New rules on crowdfunding entered into force on 1 February 2017. What is the framework and what does it mean for investments?
New rules on crowdfunding entered into force on 1 February 2017. The law passed in December by the Parliament now regulates the legal status of crowdfunding platforms and how they function.
"Crowdfunding is a type of participative financing that consists of requesting private investment to gather funds to finance a specific project through an internet platform."
In Belgium, in addition to direct investment, a tax reduction will be granted for any financing for an SME starting up, starter funds or financing vehicle. However the law does attach several conditions. For example, it is only possible to invest in companies founded less than four years ago. The investment must be made for a period of four years. The SME may only raise EUR 250,000 this way. Finally, each individual or entity may only invest a maximum of EUR 100,000 per year.
The Minister for SMEs, Willy Borsus, points out that SMEs make up the "backbone" of the economy, as they account for 99.2% of companies: "It is crucial to invest in these young companies, in these starters, and to support this type of system that is an addition to more traditional financial services."
Platforms may request authorisation
Since 1 February, platforms wishing to set up in crowdfunding have been able to lodge an authorisation request with the FSMA. Alexander De Croo, the Minister for the Digital Agenda, believes that with the authorisation of alternative financing platforms, "the system is now complete."
In concrete terms, a tax reduction is now granted for investments in the capital of a young SME of up to 45% for microbusinesses (10 employees per year and EUR 700,000 annual turnover) and 30% for SMEs.
The four ways to invest are:
- Direct investment in a target company (in stocks or shares, which has already applied since 1 July 2015);
- Investment in a target company through marketing on a platform (here, the investor is a direct shareholder in the company);
- Investment in a financing vehicle that then invests in a target company through a platform (the investor isn't a shareholder in the company, it is the 'vehicle' that remains the shareholder);
- Finally, investment in a starter fund that then invests in several companies (with risk spreading).
All the details are available on the FSMA website.
Crowdsourcing: the basics
Are you undecided about the various ways of increasing your offering? Has R&D encountered a technical problem? Perhaps your clients know more.
The concept of crowdsourcing is simple: you call for the contribution of your customers and/or the general public. An approach which is gaining popularity worldwide even though it is not actually new. As far back as 1714 crowdsourcing by the British government led to the invention of the chronometer and therefore a reliable method of calculating longitudinal position at sea.
Three hundred years later the basic principles remain the same: in crowdsourcing you work with a network of individuals and communities within and largely outside the company. They make a contribution in the form of ideas, time, expertise or financial support. This enables new solutions to be accessed and makes realisation of joint projects and optimisation of tasks possible while keeping down costs.
This system is based on exchange, transparency and communication. It also works for all sectors and at all management levels. You should be able to engage a community of designers for your product development for example and choose the best proposal together with the public. Then you will bring it onto the market, possibly even financed via crowdfunding.
The crowd is ready for this
This is certainly no science fiction, as proven by the growing success of the system. It is also the ideal time to get involved with crowdsourcing:
- communicating with the crowd is easier than ever before thanks to technological development, the social media boom and the development of online communities;
- the crowd is straining at the leash: a joint survey by several European universities showed that 54% of Europeans would like to support projects by companies and private individuals creatively and/or financially;
- co-creation, or developing a project together, is hot. The crowd can join in with a project for a whole host of reasons: the necessity for a creative outlet, commercial motives, dedication to society or just for a sense of honour or fun;
- the economy urgently needs sources of financing and innovative projects in order to achieve new growth and to increase competitiveness.
It will definitely take some getting used to as such a system radically changes the way in which a company gathers information, carries out research, produces and even finances projects. At the same time relationships with clients or users change as they evolve into potential colleagues, financiers and ambassadors.
But this does not have to be a threat. On the contrary, crowdsourcing provides you with a unique opportunity to relinquish your traditional methods. You can now look externally for ideas, get feedback from the crowd on ideas developed internally or even combine both approaches. The possibilities are endless.
Crowdfunding: financing with extras
Are you looking to finance a new project which has some risk attached to it? Present your plans to the crowd and discover how quickly small acorns can become mighty oaks.
Crowdfunding or participative financing involves looking for a (large) number of potential moneylenders. These may be professional investors or co-entrepreneurs or equally your clients or the general public. They will finance your project or company on a quid pro quo basis.
This specific form of crowdsourcing is centuries old. Just think about the construction of the Sagrada Família (Gaudi cathedral) in Barcelona or the plinth for the Statue of Liberty in New York. The way in which it happens is rather different today: via online payment or online platforms, often with lots of publicity on social media. The emergence of social media is undoubtedly one of the reasons for the increasing popularity of crowdfunding, together with the search for alternative sources of financing as a result of the crisis.
Much more than just a source of financing
While crowdfunding focused on cultural or humanitarian initiatives for a long time, its emphasis has recently shifted to commercial projects and even the financing of start-ups and small and medium sized companies. The advantages are clear:
- companies can meet the cost of – mainly innovative – projects which are less suitable for (complete) financing via a bank loan, business angels or a private equity partner. This may be because they have considerable risk attached or demonstrate too little concrete potential for growth, the required amount is too low or the company does not want to have an external party join in with the company capital.
- Financing is just one part of the story; creating sufficient 'buzz' and a community around your project will make you much more visible. Simultaneously, you carry out market research. Is there a call for your product or service? Is the design suitable? And are you bringing it onto the market in the right way? Thanks to this interaction you can also make adjustments to the product during the design phase, thereby reducing the risk of an unsuccessful launch.
