Equity crowdfunding: It’s here
The world, certainly, has not stood still since I began advocating the adoption of equity crowdfunding rules in the Philippines in 2013. That was the year I submitted a draft bill to the Senate. The following year, I wrote an article in a business newspaper on the subject, a copy of which is posted on our law firm website, www.propelstartups.com.
So what has happened since? Well, the equity crowdfunding component of the JOBS Act in the United States went live in 2015. More countries have adopted equity crowdfunding. In Asean, Malaysia came on board in 2015 (Singapore was an early adopter in 2012). Equity crowdfunding portals have popped up, and a lot of startups have been funded through them.
Most notably, our Securities and Exchange Commission published proposed equity crowdfunding rules in December 2017 and asked for public comment. I believe equity crowdfunding is on the verge of becoming a reality for Filipino entrepreneurs soon.
But what is equity crowdfunding? The Proposed Rules (PR) by the SEC offers this definition: “Crowdfunding refers to small- or limited-scale fundraising activity usually for startups, micro, small and medium enterprises (MSMEs) using electronic platforms.”
But there is one element missing in this definition—equity. Equity crowdfunding is a way for startups or MSMEs to raise capital by offering equity, or shares, in their company to investors. The investors, upon taking up the offer, become part-owners of the company (or debtors, as debt may also be offered).
This distinction is important, because there are other types of crowdfunding where capital is raised but do not offer investors any share or ownership interest in the company. In rewards-based or product crowdfunding, for example, goods are presold or rewards given to those who take up the offer. In the process of preselling his ware, the entrepreneur is able to raise the capital needed to produce the goods. Another type of crowdfunding is peer-to-peer lending (also called microfinance), where borrowers are matched with lenders to facilitate loans which could be used as capital. In both these instances, no ownership interest is given to anyone taking up the offer.
But equity crowdfunding goes one step further, since an ownership interest in the business (equity) is transferred to investors (except where only debt is offered). So the PR definition can better convey the idea by stating that it is equity crowdfunding that it seeks to regulate, not just generic crowdfunding.
Equity crowdfunding rules make access to capital easier for startups and MSMEs because, without these rules, these businesses will have to go by the same rules that apply to everyone trying to offer investments to the public. These rules involve extensive disclosure, registration and reporting requirements that would just be too cumbersome and expensive for startups and MSMEs.
Equity crowdfunding, per SEC’s PR, exempts startups and MSMEs from these onerous rules if they are only raising a maximum of P10 million a year. For investors, they can only, aggregately, invest no more than P50,000 in any 12-month period, unless he or she signs a waiver. And all equity crowdfunding investments must be done through online portals.
I am excited about equity crowdfunding because this is one way by which we could democratize investing in the Philippines. Investing seems to have been the traditional domain of the affluent. But equity crowdfunding will open up investing opportunities to a lot more of our kababayan.
I truly believe there is a reservoir of capital—and patriotism—just waiting to be tapped by Filipino entrepreneurs to help the country move toward economic progress and social stability. Equity crowdfunding has the potential to unlock this untapped resource. It’s an idea, as I stated in my 2014 article, whose time has come in the Philippines.
Lawyer Bayani “Abe” Abesamis ([email protected]) is a partner at abelaw.manila, a Philippine law firm that practices exclusively in the area of startup law.
