Leveraging 'People' Power of Sustainability
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Crowd-sourced funding is a financial service where start-ups and small businesses raise funds, generally from a large number of investors that invest small amounts of money. In the year 2016, it was estimated that worldwide, over USD 35 billion was raised through crowd sourcing. Even though it is relatively in the nascent stage, in emerging economies like India, this form of innovative funding is picking up very fast and the global outlook of crowdfunding is also very positive.
The Crowdfunding model is based on three main entities-
A) The Entrepreneur who wants to raise money for the company or for a specific project /venture
B) Investor / Funder who would like to invest in the Company /Project and
C) Platform (Moderator) that brings interested parties together to share the idea and facilities the funding opportunity.
Platforms like Kickstarter , Go Fund Me or Australian Crowdfunding platform Pozible, connects ideas of an entrepreneur to a connected audience, worldwide. In India, some of prominent platforms are Ketto and Milaap.
Crowdfunding has been used to fund a wide range of ventures that include artistic and creative projects, medical expenses, travel, or community-oriented social entrepreneurship projects.
There are four primary types of Crowdfunding
A) Equity Crowdfunding
B) Rewards Crowdfunding
C) Donation based Crowdfunding
D) Debt-based crowdfunding
In case of equity crowdfunding, the company looking at raising the funds is looking at relative long-term funding in terms of equity capital and against the funds raised the company offers equity shares at an appropriate valuation. In most cases the funding is required for more than one project rather than a single use. For example, funding is required for a software data analytics company, in this case the funding would be required to achieve scale for the company and grow further. Against the funding, share would be allocated using an appropriate valuation technique which looks the future and forward numbers rather than the present or the past.
Discounted Cash Flow (DCF) method is a popular method used along with EBIDTA multiple to arrive an appropriate enterprise valuation of project. For the entrepreneur what is important is that he/she should not dilute /sell a major portion of the shares very early because if that happens when the business picks up and grows he would end up having very little shareholding thereby could result in the promoter or owner losing control of the Company.
Rewards based crowdfunding has been used for wide range of purpose, including motion picture promotion, free software developments, inventions development, scientific research and civic projects. Some of characteristics of rewards-based Crowdfunding also called non equity Crowdfunding as follows.
In rewards based Crowdfunding funding does not rely on location. The distance between creators and investor is no constraint and entrepreneur who has an Idea for example he or she like to make a film on youth, this film/documentary requires say $100,000 to make , but he is unable to invest this kind of money. Some of investor on a Crowdfunding platform would be interested in this kind of documentary would make a good return when the rights are sold or in many cases they just believe in the subject and the kind of impact is would create hence would like to fund this project.
Donation Based Crowdfunding
Broadly speaking you can think of any Crowdfunding campaign in which there is no financial return to the investors or contributors as donation based Crowdfunding initiatives include fundraising for disaster relief, charities, non-profit and medical bills. In some countries like India there are dedicated Crowdfunding platform which help raised money for such cause or social impact projects examples, “Impact Guru” .
Crowdfunding might also be used to pay for reconstruction of infrastructure and utilities that would not otherwise be covered by Government disaster funds. At its roots, donation-based crowdfunding can be seen as comparable to micro-financing. The requirements of securing money are not as stringent as using a financial institution and the amount of funding being sought may be smaller than the minimum loan or credit amount that is available from a bank or traditional investors. It is not unheard of, however, for the final amount raised through such a platform to far exceed the initial goal that was sought.
Debt-based crowdfunding which is also commonly referred to as “crowd lending”, has proven to be a great alternative for startups, because although it is similar to acquiring a traditional bank loan, but often with competitive and lower interest rates, with more flexibility and options to secure resources.
In most cases, worldwide, the Crowdfunding platform screen and check the potential investors that would like to invest in these companies / project. In terms of risk , since the investment is relative in early stage project companies , the overall risk is high and these kind of investments fall in the High Risk – High Reward/Return category and ideally meant for investor who are high-net worth individuals (HNI).
Crowd-sourced Funding legislation in Australia
The Corporations Amendment (Crowd-sourced Funding) Act 2017 amends the Corporations Act 2001, and makes minor amendments to the Australian Securities and Investments Commission (ASIC) Act 2001, to provide a legislative framework for crowd-sourced funding. Generally, the CSF regime reduces the regulatory requirements for public fundraising while maintaining appropriate investor protection measures. A provider of CSF services must hold an Australian financial services (AFS) licence.
# Regulatory Guide 261 Crowd-sourced funding: Guide for public companies (RG 261) will assist companies seeking to raise funds through CSF to understand and comply with their obligations in the new regime, particularly as many of these companies will not have experience in making public offers of their shares.
# Regulatory Guide 262 Crowd-sourced funding: Guide for intermediaries (RG 262) will assist intermediaries seeking to provide CSF services, particularly as this is a new type of financial service and there are unique gatekeeper obligations for operating platforms for CSF offers.
Companies making Crowd-sourced funding offers should also note following key points as enlisted by ASIC
# Under the CSF regime, eligible public companies will be able to make offers of their shares, via an intermediary CSF service, using an offer document.
# Unlisted public companies with less than $25 million in assets and annual turnover will be eligible to raise funds under the CSF regime. Eligible companies will be able to make offers of ordinary shares to raise up to $5 million in any 12-month period.
# Newly created or converted public companies making CSF offers will not have to comply with certain reporting, audit and AGM obligations that would usually apply to public companies, for up to five years.
There are obligations and investor protections that apply to CSF offers, together with corporate governance concessions for companies undertaking CSF offers, including:
# An investor cap of $10,000 per annum per company for retail investors
# The provision of a CSF offer document containing minimum information and a prescribed risk warning, and
# A five-day cooling-off period.
Overall, the crowdfunding is proving to be the new buzz in the Banking & Finance industry and is quite contrary to the traditional banking that we were used to.
(This is my personal view collected from various resources and has no link in any manner with State Bank of India).
Mr. Pranay Kumar
Chief Executive Officer (CEO)
State Bank of India, Sydney
Mr. Pranay Kumar has been working with State Bank of India (premier fortune 500 company and among top 50 globally banks) for more than two decades.
Mr. Pranay holds an Executive MBA from S.P. Jain Institute of Management, Mumbai and gained expert knowledge on Merger & Acquisition from IIM Ahmedabad.
Mr. Pranay has extensive hands on experience in Project Finance and in past has managed in deal structuring for Energy, Roadways, Telecom & Hydrocarbon.