I like crowdfunding. It usually removes friction, barriers and middlemen and matches demand with (sometimes only perceived) supply. Crowdfunding, thus far, has mostly either been for products (you send us $99, we’ll send you a smartwatch) or for donations/social causes (let’s raise money for an animal shelter). These two (product crowdfunding and donation crowdfunding) have already disrupted things in a significant way, but I think that equity crowdfunding might even be more significant in the online landscape.
First, back to the original two and more focused on the South African context:
Crowdfunding is more popular –or rather, successful– in the developed world, as it is quite dependent on mature internet markets and access to money (disposable income or GDP per capita). Every country has it’s own regulations (or lack thereof) and culture with regards to online sales and donations, making it difficult to make blanket predictions on potential international outcomes. In South Africa, for instance, payments need to be for goods or services rendered (as in, you need to sell something or provide a service and be able to provide an invoice/receipt for the transaction). If you just want to send money to someone (like a father sending money to a dependent), it is considered a remittance and these have to go through a party with a banking license. The reason, I suspect, is that the authorities want to prevent money laundering, but there are consequences to the poor sending payments across the border. But almost everywhere, people like receiving (even if they have to pay for it) and that’s in short what rewards-based crowdfunding is about.
For emphasis: the Reserve Bank of South Africa doesn’t allow you just send money to someone. This means you can’t just send money for a crowdfunding campaign, where the recipient doesn’t provide goods or services in exchange for the payment. There’s an enormously simple loophole in all of this: just provide something.
There are reasons aplenty to do this in any case, as people are far more inclined to reach for their credit card if they get something in return. Make the minimum donation a little higher and send out a nice card, a limited edition t-shirt, a bumper sticker anything that makes it more of a transaction and less of a case of “just sending money”. A simple, cynical rule of mine regarding altruism is that whenever someone considers doing something nice, they’re first and foremost asking the very human, very selfish question: “What’s in it for me?”. Do I get a save the rhino shopping bag to make my peers see how much I care? Do I get a tax-deductible certificate for my corporate donation? Do I get a warm fuzzy feeling when I get a thank-you card? Do I get to have my name in the acknowledgements section of the book I helped to back?
(Full disclosure: I make monthly donations, but I do so not because of altruism, but rather for that warm, fuzzy feeling of feeling like I’m doing something really nice.)
You’ll have to decide if you want an all-or-nothing campaign or not. With those campaigns, the backers get reimbursed if the goal amount isn’t met. This can prove to be tricky, since payment gateways/banks will charge a percentage of each payment made and if you have to reimburse backers for a campaign that fell short of a R100,000 goal, you’ll be out somewhere between R4000-R6000. Bigger platforms (Kickstarter, Indiegogo) put a “hold” or “auth” on a card, but don’t complete the payment until the project is backed. If it isn’t it just doesn’t process the payment (the same way an auth can be put on a rental car that you book, but not pay, in advance). If you don’t have an all-or-nothing campaign, you can still provide something to your backers.
Back to the rewards: some of the most successful campaigns on Kickstarter and Indiegogo are the ones that incentivise people to donate by giving them something in return. Amanda Palmer (of the Dresden Dolls) raised close to $1.2 million and some of the creative things you could get in exchange for your hard earned cash included a full night out partying with the band, dinners, photo shoots, invites to their house party and even writing something with a permanent marker on her naked body. Maybe a bit impractical (if you’re not a rock star), but the $10000 she earned for taking someone to dinner, makes for a pretty damn good return on investment.
The exception to the “goods and services” rule, outlined above, doesn’t apply to non-profit organisations. If you are a registered non-profit organisation (such as an NPO, Section 21 company, not-for-profit trust etc.) you can run a campaign for donations to be applied to a specific project of yours (or just fundraising in general). I’d say the rule of “What’s in it for me?” still applies. Give the backer something even if it isn’t a tangible product.
I predict a rise in the use of crowdfunding for churches, educational institutions and charities in general. Unfortunately, South Africa, doesn’t do a stellar job at charitable giving. This can be paired with the fact that, PPP adjusted, over 15 million earn less than $2 a day, that there isn’t a massive middle and high income class (in sheer number) left who can afford to make charitable online donations.
Enter equity crowdfunding
The idea is similar as for “traditional” crowdfunding. For a few (or few thousand) dollars, you get yourself a little stake in the company you’re backing, instead of the usual t-shirt, knick-knack or warm, fuzzy feeling. Early investment into startups was hereto primarily reserved for savvy (and wealthy) investors, depending on the country you live in.
Equity crowdfunding: US & UK
Regulation surrounding crowdfunded equity is evolving (where it formally exists) as backers, businesses and regulators get more used to the very idea of crowdfunding. Scottish beer brewery BrewDog raised £250,000 pounds with their awesome Equity for Punks project; giving the backers things like the novelty of saying they own a bit of a beer brand (which might be worth something, someday) to the more practical discounts on the grog. In the long run, a crowd of investors can financially gain in dividends, sale proceeds in case of a merger/acquisition or get listed on an exchange (converting mostly illiquid shares into something pegged to a cold, hard currency).
Things have been slower with equity crowdfunding in the US for many reasons. The SEC is loosening some of these investment restrictions, but these restrictions can often be hard to defend. Supporters say that individuals have every right to pick, purchase from and invest in companies as they please. Critics say that the banks argued with the same logic before the 2008 economic/housing collapse and that a lot of individuals –particularly those who lost almost everything– could have been protected if they were excluded from making risky investments by better drafted regulations.
As always, the answer lies somewhere in-between, and things like voting rights and complex legal decisions should probably not be made by the average investor. As with any investment, they should be made aware that they can lose everything (and that the vast majority of startups fail, without the net of being bought or getting listed).
We’ll probably see more successful equity campaigns, both here and abroad, complete with slick, shareable videos and predicted-returns brochures. We’ll eventually hear of early crowd-investors who made lots of money when the startup idea they backed made it big. We’ll also probably see a lot of these socially backed sites reach their evolutionary fate with crowd investors losing all their money. Watch this space.
Information on equity crowdfunding (and particular the legal restrictions/definitions around it) in South Africa is pretty hard to come by. I welcome comments by those who can contribute!