- By taking the input of the crowd into consideration you will create a much closer bond with your target market, with clients developing into co-designers, fans and ambassadors.
The many forms of crowdfunding
There are several types of crowdfunding and each has its own way of working, providers and regulations.
Generally speaking we can see four different major types which each attract a different type of funder.
Reward based: crowdfunding with reward system
This formula is the quickest growing crowdfunding segment and it is specifically focused on creative projects by private individuals or small companies. It often involves a form of advanced sale whereby a producer or designer tries to gather the necessary funds to bring a new product onto the market. In exchange for their contribution, funders are entitled to rewards which mainly increase as more capital is collected. These rewards may be additional or exclusive options or perhaps signed copies, a more attractive price or even delivery of the product months before it becomes available to non-participants. Tangible or not, all these rewards have one common feature: they add value for the funder. The big players in this market are American platforms such as Kickstarter and IndieGogo or Hello crowd!Ulule.
Debt/Lending based: crowdfunding via loans
This type of crowdfunding is primarily intended for start-ups or companies which want to set up a new project. They borrow the necessary funds for this from a number of funders. The precise repayment modalities for the loan areset in conjunction with the financiers. This may occur with monthly sums for example, on one occasion at the end of the term – with annual payment of interest – or via a formula whereby both the capital and the interest are repaid at the end of the term.
Examples of providers include Lending Club (USA), Babyloan (FR) or Belgian platforms such as CroFun and Look&Fin. In Flanders this form of financing can also occur in the form of a Winwinlening (win-win loan) which provides the funder with additional tax benefits.
Equity based: crowdfunding through share participation
Large projects or companies which wish to collect a substantial amount are best advised to make use of this formula. In concrete terms the funders or investors form a cooperative which receives a share in the company concerned. In this way they invest directly in the equity capital of the company and have the prospect of a financial return if the project turns out to be successful.
An additional form is crowdfunding via profit sharing where funders invest a previously stated amount in a new company project. In return they receive a payment which is calculated on the basis of the growth in turnover or profit which the project achieves.
In our country MyMicroInvest and Angel.me provide crowdfunding services of this nature.
Donation based: crowdfunding via gift
With this type of crowdfunding, which is actually a form of philanthropy or patronage, funders do not expect any reward or yield for their contribution. The return is purely an emotional one. The beneficiaries are generally 'good causes' in the broadest sense, ranging from gymnastics clubs looking for sponsorship for new apparatus to initiatives for socially vulnerable groups. The Belgian organisation SoCrowd is an example of a donation based platform.
Intermediate forms An innovative form of financing like crowdfunding can of course not be shackled. This is why more and more hybrid types are cropping up. A company can set up a system, for instance, where they contribute 1 euro for each euro which is contributed by private funders. Another intermediate form is an interest free loan to a non-profit making organisation, a sort of combination of donation and loan.
Crowdfunding is also very frequently combined with other forms of financing such as bank loans or contributions by business angels or venture capitalists.
Banks and crowdfunding: an impossible marriage?
Crowdfunding is enjoying a sharp increase. Banks are therefore giving the financing method close attention. But do they see this as competition or as a potential partner?
We put this question to Aymeric Olibet, Senior Advisor Business Development at BNP Paribas Fortis.
Does crowdfunding represent a threat or an opportunity?
Aymeric Olibet (AO):
"I see it primarily as a great opportunity for the economy and the banking sector. The financial landscape and the relationship between bank, entrepreneur and individual saver are developing at lightning speed so we need to adapt.
The emergence of the collaborative economy provides us with an excellent opportunity to be close to our clients and bring them closer to us at the same time. New technologies will enable us to identify their exact needs and propose suitable solutions proactively. I am convinced that this will lead to us banking in a completely different way by 2020 with customers in a position to ask for, select and compile made to measure services."
Do you see crowdfunding as a supplementary source of financing?
"Absolutely, because the crowd operates different investment criteria to the model within which we work at present. Traditionally banks mainly finance 'bankable business': investments with an acceptable risk and a reasonable yield. This is logical as financing requires the use of savings which the bank must manage prudently.
This does, however, also mean that a number of initiatives have difficulties getting financed. Projects which provide a social benefit rather than a financial one for example. Or innovative projects where the chances of success are hard to judge and thus involve a high risk and possible loss. Participative financing, where the risk is spread over a large group of moneylenders, is the ideal solution for projects of this nature."
A solution which the economy desperately needs?
"Exactly. Participative financing attaches importance to other criteria like passion, solidarity and a sense of responsibility towards future generations. That makes it easier to join in with innovative projects which may be deemed risky according to the traditional yardstick. The European economy needs this if it is to grow further. A particular feature about crowdfunding is also the fact that these risks do not pass via the balance sheet of a financial institution. There is therefore no systemic risk. The concrete risk for the backer is also limited because he makes a small contribution, knows exactly what his money is used for and is completely behind the investment decision."
How do you envisage the phenomenon developing further?
"Participative financing will continue to grow in popularity thanks to a more flexible regulatory framework and the growing number of investors. The government is also aware of the potential for growth and the interest of the public at large in this form of financing. This means that the threshold for which publication of a prospectus is necessary, for equity and lending based crowdfunding, has increased. In France this has gone up from 100,000 euros to 1 million euros for example. In Belgium as well this ceiling will soon rise from 100,000 to 300,000 euros.
Banks will play an important role in this revolution with their extended networks and financing expertise. The parties involved in crowdfunding are aware of this – just think of Hello crowd!”