Loading...
The Financial Express

Crowdfunding: Developing policy and regulatory framework


Crowdfunding: Developing policy and regulatory framework

As the crowdfunding industry grows, several legal issues, risks, and implication related matters are coming up.  Experiences with crowdfunding arrangements in emerging economies are also coming up with several lessons. Stakeholders are keen to know emerging market considerations about when, why and how to launch a  crowdfunding campaign.

It is to be noted that  crowdfunding is much more difficult than most entrepreneurs anticipate and is not for everyone. Running a successful campaign requires significant human and financial resources, and entrepreneurs should obtain information on other  crowdfunding campaigns in similar sectors or geographic areas to understand the opportunity costs of  crowdfunding compared with other available sources of capital. It is crucial for the entrepreneurs to assess realistically how much capital can be raised from  crowdfunding platforms -- targeted groups/ geographic areas. Practically, debt and equity platforms that tend to enable larger amounts of funding are often not available in many developing markets.

Platform choice by the fund raisers depends upon certain factors. Most leading international  crowdfunding platforms often set restrictions on who can launch campaigns and use payment systems that block investors from developing global networks. Locally originated platforms are believed to be most suitable in the developing world. Developing connections with the targeted contributors is always very crucial. Entrepreneurs should give effort and time for building a contact base with the targeted contributors and promote the campaign. Practically, entrepreneurs having pre-networking with the targeted contributing group stand a better chance of meeting fund raising goals through such platforms. Other complementary sources of funds may be required to meet the total fund requirements. Entrepreneurs should tap into complementary resources and organisations to increase their likelihood of success.  Crowdfunding arrangement and platforms can offer additional benefits related to businesses and products. In addition to capital,  crowdfunding helped several businesses increase credibility and market awareness, which sometimes resulted in partnerships, sales or investment. Feedbacks of the contributors might be important information for the entrepreneurs to refine their products or business models

Some financial risks associated with P2P funding and other  crowdfunding arrangements have been identified in some recently published documents. Solvency risks in P2P operations can be increased due to greater asymmetry of information between entrepreneurs and investors, given that there is no regulation specifying what information is to be shared between them. It is possible that one party in the financial operation might not obtain the necessary liquidity which may became one of the main financial risks in traditional operations as well as in  crowdfunding arrangement. Credit risk and operational risks would always be there. Credit risk is based on the possibility that one of the parties in the financial operation may fail to assume all of the obligations agreed between the entrepreneur and the investor. And there is the possibility of experiencing losses resulting from failures in processes, information and internal systems of the platform as well as losses resulting from human error or the consequences of events external to the operation. Regulatory risks and concerns remained critical. Although new regulations and rules are beginning to be created to regulate  crowdfunding operations, a degree of uncertainty persists with respect to the application of certain local rules in the global context in which  crowdfunding takes place. Moreover, poor coordination between the regulators in different countries may cause fragmented markets that are big barriers in the rise of  crowdfunding. With regard to regulations, one of the main financial risks characterising  crowdfunding platforms is that they operate in shadow banking. In fact, the less stringent regulations of this alternative market and the degree of informality with which many of the platforms operate increase the liquidity and solvency risks faced by the investors.

Regulatory issues are taking shape to encourage  crowdfunding in different countries. To address regulatory concerns, specific regulations are beginning to emerge in some countries with the objectives of on one hand, to protect unqualified investors and, on the other, to make it easier to access funding for startups or small businesses, which hardly get access in the conventional financial market. In 2012, the Jumpstart Our Business Startups (JOBS) Act was passed in USA as a measure to ease key regulatory burdens on entrepreneurs seeking to raise startup capital, with the goal of encouraging small business and startup funding. The Act removed several barriers for such efforts by allowing companies to promote and advertise the merits of their stock offering to the general public, rather than being restricted to sharing that information only with accredited investors which gives entrepreneurs a new avenue for raising funds. In a growing number of OECD countries, policymakers are designing specific regulations for lending-based  crowdfunding platforms. In 2018, as a part of its Fintech action plan, the European Commission presented its proposal for the EU-wide regime. To evaluate these new regimes, this study collects information about the regulation of lending-based  crowdfunding platforms in 17 OECD countries and proposes a theoretical framework to reflect about different regulatory regimes. In the context of developing countries, the idea behind regulating  crowdfunding is to enable small businesses and startups to leverage the advertising power of the internet to raise small amounts of money from large number of people in a cost-effective way. With platforms providing top-notch  crowdfunding services in India to NGOs and individuals,  crowdfunding is very much legal. However, it is the kind of  crowdfunding that puts the law under question. Securities and Exchange Board of India's (SEBI) consultation paper on  crowdfunding released in 2014, recognises four kinds of  crowdfunding models: social lending/donation  crowdfunding, rewards  crowdfunding, equity  crowdfunding and P2P lending. While the first two (donation and rewards) are clubbed under community  crowdfunding, the latter two (Equity and P2P Lending) fall under financial return  crowdfunding.

The idea of  crowdfunding has already become popular around the world which empowers a business idea or venture by raising a small amount of money from a large number of people. Such an initiative might be very supportive to help entrepreneurs to bring innovative ideas and business ventures to life by gathering the initial funding needed. Developing  crowdfunding market would complement the banking industry that almost single-handedly meets the financing needs of the country as an institutional source.  Crowdfunding possibilities are largely unexplored in Bangladesh. It is time to formulate a policy and regulatory framework in Bangladesh.

Dr Shah Md Ahsan Habib is Professor and Director, Bangladesh Institute of Bank Management (BIBM).

[email protected]

Share if you like

Filter By Topic