‘THERE is nothing more powerful,” goes one iteration of this famous thought, “than an idea whose time has come.” Is equity crowdfunding an idea whose time has come in the Philippines?
The Oxford dictionary defines crowdfunding (also known as crowdsourcing) as “the practice of funding a project or venture from a large number of people, typically via the Internet.” Most of us are familiar with Kickstarter and Indiegogo, web sites where people and businesses raise funds by soliciting donations, offering or selling goods, or giving out rewards. (The most prominent crowdfunding site in the Philippines is www.TheSparkProject.com.) But equity crowdfunding goes one step further. Through equity crowdfunding, proponents can offer shares or an ownership interest (equity) in the business they are promoting. This means that people who take up the offer actually become investors in, and owners of the business, and can share in the joy of seeing their investment grow as the business flourishes, or suffer the agony of loss if the venture goes bust.
As Philippine law stands, an exception to current securities law is needed (by way of legislation or regulation) for equity crowdfunding to be allowed. This is because the Securities Regulation Code and related laws call for extensive disclosure, reportorial and regulatory compliance before any person could solicit any form of investment from the public. Given the complexity of the laws, rules and regulations involved, and the attendant cost of the compliance process (called securities registration), all but the highly funded companies can avail themselves of this option. Start-ups, who are almost always financially disadvantaged in the first place, could never hope to raise capital this way. It would just be too costly to pay lawyers, accountants, investment bankers, etc., to access capital the traditional way. This is where equity crowdfunding comes in. It would drastically simplify the process, resulting in a corresponding dramatic drop in cost. It was precisely
this imperative to help start-ups that led to the passage of the JOBS (Jumpstart Our Business Start-ups) Act in the US in 2012, and effectively ushered in the era of equity crowdfunding globally, as many counties, including Canada, soon followed suit.
While equity crowdfunding holds promise to spur innovation and jump-start businesses, mostly SME’s (the main generator of employment and livelihood in many countries, including the Philippines), many point to the specter of fraud as a major downside. But supporters of the system counter that, properly regulated by the government and the Internet community itself, equity crowdfunding can address this and many other challenges. Everything is susceptible to fraud, they argue, even the tightly regulated regular capital markets (insider trading, stock manipulation, etc.), and, like everything else that you put out into the open market, the key is to keep schemes and scams to a minimum. Safeguards such as tightly monitored portals, steep criminal and civil penalties, disclosure requirements (even though not as extensive as with regular securities), close project vetting and monitoring by portals, and extensive investor education, should address these concerns adequately, supporters counter.
But has equity crowdfunding’s time has come in the Philippines? The writer believes so. While the start-up community in the country is still relatively in its infancy, it’s level of activity has noticeably increased, Incubators such as Smart/PLDT’s ideaspace, headed by Stanford alum Earl Valencia, and the Ayala Group’s Kickstart, are in the forefront of the Philippine start-up charge. Start-ups are now congregating in many places in the country, one of the most prominent hot spots being Katipunan Road, touted as Philippines’s Silicon Valley. Filipino start-ups have been quite active promoting their ventures, and some have reached a degree of success that they have entered the realm of the consciousness of Filipino consumers, such as chika.com, sulit.com, Mang Inasal, etc. Everything seems to point to the Philippine start-up industry being on the verge of a major breakthrough. But capital, or the lack of it, is holding it back. Enter equity crowdfunding. It could just be the push that the start-up industry needs to propel it to the next level. And how would equity crowdfunding do this?
An estimated 10.5 million Filipinos either work temporarily or live permanently abroad. Of this number, about 2.2 million are workers (OFWs). Overseas Filipino workers
remitted a record $25.1 billion in 2013, and the British Standard and Chartered Bank predicts this amount to increase 8.5 percent in 2014. But the Philippine Statistics Authority believes that OFWs do not remit all of their earnings home. And Filipinos permanently residing abroad, who have become somewhat investor savvy, have investible funds handy. All this points to an otherwise untapped cache of funds, the potential of which to propel entrepreneurial dreams into commercial reality has yet to be fully exploited. Here lies equity crowdfunding’s greatest promise: providing a convenient (as the Internet is available in almost all parts of the globe), instantaneous (online) and secure vehicle for Filipinos abroad to invest in Philippine businesses and start-ups. Let’s do the math: if only 5 percent of the estimated 10.5 million Filipinos abroad invest through equity crowdfunding, and they put in just $100 each, the equivalent investment would total more than P2 billion. This amount would certainly provide a boost to the fledgling Philippine start-up sector.
But equity crowdfunding should not only be viewed as a business- funding tool. It could, in the same breadth, be a platform for patriotism. As one invests in a Filipino start-up, one also invests in the hope that this start-up would launch, operate, grow and thrive, and in the process create livelihood and employment for many of our kababayan. Given the Philippines’s perennial precarious economic situation, even with the great strides we are now making under the present dispensation, entrepreneurship remains a key cog in the economic machinery that will lift us out of poverty and despair. Equity crowdfunding could unleash the Filipino’s full entrepreneurial potential.
This is what has animated me to draft a Philippine equity crowdfunding bill. I submitted this draft to the office of Sen. Bam Aquino for his sponsorship, the senator being known as a champion of entrepreneurship. The bill is now undergoing the usual vetting process by his staff. We shall shortly be soliciting congressional sponsorship of the bill. With the support of many start-up groups, we are hoping the passage of the law will usher in the golden age of Filipino entrepreneurship.
Equity crowdfunding, now a fact of life in countries such as the UK, New Zealand, Italy, Sweden and
Kenya, holds the promise of unlocking the potential of Filipino entrepreneurship, which for so long has been held back by lack of resources, principally capital. It is poised to give free rein to the Filipino’s innate capacity for creativity and innovation, thus hastening the country’s march toward economic sufficiency and social progress.
Next: Salient provisions of the Philippine equity crowdfunding bill.
Atty. Bayani F. Abesamis is a lawyer with abelaw.manila, which practises exclusively in the area of business law. Comments can be sent to upstart@abelaw.ca.