Better Together: Crowdfunding

Working together to build something great has serious benefits, plus an even more enormous potential for cash. Though in its early stages, China will soon lead the globe’s crowdfunding effort and wallets will benefit.

Crowdfunding has become a popular way to raise investments in the West. In China, however, it remains a relatively nascent industry. By the end of April 2016, there were a total of 332 crowdfunding platforms in China compared to 344 in the U.S. by the end of 2013.

However, China’s potential for growth in the industry is enormous. According to estimates by the World Bank in its 2013 Crowdfunding’s Potential for the Developing World report, China is estimated to generate US$ 50 billion, or 52 percent of the global total, in crowdfunding by 2025. During 2015, 11.4 billion RMB (US$ 1.7 billion) was raised through crowdfunding platforms in China—an increase of over 400 percent, compared to 2014.

Market conditions
Crowdfunding first appeared in the Chinese market in July 2011, with the debut of Demohour, a platform primarily serving creative fields such as design, film and video, music and publishing. At present, Demohour is one of the largest crowdfunding platforms in China. However, its specific focus on creative fields makes it difficult to compare with the traditional reward and equity crowdfunding platforms. Even Demohour’s founder and chief executive Chang Yu considers the company to be more of an online presale retailer, more akin to Groupon than to Kickstarter.

In fact, many crowdfunding platforms in China have specialized focuses. For example, Dreamore raises funds for art, culture, and public welfare projects, Musikid serves as a platform for music-related projects, and Tao Meng funds amateur filmmakers and can also recruit crew for proposed projects.

Additionally, Chinese crowdfunding platforms, more so than their counterparts in the West, offer more tangible rewards for their contributors. Chang of Demohour attributes this to the different culture of donations in mainland China. Frequently, a campaign will offer physical goods like coupons, souvenirs, books, and/or DVDs in return for the contributions – much more like a sale than a donation. In most cases, the idea or innovation that the campaign is raising funds for has already started or finished their first prototype.

Top players
At present, it seems that the crowdfunding industry will experience numerous and lasting changes as bigger companies foray into the field. In December 2013, Aliababa launched crowdfunding on Taobao, under which the company created Yulebao, which allows investors to support Chinese films. The site allows participants to invest small amounts, between 100 RMB and 1,000 RMB, in domestically-produced films, and was involved in funding popular projects like “Wolf Totem” and “Tiny Times.”

Market potential
Recently, there have been many new entries into the market, not only because of the massive potential of Chinese crowdfunding, but due to the prevalence of smartphone usage among the Chinese populace. There are 650 million internet users in China, and 86 percent of internet usage is through smartphones. Furthermore, the use of electronic money is on the rise; Alipay consists of 350 million users, with WeChat Wallet, Baidu Wallet, and many others vying for market share.

There is also a need for crowdfunding from both the demand and the supply side. Chinese investors are actively on the hunt for attractive investment projects to place their money – about US$4.6 trillion worth. At the same time, startups and entrepreneurs have difficulties accessing loans, both from commercial banks and institutional investors, and a low percentage of all bank loans are directed towards them.

Regulating the market
Despite positive momentum within the market, crowdfunding in China has been rocked by allegations of fraud. One such example is Ezubao, an online finance company that supposedly offered fake investment products to nearly one million investors, pilfered over US$7.6 billion, and in late 2015, was eventually investigated, shut down, and discredited by local officials as a large Ponzi scheme. Cases like Ezubao highlight the need for oversight in what may one day be the world’s largest crowdfunding market.

Industry regulations have been slow to be approved and implemented, and at times, contradictory. In December 2014, the Securities Association of China (SAC) issued the first draft regulations for equity crowdfunding, including clear rules on what platforms, investors, and companies are and are not allowed to do. Simultaneously, the draft regulations also place higher requirements for prospective investors, based on the idea that investors must be of the “accredited” sort. This would mean that anyone who wants to invest in equity crowdfunding projects must meet at least one of the following requirements:

• Investing at least 1 million RMB in a single project
• Possessing net assets of 10 million RMB, or
• Possessing financial assets of 3 million RMB and having an annual income of at least 500,000 RMB for the past five years

Conclusion
Despite impressive industry growth in 2015, that year still managed to underperform expectations by about 38 billion RMB (US$7.5 billion). However, policy changes spearheaded by the government and a greater acceptance of this particular form of funding among laypeople may promise massive returns for those companies able to weather the competition.

Since its establishment in 1992, Dezan Shira & Associates has guided foreign clients through South China and Asia’s complex regulatory environment, assisting with legal, accounting, tax, internal control, HR, payroll and audit matters. As one of the most experienced and longest established practices in the Pearl River Delta with over 70 professionals well versed in practical China knowledge, we are your reliable partner for business expansion in this region and beyond.

To schedule a free consultation on how your business can benefit from the latest regulatory changes in South China and other regions, please contact Mr. Stephen O’Regan at +86 186 2007 3991, email us at dongguan@dezshira.com or visit www.dezshira.com

Category The Know How