Crowdfunding and Singapore Startups

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Crowdfunding & Singapore Startups

While highly developed in the United States and Europe, crowdfunding in Asia is still nascent and developing. That said, there is definitely a groundswell of interest in Singapore, and more and more entrepreneurs and innovators are turning to the service as an alternative to more traditional lines of funding.

This new interest is largely attributed to social media’s rapid growth beyond the realms of being a simple marketing tool. Now omnipresent in both public and private life, social media’s influence has led to a cultural shift in approaches to funding, and is even suggested by its name – a portmanteau of ‘crowdsourcing’ and ‘funding’, the former referring to collective effort undertaken by a distributed network of individuals to solve a problem or answer a question. Here, the common task is the raising of capital for a new product or speculative business venture, with each individual contributing a small amount – often in the single or double digits.

What is crowdfunding?

What crowdsourcing is to the solving a problem or calculating an answer, crowdfunding is to providing start-up capital. By broadening the circle of investors beyond the usual suspects of business owners, relatives and venture capitalists, crowdfunding can make entrepreneurship accessible to more people, giving them a global platform from which to draw from, rather than a regional or metropolitan one. By utilising pre-existing networks such as Facebook, Twitter, Google+ and LinkedIn, entrepreneurs can better utilise their friends, families and professional connections to get the word out about their new projects.

Why it’s important for start-ups

Crowdfunding can benefit Singaporean start-ups in more ways than one. In addition to providing a potential channel for the injection of much-needed capital, it allows business-owners to get a first-hand look at their potential customers, allowing them to take the temperature of the market. Savvy entrepreneurs may also utilise the wisdom of the crowds to gauge market-readiness for their product. In short, it offers a variety of highly-effective, low-cost ways for entrepreneurs to conduct early market research and marketing efforts:

  • The success (or failure) of a crowdfunding campaign is both a fantastic bellwether for the viability of the business idea or venture, and an early victory that may be looked upon favourably by businesses seeking funding from more traditional investors. The initial market reaction should be taken in context, but has often proved to be a reliable indication of the market’s readiness for the idea’s complete roll-out. Fundamentally, people who are likely to contribute to the success of a business proposal (colloquially referred to as ‘backers’) will only do so fi the product or service is compelling enough for them to buy as a consumer had the idea simply appeared on the market through traditional channels. Similarly, unsuccessful campaigns can provide much needed information for entrepreneurs that allows them to hone and refine their approach for future attempts.
  • The intimacy and immediacy of social media allows entrepreneurs to more closely interface with potential customers, fostering a deeper sense of participation in individual backers and a corresponding strong sense of customer loyalty.
  • Online communities that form around crowdfunding campaigns are the perfect vehicle for the dissemination of information and the running of publicity campaigns both aimed at existing backers and potential customers.
  • By providing pre-release access to the product or service to contributors (e.g. a beta or unfinished version of a video game or piece of software), entrepreneurs can test the waters, so to speak, using feedback from contributors to shape the development of the product or service so it arrives on the market in a more polished state than it otherwise would.

Crowdfunding in Singapore

The state of Singapore’s crowdfunding scene

Entrepreneurs across the United States and Europe have made great use of US-based crowdfunding platforms such as Kickstarter and Indiegogo as a key initial source of funding. These platforms have provided a crucial bridge between – in many cases – otherwise unknown entrepreneurs and ventures and a large and growing audience of potential investors. This model has led to the successful launch of a huge number of ventures across a diverse range of industries.

This said, the concept of crowdfunding remains new and its development early in most countries across Asia, though this is changing. The Singaporean crowdfunding scene is growing in scale and ability as more people with more resources become interested in the utility of the concept. Several online crowdfunding platforms have bene developed here in Singapore, including ToGather.Asia, Crowdonomic, and Cliquefund.

These and other platforms have already contributed to numerous success stories, contributing to increasing recognition of this method as a viable mode funding:

  • Project Silverline raised in excess of US$36,000 with four days left on their Indiegogo campaign with the goal of providing senior citizens with second-hand smartphones pre-equipped with apps designed to improve healthcare and personal safety. By the end of their campaign, they had raised over US$54,000 – 50 per cent more than they required at that stage to fund the scheme.
  • Bamboobee Kickstarter campaign sought US$40,000 to support a business venture aimed at producing handcrafted bicycles made from Bamboo. They ended up raising more than 97 per cent of this amount in just over two weeks, and closed the campaign with a total of US$63,879 – almost 60% more than the sought amount.

Equity-Based Crowdfunding

What is equity-based crowdfunding?

While the first-wave of crowdfunding platforms treated all provided funds as donations (with some caveats – on some platforms, pledged funds were only withdrawn from the contributors and paid to the venture if they met their fund target), many entrepreneurs are seeing crowdfunding as a possible avenue for securing investments. Selling investments in a venture via crowdfunding – also referred to as equity-based crowdfunding – is a mechanism that allows broad groups of investors who may individually lack the funds necessary to financially support a business to provide funds to start-up companies and established small businesses in return for equity. In return for a sum of money (potentially three digits or less), an investor receives ownership of a small piece of the business in the form of equity. The value of this ownership then increases or decreases in the same manner as any other share, depending on the success of the business.

Associated risks

The crowdfunding process is quite similar to the public offering process – wherein a company offers securities for public ownership and trading – and has similar risk associated with it.

