products… provided that the offering of such Products are lawful under all applicable laws, including without limitation state and federal securities laws”.  Furthermore, in their FAQs, it is explicitly stipulated that they will not accept any campaigns or start-ups that offer “products with financial incentives, such as repayable loans, ownership, share of profits, equity and etc”. ToGether.Asia allows products to be offered if they are “creative products with clearly defined goals and expectations. Creative products refer to products related to films, music, books, technology, design, art, games, environment (green products) and fashion.”

In Summary

Although Singapore offers a very supportive environment for new businesses and entrepreneurship, raising funds for a new venture is a challenging task regardless of location. This is especially so during times of recession or slow economic growth, when banks may be slow to lend and investors may be more prudent in parting with their money. Currently, in a seemingly relentless recession wave, small businesses are struggling more than ever to stay afloat, and entrepreneurs are not facing favorable odds.

Crowdfunding offers a promising chance of success by allowing start-ups to showcase their businesses and projects to the entire world. It can be an alternative or a complement to traditional funding sources such as government grants and loans from family and friends, which are relied upon by most Asian start-ups. With modern technological advancements and the exponentially growing usage of the Internet, it is likely that crowdfunding platforms will gain popularity amongst entrepreneurs around the globe.

That said, it is important to tread carefully. Crowdfunding in Singapore is still fraught with many legal uncertainties, and it is always advisable to read the T&Cs of your chosen crowdfunding platform. Until Singapore provides clearer guidance or legislation (similar to the JOBS Act in the US), it would appear that start-ups are unable to offer securities, shares, or any other form of equity investment as part of a crowdfunding campaign. Without such clarity, there are many inherent risks involved in offering an equity interest in your business to the public.

However, other types of rewards are allowed. Rewards can be anything in the imagination of the start-up, such as granting early access to products or services, or invites to special launch events, etc. Crowdfunding can also add non-monetary value to start-ups. It is a great way to market the business and build confidence and trust amongst the general public. In fact, many crowdfunding platforms not only help start-ups acquire funding, but also help them acquire a community with deep public engagement. For instance, one of the newest Singapore platforms, Cliquefund, has introduced a slightly different approach; it offers a platform for social enterprises to participate in long-term engagement with potential patrons of their cause, thereby transforming these patrons into advocates, who, in turn, feel that they have a vested interest in the wellbeing of the social enterprise.

In short, crowdfunding is social networking meets angel investing. A successful crowdfunding campaign can be a great tool for sourcing potential customers, as well as marketing and building the public profile of a start-up company. If your crowdfunding project will involve any offer of monetary rewards to the public, it would be best to seek proper legal guidance before embarking on the project.

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