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Crowdfunding Filipino SMEs

Marta Luisa Maria B. Garcia-Morera ACCRA Law Associate

April 16, 2014
YOU have a brilliant business idea, but you do not have the funding. Then there is the
investor, wanting to invest in an idea, yet he does not know what. If only you have a
way to meet each other... You do.
Imagine a portal similar to Kickstarter and SoMoLend. Post your brilliant business idea, pictures
showing your prototype, implementation plans, and funding requirements. Offer equity to
qualified investors. Then read feedback, answer product queries, and see your first funding
Crowdfunding... a web-based social capital generation system that allows entrepreneurs, artists,
and inventors who have insufficient funds to receive collective funding from a multitude of
ambitious investors, who, individually, do not meet the minimum financial requirements of
traditional investment channels.
Perfect for your brilliant business idea, the Searching Investor, and thousands of other struggling
Small- and Medium-Scale Enterprises (SMEs) in the Philippines and ambitious would-be
The Philippines is a developing country, and by developing country we mean that the highest
average educational attainment is below college level.
We always seek foreign investments, but currently too many foreign investments translate into
companies that hire only college-level Filipinos. Understandably, foreign investments aim to
generate the most profits; in this new economy, when knowledge allows the greatest returns on
investment, foreign investments would naturally seek knowledge-based enterprises.
We are now globally ranked second in business process outsourcing, we have talent in
programming, and we are a great resource in computer animation, specializations requiring
college education.
For the majority of Filipinos, survival means jobs at enterprises that most new foreign
investments dare not touch. So we celebrate our SMEs and give them our utmost support, in
spirit and policy.
In the International Finance Corporation-World Banks Ease of Doing Business Report, through
informed policy changes, the Philippines emerged in the top 10 Most Improved for 2012-2013.
So how can we support our SMEs when they need funding to expand?

For start-ups, especially those based upon novel ideas, equity-based crowdfunding may be most
strategic. Students planning to build a company around their class project, a smartphone app
that provides data-driven real-time alternate routes to avoid traffic congestions, would attract
investors who actually love the app, investors who would be the first customers and endorsers
of the product. And why would these investors-turned-customers endorse it? To help friends
avoid traffic, save gas, and save time, all while turning a profit.
For established SMEs needing fresh capital to expand or to meet short-term demand, lendingbased crowdfunding would be most appropriate. An SME producing lambanog, which is really
coconut vodka, gets huge orders from Republiq. Banks may take long to extend a loan, but the
sheer mention of Republiq during crowdfunding will definitely draw spirited crowds.
Crowdfunding portals leverage technology to provide investors not only with historical data on
the performance of different industries, but also with up-to-date information on the
creditworthiness of registered Filipino SMEs, management composition, and product or service
demand; similar to what our Credit Information Corp. (CIC), seeks to provide: independent and
reliable credit information. While government entities inevitably take longer to set up, private
ones are less hamstrung by red tape and are equally useful.
Such information can aid investors in evaluating various project proposals at one time and
hasten the process of determining which projects to support and the amounts to invest. Because
project plans are presented to a network, natural filtering takes place: only the most promising
projects get funded, and those that do immediately receive favorable reviews, and, as we all
know, favorable reviews usually translate to better than modest sales. SMEs whose projects do
not get the nod of investors immediately get feedback from the community, enabling them to
correct mistakes and improve offerings.
As crowdfunding fuels the creation of new SMEs and the expansion of existing ones, it facilitates
the creation of new jobs and inspires further innovation. However, crowdfunding is relatively
new, and can be potentially risky to uninformed investors. Failure in project implementation,
unaccountability, and fraud are just some of the dangers facing investors.
In this situation -- we wish to seize an opportunity to create wealth but stop in our tracks
because of investment apprehensions -- what we need are portal standards and crowdfunding
regulations. Fortunately, we have a government agency that serves the function of regulating
the securities industry -- the Securities and Exchange Commission (SEC). The SEC must strike a
perfect balance between encouraging the flow of local investments to Filipino SMEs and
ensuring investor protection.

Recent efforts by the SEC to improve credit acquisition for SMEs resulted in a jump of 40 places
(to 86th in a field of 189 economies) for the Philippines on the Getting Credit ranking in the
International Finance Corporation-World Banks Ease of Doing Business Report. The
establishment of the CIC, a public credit database, operating under the SEC and supervised by
the Governance Commission for GOCCs and the passing of the Data Privacy Act of 2012,
ensures ready and immediate access to credit information. There will be even more
improvements this year as the CIC is coming up with a web portal for borrowers to be able to
access data from the BAP Credit Bureau and from credit card systems as well. Moreover, the
BAP Credit Bureau is coming up with a new system called the Positive Data Sharing System, to
be implemented by May, which intends to generates credit information on a daily basis. The
data is made available to financial institutions and is accessible online. In addition, the system
will include Consumer Loans (Auto Financing and Home Mortgages), a Microfinance Positive Data
Sharing System, a Chattel Mortgage Registry System and a Caution Alert System.
However, on the Protecting Investors ranking, the Philippines actually slipped down one notch to
To standardize the minimum functionalities of crowdfunding portals, the SEC must require
stringent certifications. Portals must provide investor education tools, financial calculators, realtime credit ratings of registered Filipino SMEs, and company and management profiles of
member SMEs.
To lessen failure risk to prospective crowdfunding investors, the SEC can certify individuals, not
through capacity to invest, but through an investor certification test. The portals will allow only
certified investors to participate in crowdfunding activities.
To protect crowdfunding investors, the SEC must require that SMEs allow background checks on
their officers, provide extensive corporate disclosures, and submit to external auditing. The SEC
must create rules on the accountability and liability of SME officers. The SEC must set limits,
depending on the size of the project relative to set standards, on the funds that SMEs can
attempt to raise through certified portals. In addition, the SEC can also set limits, algorithmically
determined from investment history, on the amount that individuals can invest through the
The SEC can create a regulatory framework that leverages web technology. Crowdfunding
portals can monitor and report on the activities of entrepreneurs and investors. The portals can
also report on community behavior towards SMEs that attempt to secure funding. Thus, the SEC
can create a framework that would help both capital generation and investor protection.
We cannot forever rely upon foreign investments; we ourselves must start investing -- make the
leap of faith that would inspire innovation, encourage best practices, and effect high levels of
quality in our products and services.

(The author is an Associate of the Angara Abello Concepcion Regala & Cruz Law Offices
[ACCRALAW]. She can be contacted at 830-8000 or through email The views and opinions expressed in this article are those
of the author. This article is for general information and educational purposes only and not
offered as and does not constitute legal advice or legal opinion).