The majority of jurisdictions mandate strict regulatory requirements around 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). The solicitation of investments form the general public is in most cases considered to be illegal, unless where the opportunity has been filed with the appropriate securities regulatory authority (such as the Securities and Exchange Commission in the US). This similarity to public offering has the potential to ensnare participants in a crowdfunding campaign in a diverse range of complex securities laws.

Equity-based crowdfunding in the United States

The United States has been at the forefront of legislative efforts surrounding crowdfunding. The JOBS Act (Jumpstart Our Business Startups Act) enacted in April 2012 lifted restrictions on companies that previously forbade them from selling shares to the general public through crowdfunding platforms. One of the key developments of the legislation was that funding portals engaged in the offering of crowdfunding services are required to register as a broker or a “funding portal” with the US Securities and Exchange Commission (SEC), in effect permitting equity-based crowdfunding where either the funding portal is registered with the SEC or the fundraising is conducted by a licensed broker-dealer. The enactment of the this legislation acted as a catalyst for the launching of several crowdfunding services designed to meet this precise need.

Singapore regulators’ position on equity-based crowdfunding

A risk associated with equity-based crowdfunding operations in Singapore is the potential it has to meet the requirements for an ‘offer of securities’, which are statutorily required to comply with all regulations provided by the Singapore Securities & Futures Act (Cap. 289). No law has been made that criminalises or disallows equity-based crowdfunding, but it does fall into a legal grey area where many experts are unsure whether it violates the regulations of the Securities & Futures Act. Nevertheless, many Singapore crowdfunding platforms continue to operate by circumventing the risk by prohibiting the offering of partial ownership in a company in exchange for financial contributions made by members of the public. The Terms of Use of these platforms normally explicitly exclude securities from being offered as a ‘reward’ to contributing members of the public.

This is an important distinction to make, as the majority of crowdfunding platforms based both in Singapore and around the world are rewards-based. The wild success of these platforms can in part be attributed to the offering of rewards in return for financial support. Companies can now no longer offer equities as one of these rewards. These rewards now most often take the form of specific privileges in return for the support of contributors such as early or discounted access to new products or services, or promotional material or merchandise relating to the product, invitations to launch events and others. With the removal of equities as a potential reward, it is now incumbent upon the start-up to determine what rewards they can offer to entice potential contributors to make financial contributions.

How the “offer of securities” risk has been circumvented in Singapore

ToGether.Asia was one of the pioneers of the Singapore crowdfunding scene, and has adopted a specific policy on which rewards can be provided to contributors. Under the platform’s Terms of Use, it is stated that the entity seeking investment “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, their Frequently Asked Questions page explicitly states that any campaign or start-up offering “products with financial incentives, such as repayable loans, ownership, share of profits, equity and etc” will not be accepted onto the service. ToGether.Asia allows products to be offered through the service 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 conclusion

No matter where you choose to establish your business, raising funds to begin a new venture is always a difficult task. This is true even in Singapore’s highly supporting economic environment, but is especially so during downtimes of times of recession or slow growth. These periods can be difficult for entrepreneurs as investors may choose more conservative vehicles for investment, and banks may be slow or unwilling to lend. Recessions are also directly harmful to smaller businesses, as cash-flows can affected leading to many organisations struggling to stay afloat and new businesses struggling more than ever to get off the ground.

Crowdfunding provides a credible alternative in harder economic climates by allowing businesses a more direct way to showcase their products and services directly to the people who sustain their organisation. Suitable as both a complement and a strict alternative to the traditional funding sources most frequently relied upon by Asia-based entrepreneurs such as informal loans from family and friends and government grants, modern technological advancements and the expanding role of the internet in every aspect of people’s lives are likely to make crowdfunding platforms a more popular option for entrepreneurs around the globe.

It’s important to approach these new platforms with a sense of caution, as the legal situation of crowdfunding in Singapore is still tenuous and poorly defined, so it is critical to closely read and ensure you thoroughly understand the terms and conditions of your preferred crowdfunding platform. Until the passing of legislation similar to the JOBS Act in the United States, it may be that start-ups are severely limited in what they can offer contributors in terms of compensation or reward. Currently, no securities, shares or other forms of equity investment may be provided, but this may change in the future. Without this clarification, a number of risks remain in offering equity interest in your business to the public.

This said, businesses can offer other kinds of rewards in exchange for support. Once you’ve excluded equity interest, the nature of the reward is only limited by your own imagination. Depending on the specific nature of the business, rewards can include everything from early access to your product or service, to initiations to special launch events to promotional merchandise, input on the development process or discounted price on the final product or service. It’s also important to note that crowdfunding can also add benefits other than capital to start-up, such as helping to build confidence and trust in in the business while also raising the profile of its brand. Many crowdfunding platforms also support start-ups by helping them not only build capital for the operation of the business, but also a community that’s deeply engaged in the future success of the organisation and its products and services. One of Singapore’s premier crowdfunding platforms, Cliquefund, developed a name for itself by championing a slightly different approach; social enterprises are encouraged to engage over a long period of time with potential patrons of their cause, turning them into advocates for the venture who feel a stronger connection to the business and will work harder to see it succeed.

In a nutshell, crowdfunding can be seen as the end result of a growing reliance on social media and a widening pool of angel investors. Successful crowdfunding campaigns are a great tool not only for building wealth into the company, but cultivating a strong customer-base ahead of the public release of any product or service and raising the public profile of the start-up company. Entrepreneurs are advised to seek legal guidance prior to embarking on any crowdfunding campaign offering any monetary reward to members of the public.