With the internet, ever-evolving and creative online community continues to push the boundaries in commercial activities, challenging traditional business models. Crowdfunding is an example of innovation in electronic commerce that has proven success. It has been used effectively in many fund raising platforms to support social cause, kick-start commercial application of new ideas, or provide financing for start-ups.
Oculus, recently announced to be acquired by Facebook for US$2 billion, had its beginning from crowdfunding. In 2012, the founder took his virtual reality game idea to Kickstarter, a crowdfunding platform, and successfully raised $2.4million there that catapulted the business. Oculus then drew significant interest from venture capital investors and grown to its current valuation, but it was crowdfunding that gave its start.
Crowdfunding models have further developed since. Those who supported Oculus put in their funds as donations, similar to crowdfunding for social benefits. However, increasingly there are equity crowdfunding and loan crowdfunding platforms that are providing small businesses with capital or alternative financing.
In the last year or so, a number of crowdfunding sites have been set up that are based in Hong Kong and target Asia. In January, StartupsHK organised “Crowdfunding 2014” and highlighted four crowdfunding platforms. Colony88 and Bigcolors are both equity crowdfunding sites to bring together crowdfunding investors and startups. Welend is an online social (peer-to-peer) lending site that connects people who need loans to those able to extend funds, without involving middlemen or banks. As it states on its website: “By removing expensive middlemen and other complexities from our business model, we make securing a personal loan easy and affordable.”
The fourth, Crowdbaron, is a real estate crowd-funding platform, said to be Asia’s first. Taking equity crowdfunding a step further, Crowdbaron’s aim is to enable ‘community-shared’ participation in real estate investment. The company is based in Hong Kong, but with the borderless internet, it can pull funds from investors anywhere in the world, and also able to invest in international real estate. Currently, the company is focusing on real estate opportunities in London, as gleaned from all 9 property investment projects listed on its website.
How does Crowdbaron apply the crowdfunding model, in the real estate investment sector typically considered traditional and personal?
It is not a time-share scheme where investors would get to enjoy the invested property. With the lowest possible investment of just 1% of a project, it is easy to get on board. The company promotes simplicity and transparency as the core strengths of its business model. Those who are interested will be provided with information about the proposed property for investment, plan for sale, cost and all fees involved.
Funding will proceed only when the company has received sufficient commitment or ‘pledges’ to meet the required amount to make the purchase. The company charges a 4% set-up fee for each project, and also a management fee of 1% per year which is payable as a back-end charge only when the property is sold. Subject to that, the community of owners will be entitled to all remaining net profit from sale. Crowdbaron does not take a share in the rental income or gain on sale of property, but neither would it share in any losses.
Although the company does not rule out property holding for rental income, in a number of investment proposals, the company clearly outlines the intention to realise the properties at target price points.
While the approach to pull funds online under the crowd-funding model for real estate investments is unique, Crowdbaron will set up an offshore company to hold the invested property and issue share certificates to all the investors who are participating and contributed funds.
However, the company will provide liquidity not normally available in real estate investments. “We allow the members to sell and transfer their shares, allowing for a more liquid investment than traditional real estate purchases.” Founder Saeed Hassan said in an interview with StartupsHK.
Such elements of equity crowdfunding platforms have attracted attention from financial regulators in a number of markets, as raising questions of securities offering. The International Organisation of Securities Commissions (IOSCO) published a report last month that warns of the potential risks from an investor protection perspective, and urges the development of international harmonised rules on equity or “financial return” crowdfunding. Just last week, the Ontario Securities Commission of Canada issued proposals to clarify crowd-funding rules and prescribe limits for investments. On Monday, U.S. Federal Reserve Jeremy Stein said the regulator is keeping an eye for potential benefits and pitfalls, although in 2012 the U.S. passed the Jumpstart Our Business Startups (JOBS) Act that include Title II and Title III relevant to crowdfunding. Title II lifted securities offering restriction in allowing crowdfunding sites that target only accredited investors. The Securities Exchange Commission recently issued proposals for new crowdfunding legislation to regulate crowdfunding portals, to implement Title III of JOBS Act.
Under Hong Kong securities laws, equity crowdfunding including real estate crowd-funding investment model such as Colony88, Bigcolors or Crowdbaron may be caught by a broad definition of “collective investment scheme” under Hong Kong securities laws. Such collective investment schemes may not be offered to the public, unless an authorization has been obtained from the Hong Kong Securities and Futures Commission, or that an exemption applies, such as invitations to professional investors only. Offering of securities to the public are restricted and subject to regulations.
Crowdbaron indicates on its website that investors will need to be “professional investors” according to the rules of the Hong Kong Securities & Futures Commission, which would require individuals to have an investment portfolio of not less than HK$8 million or a corporation or partnership to have an investment portfolio of not less than HK$8 million or total assets of not less than HK$40 million. Crowdbaron also includes specific and clear warnings on investment risks throughout the website.
Crowdbaron started operations about a year ago, and by October 2013, it had crowdfunded approximately US$3 million with which it closed investments in a handful of projects. In October, the Grow VC Group announced a strategic investment in Crowdbaron. Grow VC Group is a business that pioneers securities crowdfunding, peer-to-peer marketplaces and new investment models globally.
As a new business model breaking new ground in Hong Kong and Asia, Crowdbaron and the rest of the crowdfunding pack face opportunities as well as challenges. However, like the others who have chosen Hong Kong as home base, Crowdbaron’s founder Saeed Hassan is positive.
As Saeed said to StartupsHK, “The startup environment in Hong Kong is young, but developing year by year. I believe it could become a regional hub for entrepreneurs and a viable alternative to setting up in the US. A challenge we face is the slow acceptance to consider innovation from some professions when it comes to startups. For example, legal advisors willing to invest in innovative ideas with experience dealing with new business models would be a great help.”
Note: In May 2014, the Hong Kong Securities and Futures Commission and Investor Education Centre published an outline of the issues and the potential risks in crowdfunding. The regulator also issued a notice to highlight the potential regulations that may apply.