By Conor Roche Director of BOP China and Co-Founder of Fieldwork, with additional research by Chen XU Director of Operations of BOP China
Equity crowdfunding is at a very nascent stage of development in China. Unlike in the UK and the US, there is no specific policy regarding the use of the internet as a means of selling equity in a private business to the public. There are strict rules regarding ‘illegal fund-raising’ online. However these rules are primarily focused on peer-to-peer loans and exist to stop fraudulent lenders. Yet to date, in mainland China there are no equity crowdfunding platforms. Although limited forms do exist.
The lack of clear regulations and consequently a fear of government reprisals from what might be deemed illegal activity has slowed development in this area. The World Bank estimates the size of the Chinese crowdfunding industry by 2025 at US$50 billion. While this estimate includes all types of crowdfunding, it illustrates the scale of the market potential in China.
The government and industry are very aware of the potential of equity crowdfunding to jump-start a new entrepreneurial ecosystem. A recent report in China Daily suggest that the China Securities Regulatory Commission (CSRC) are set to implement regulations. This follows what the CSRC described in a related press release as an ‘in-depth research and survey’ of the equity crowdfunding industry.
‘Lately, we at the Commission have carried out in-depth research and survey regarding the equity crowd funding industry. At present, based on overseas regulatory experience and the results of the research and survey, we are dedicated to developing a set of regulatory rules for crowdfunding financing.’
While CSRC carries out their research the industry speculates that the forthcoming regulations will likely limit the total amount of investment that can be raised through equity crowdfunding and also limit the amount each investor can invest.
Existing financing platforms that offer limited forms of equity and investment based funding online like; angelcrunch.com, dajiatou.com and yuanshihui.com, will be ready to take advantage of the regulations when they arrive. Other platforms will also emerge once there is more certaintity in the market, these platform are likely to follow international trends and target niche sectors for example; green tech and social enterprises.
In addition, in recent conversations between BOP China and representatives from the Shanghai Free Trade Zone (SFTZ), we understand one of the main purposes of the SFTZ is to provide an opportunity for innovation in financing, nationally and internationally. This may include opportunities for international investors through equity crowdfunding platforms based in the SFTZ.
What does this mean for the cultural industries?
While weak intellectual property protection in China can dissuade people from posting their ideas online, reward based crowdfunding is already very popular amongst filmmakers and creatives. According to the World Bank report Demohour, one of two of the most popular reward based crowdfunding platforms (the other Dreamore) raised Y1.6 million (about US$260,000) for a cartoon movie named Big Fish and Chinese Flowering Crabapple. 3596 users backed the project. The most supported project on Demohour, also a movie called A Hundred Thousand Bad Jokes, raised Y1.3 million (about US$210,000) from 5,533 users.
Also a financing platform launched earlier this year by Alibaba called Yule Bao, enabled Alibaba users to indirectly invest money in a range of projects from games, movies, and TV shows. Alibaba stressed that Yule Bao was not a crowdfunding platform as Yule Bao raises funds from selling insurance products to users, the funds are then subsequently invested.
Beyond China, a mature reward crowdfunding market has typically preceded equity crowdfunding, and China looks like it will follow his trend. That is good news for the cultural industries, where equity crowdfunding has the potential to raise significantly larger amounts due to the potential financial returns for investors.
BOP China are actively exploring opportunities for cultural organisaions looking to make use of crowdfunding and equity crowdfunding. We would be very happy to hear from anybody who has experience in this space.